Weathering the Evolving Real-time Payment Rails in the U.S.

While the U.S. market has been at the forefront of many innovations in banking and payments technology over the years, one area in which it was conspicuously behind the curve in recent times was the adoption of effective real-time payments solutions. But this has all changed. The Clearing House (TCH) launched its Real-Time Payments (RTP) service almost two years ago, and Zelle and Venmo have established P2P real-time payment services. And to further bolster the market, the Federal Reserve Bank has announced plans for a large-scale network called FedNow.

So, what will faster payments initiatives in the U.S. mean for the domestic payments market, and will it bring the revolution that has been promised to how the U.S. makes payments?

Paynow in the U.S.

The goal of all real-time payment services is to evolve into one that is faster, ubiquitous, broadly inclusive, safe, highly secure and efficient. TCH cleared its first RTP transaction in November 2017. Since then, 11 of its 26 member banks are on board, which represents over half of deposits in the U.S., and they expect to have nearly all banks on board by the end of 2020. But unlike other U.S. services (Zelle, Venmo, etc.) the RTP network is designed to address unmet customer needs across all customer segments (B2B, B2C, C2B, P2P, A2A, G2C, etc.).

In addition to clearing and settling payments in seconds, RTP aims to innovate and includes features like payment confirmation and the Request for Payment messaging that enable pull payments to deliver bills and invoices through digital channels, which provide insight into the life cycle of the payment.

Meanwhile, the Federal Reserve Bank has announced its intention to develop FedNow, a new interbank 24/7 real-time gross settlement service with integrated clearing functionality – but not live until 2023 or 2024.

TCH now or FedNow later?

The FedNow announcement injects an element of uncertainty into how real-time payments will evolve in the U.S. Banks might kick the can down the road when more will be known about the Fed’s system, such as whether they will have to make further investments in infrastructure, and the cost of dealing with FedNow rather than TCH.

Critical mass is the perennial issue for new and innovative services, regardless of the industry. It’s tough to get banks to invest in new, real-time clearing and settlement infrastructure, and banks, like any enterprise, invest in infrastructure only if there is a reason to upgrade. Banks must believe that the use cases built on top of the new real-time payment rails will be compelling enough to monetize, not cannibalize, existing payments flows.

Banks also know that unless such a network is ubiquitous, it’s not worth much. Igniting a network at scale and right out of the box can be complex, as the litany of failed payments startups knows all too well. Even if FedNow launches in 2024, it is hard to know how quickly it will reach the ubiquity necessary for a real-time money transfer system.

Control the controllable

The adoption of real-time payments in the U.S. has certainly been slower than predicted. However, as the use cases are developed beyond the low-hanging fruit of P2P payments and into the business and corporate world, this is expected to change quickly. Once merchants and the big institutions are onboard and recognize the benefits of real-time payments, then adoption will organically and exponentially grow.

This is an ideal time for financial institutions to jump in. Predictions of daily real-time payment value on all services is expected to rise from $3 billion this year to $6.4 billion by 2021.¹ The smart strategy for banks is to continue with advancing their payment strategy and not pause all work in anticipation of Fed’s delivery which is several years away. Many are looking to managed service that support easily onboarding onto the RTP network while monitoring the Fed developments. With a smaller investment than rebuilding, banks can gain great insights into working with faster payments without the hassles of increasing staffing and expertise in house, and then switch or offer both as options as services become available.

¹ Mercator Advisory Group Faster Payments Forecast