Real-time payments – systems that transfer and settle transactions almost instantly – are becoming the norm worldwide. Numerous countries already offer well-established services, and more are under development.
As the United States nears its 2020 mandate to ensure every financial institution has access to the Real-Time Payments (RTP) network, it’s important to consider the possible implications. The Initial emphasis of real-time payments was on person-to-person (P2P) money movement. However, we should not overlook the potential benefits of the more lucrative person-to-business (P2B), business-to-person (B2P) and business-to-business (B2B) use cases, which present additional, ancillary benefits.
Justifying the ROI
In the United States, consumers have become acclimatized to current settlement delays of two to three days for debit and credit accounts. Meanwhile, growth in same-day ACH services has further undermined the demand and adoption of real-time. Does this explain the slow uptake of the newly launched Clearing House RTP initiative and its emphasis on P2P payment services? Even where real-time services are live, such as the UK, Europe, Australia, etc., there has been a marked reduction in the use of cash (and checks) with P2P services, while B2B payments have yet to find a place in an accelerated world.
The (Use) Case for Businesses
The reality is that return on investment (ROI) will never be justified if banks focus solely on the P2P market. The real value comes from expanding the real-time payment rails to additional use cases, such as P2B, B2P, and B2B through the provision of better services for SMBs and corporate customers. Market leaders must look past simply increasing the speed and reducing the cost of money movement, but also focus on creating relevant solutions that are tailored to the needs of business customers.
Consider how instant payments could impact markets that rely on cash-on-delivery, or how instant payroll would greatly simplify payments to temporary or freelance workers. Retailers often wait for a consumer’s payment to clear before placing that customer’s order and then sending payment to the wholesaler for fulfillment. With real-time payments, businesses can request a customer’s order, receive payment and send their payment to the wholesaler all on the same day. This scenario ensures there is no impact on the merchant’s cash flow, while also improving the customer experience (CX).
The ability to unlock working capital from supply chains is often a serious obstacle to growth. Real-time payments can help merchants grow by driving loyalty and satisfaction with their customers.
Beyond the Need for Speed
Real-time payment schemes are about more than simply how fast the payment arrives: The certainty of authorization, confirmation and clearing increases a bank’s liquidity by becoming a value-added service for its customers.
The move toward real-time also accelerates the convergence of corporate and retail banking by allowing banks to leverage the lowest-cost routing for transactions. Since real-time payments have a lower cost-per-transaction than real-time gross settlement (RTGS), this can result in savings for customers.
Just in Time
We are living in an era of instant gratification and these demands will only increase. A great smartphone app isn’t going to suffice as the wearables market explodes and the internet of things (IoT) becomes more ubiquitous. Similarly, the global drive toward open banking is also a major boost to the widespread adoption of faster payment solutions. Those that are ready for real-time payments on “day one” will gain a serious competitive advantage.
Financial institutions, especially those in the United States, need to evaluate their position carefully. While real-time payments are still at a beginning phase, banks must decide when to join the inevitable evolution of the modern payments ecosystem. Smaller players need to consider whether to play to win now, possibly through a hosted payment-as-a-service (PaaS) operation, or risk being left behind.
Real-time payments are clearly the answer, but not only for the classical P2P problem as originally thought. Instant payments is the key that has opened the possibilities for new services for a much wider set of customer segments. As instant payments schemes spread worldwide, this seismic shift in payments innovation is set to continue for years to come.