With no governmental mandate for real-time payments (RTPs) in the United States, adoption has been slow and limited in application. However, P2P payments are now accessible to one in two bank account holders through Zelle, according to Early Warning. Consumer demand has increased to the point that offering Zelle is now table stakes for financial institutions to compete against PayPal’s Venmo.
Introduction of an RTP platform by The Clearing House (TCH) ushers in the next wave of applications, eventually further fueled by the introduction of FedNow estimated to launch in the 2023-2024 timeframe.
Where do RTPs progress from here? I foresee the next big growth area as disbursements from large firms such as insurance companies to consumers. Think about how much better auto insurance companies can satisfy their customers after accidents not only by replacing wait time for the adjuster’s arrival with a digitally-sent photo but also substituting the traditional payment schedule with RTP. Plus, insurance companies will pay less out for rentals since customers will get their cars fixed sooner.
Future RTP growth in the bank space
In the bank space, RTP applications will initially focus on moving money in real time for large bill payments or large invoice payments for business-to-business.
The trillion-dollar banks have the resources and ability to play in the RTP arena. But other banks, including Main Street U.S.A. Bank, realize they need a partner to provide RTPs to customers and help them operate their back office 24/7/365. According to a recent article in pymnts.com, 43 percent of U.S. banks plan to connect to the RTP system through third parties.
In evaluating a third party RTP partner, such as FIS, key questions to ask include:
- What is their experience with RTPs?
- What is their relationship with both TCH and FedNow? (The systems will not be immediately interoperable so third party providers should have deep knowledge of both platforms).
- Do they have the capability to provide solutions to financial institutions of any asset size?
- Can they provide back-office services to support RTP?
- Do they have the technology to move money according to the needs of the bank and its customers – TCH, FedNow or ACH, for example?
RTPs will benefit banks and their clients
While small- and medium-sized businesses (SMBs) typically have relationships with their local bank, the bank must provide the services they need to retain their business. It’s no secret that cash flow mismanagement is the No. 1 killer of small businesses – cited 82 percent of the time as a contributor to failure in a U.S. Bank study. RTP can solve customers’ liquidity problems to help them flourish.
Although speed costs more, business owners’ appetites for solving cash flow problems will likely outweigh the slightly higher fees that the bank will need to charge to offset the expense of RTPs. Another way that banks can recoup some of the expense is to clear funds faster and add the proceeds to overnight sweep accounts.
Now is the window for U.S. bank executives to learn as much as possible about RTPs, including benefits and pitfalls, as RTP applications expand.