Despite the fanfare around the launch of FedNow this year, many businesses are skeptical that real-time payments (RTP) can be monetized and are adopting a wait-and-see approach. Although it is true that RTP technology has not come into full force and use cases have not been completely fleshed out, banks and fintechs need to have a strategy so they are not left behind as RTP becomes the standard over the next few years.
During a recent PaymentsJournal webinar, Chris Nichols, Director of Capital Markets at SouthState Bank; Reed Luhtanen, Executive Director at U.S. Faster Payments Council; Carrie Blankenship, Payments Innovation Principal at Volante, and Steve Murphy, Director of Commercial Payments at Javelin Strategy and Research, shed light on the various RTP business cases and gave an overview of how the space is set to change.
Strategy for RTP and FedNow
With real-time payments—or faster payments as they’re referred to in some countries—adoption has varied. According to Luhtanen, it’s important to take a step back and look at the contrasts of adoption to get a full picture. “In many countries where you hear about advancements and being ahead of the U.S. when it comes to faster payments, there were government mandates put in place that caused those advancements to happen,” he said. “There’s essentially a monopoly service that’s pushing that forward in those countries.”
“The U.S. hasn’t gone that way,” he added. “We’ve got a market-based approach with a number of different flavors of fast, if you will.”
There are certainly several considerations in developing an RTP strategy, and for many, those considerations convene at figuring out if they should be looking at RTP or FedNow—or thinking about both. “It’s about getting an understanding of what are your customers looking for,” Luthanen said. “What are the demands in the marketplace that you’re trying to solve for, and what are the use cases that are going to move the needle?”
“Part of that knowing is building out that strategy and getting informed and involved in different forums. What are other folks in my peer set doing? What are their customers telling them?”
According to Nichols, FedNow is likely to have more acceptance throughout the financial space, but that doesn’t mean The Clearing House network should be counted out. “Over time, we think The Clearing House is going to compete with FedNow on pricing,” he said. “We want to be able to take advantage of that when the time comes.”
In the current ACH space, if you have one ACH network or one ACH provider, you have access to all of them. But as Blankenship points out, in the instant payments space in the United States, that’s simply not the case yet. “It comes down to an issue of I can send a payment to Chris, but I can’t send one to Reed,” Blankenship said. “Whether there are commercial small businesses or retail customers, they’re not going to understand the difference. In the foreseeable future, the importance of leveraging both RTP and FedNow really cannot be underestimated simply for the fact that there’s that lack of interoperability between the two that wouldn’t be understood by your customer base.”
“Once they’re interoperable, you can declare for one or the other, but in the short run, it’s certainly a really important consideration to think through, the idea of leveraging both,” she said.
FedNow and the RTP network will differ in some nuanced ways when it comes to settlement accounts, risk tolerance, and technical implementation. “In order to send a real-time payment, you need a settlement account. With FedNow, that’s a direct federal reserve account,” Murphy said. “With TCH, it’s a joint account that’s managed on a continuous settlement basis.”
Transactions may post at slightly different times between the two and differ in risk tolerance. “RTP currently has a $1 million single transaction limit. FedNow is going to start with $500,000,” Murphy said. “The banks can set their own ceilings below those limits, depending on their risk tolerance, and we’re expecting these overall transaction limits to increase over time.” The systems are also both based on ISO 20022 messaging standard, which institutes a common platform for the development of messages in financial services.
In the United States, real-time payments have been around for roughly five years. Although payments are generally commoditized, there’s an opportunity—specifically for banks—to monetize RTP and provide more value-added services.
“I believe you’ll see the industry move more to a subscription-based model where you subscribe for a year for a bulk of transactions and go from there,” Nichols said. “But that’s not where we believe the fight is. We believe the fight is over the ability to create new and innovative products, like using the components of RTP and FedNow and combining it with certain integrations such as fraud, identity escrow, and just a number of other products we believe will be higher-margin products that banks and fintechs can charge for.”
Luhtanen noted a large financial institution he spoke to that’s winning more auto loans because it is funding using RTP and the dealer wants to ensure that the payments are coming through right away. “Things like that can be key differentiators and make your service more attractive,” he said.
The Business Case for RTP
For FIs, there are typically many competing priorities, and it can be difficult to keep a focus on the right ones. One of the best pieces of advice, Blankenship said, is to know your enterprise goals. “Faster payments can facilitate or enable those goals that are already in place,” she said.
“Think about loan growth” she added. “What happens if you can fund a loan two to three days faster on an individual loan? Three days of interest may not be significant, but you can make thousands of those loans and you fund them two to three days faster.”
The stronger case is that real-time payments will be standard in the future, and companies that don’t get on board will fall behind.
“Studies that I’ve seen in the last year have indicated that a vast majority of companies are either ready to use or utilize the capabilities in these instant payment systems within a couple of years,” Murphy said. “It’s a competitive necessity, but more like an opportunity cost if you don’t do something about it now.”
Getting on Board With RTP
Companies can set up their own RTP payment hubs or they can partner with a fintech company like Volante that will help them through the process. This will be especially important for smaller banks that don’t have the resources or the inclination to handle RTP technology in-house.
Regardless, companies should understand that the IT aspect is only part of the battle.
“RTP launched in late 2017 and a colleague of mine, we did some interviews a year later with some of the early adopting banks, including Citi and JPMorgan Chase,” Murphy said. “And the interesting thing is that they said it was roughly a five out of 10 in terms of IT complexity, but a bit more complex when it came to operational synergy.
“That’s what banks have to keep in mind, having operations in place. In a separate conversation with TCH, they indicated that they’re ready at around 300 bank connections, and more than 80% of those are smaller banks. So it’s pretty obvious that the smaller institutions need that type of resource.”
Regardless of how banks prepare, they need to get ready now for real-time payments. “A bank that waits is not going to be able to handle some of these new products that are coming down the line, are not going to be able to change their operations quickly enough,” Nichols said.
Murphy notes that real-time payments are already starting to be a differentiating factor.
“Small businesses are already seeing some merchant services providers that are offering same-day instant cashouts,” he said. “Some of those businesses may need that liquidity on a Saturday to be able to go to market and get their next set of supplies to be ready for Monday morning. These are the things that are already out there. Just like movies on demand, just like purchasing on-demand Instacart in an hour, those expectations are already set.”