Beyond P2P: The Future of Real-Time Payments

Another ripple-effect from the pandemic-driven explosion of online payments is a speedup in the development and deployment of real time payment systems. The U.S. represents a huge, largely untapped market for RTP that banks and credit unions can tap to competitive advantage.

For years real-time payment (RTP) system development inched forward exceedingly slowly in the U.S., other than for person-to-person payments. No more. During the Covid-19 pandemic payments rapidly migrated online, jump-starting interest in ever-faster availability.

Participants throughout the financial services industry increasingly see the potential value for rapid expansion of RTP services not only for consumers but for businesses and government agencies. In the words of the most recent ACI report on global RTP development, “The U.S. is no longer just playing catchup; it has become a digital payment powerhouse.”

In the report “Prime Time For Real-Time” ACI Worldwide forecasts for the 2020-2025 timeframe a compound annual growth rate for total electronic payments of 43.4%, or 6.2 billion additional transactions. In that period, the share of RTP payments will go from 0.6% to 3%; other electronic payments will increase from 75% to 80%; and cash transactions will drop from 24% to 17%.

The real-time component may seem minuscule, but that exactly the point. “The U.S. is a mega market with enormous real-time payments potential that, to date, remains almost completely untapped,” says Mandy Killam, head of North America at ACI Worldwide. Today, it finally stands on the cusp of a real-time payments transformation — all that’s needed is bold action from one or more of the market’s incumbents to nudge it into the mainstream.”

Where Will the ‘Nudge’ Come From?

One push is likely to come from merchant bank acquirers who, in turn, are motivated by merchants seeking to satisfy their own customers, says Killam. “Acquirers brave enough to kick-start payments modernization projects that enable them to move earliest here stand to win huge future market share, as merchants seek the best possible digital payment experiences for customers at the fairest prices.”

Similarly banks and credit unions in general could provide significant momentum for RTP according to the ACI report by taking advantage of the ubiquity and interoperability such systems could offer. “The headline here will no longer be whether banks should implement RTP but rather how they can make the most of their RTP implementation,” the report says.

Ahead of the Curve:

Opportune moments are not always easy to spot. Deploying real-time payment services could prove to be one for financial institutions that get in early.

Worldwide, “we are beginning to see the majority of real-time schemes also account for large corporate needs, says Jeremy Wilmot, chief product officer at ACI, “dispelling the misconception that real-time payments are exclusively a consumer payments and P2P opportunity. It’s early stages in this process, but there’s no technical reason preventing the infrastructures being put in place from handling payments of millions of dollars. Reserve bank or central government sponsorship inspires ample confidence in the reliability of real-time payments.”

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The Fed Picks Up the Pace

In August 2019, about two years after The Clearing House launched its RTP Network, the Federal Reserve Banks announced they would develop the FedNow Service to support instant payments in the United States. A year later it detailed its features and functionality. At initial launch it will include core clearing and settlement, a request-for payment capability, and tools to support participants in their handling of payment inquiries.

The Fed now expects to launch FedNow industry-wide in 2023 — not 2024 as originally announced. Already it has started a pilot program that includes at least 116 banks, credit unions, and financial services companies.

The stated goal of FedNow is to provide a system that facilitates and encourages economic activity by making it faster, cheaper and more convenient for individuals and businesses to pay for goods and services.

Big Reach:

With FedNow, the Federal Reserve seeks to make real-time payment services available widely through its relationships with 10,000 depository institutions.

Tellingly, according to a FAQ on the FedNow site, “by facilitating nationwide reach for instant payments, the FedNow Service will likely make the development of new instant payment services more attractive, improving efficiency by increasing innovation and competition in the market for end-user instant payment services.”

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RTP Network Participants Expand Rapidly

The Clearing House’s RTP Network, launched in 2017, experienced a robust growth spurt in 2020. At the beginning of 2020 it had 19 large institutions. By June it had 30 participants. Now it counts 114 banks and credit unions that access the network directly.

Other institutions can integrate into the RTP network through third-party service providers, bankers banks, and corporate credit unions.

“Today the RTP network’s real-time payment capabilities are accessible to financial institutions that hold 70% of U.S. demand deposit accounts,” according to its fact sheet.

In addition to enabling P2P transactions, the RTP supports transactions occurring business-to-business, business-to-consumer, consumer-to-business, account-to-account and government-to-consumer.

This ties in with an observation by Rachael Tomaney, Director of Product Marketing at ACI Worldwide, who remarks on the pandemic effect of 2020. “Real-time payments have enabled governments, working with their financial institutions, to accelerate much needed disbursements and economic stimulus payments to their citizens. They have also enabled real-time liquidity to businesses that had to adapt to disrupted supply-and-demand patterns, including developing new supplier relationships with whom lines of credit had not yet been established.”

Signaling even more expansion, The Clearing House, FIS, Fiserv, and Jack Henry & Associates said in a joint announcement that they will cover the onboarding costs for minority-owned depository institutions to join the RTP network.

( Read More: Why This Bank Is Betting Its Future on Blockchain Payments )

A New Real-Time Pay Option

Jumping into this rapidly evolving mix comes FIS’s new platform called RealNet — so new that potential customers first saw demonstrations at the company’s virtual event in mid-May 2021. It’s touted as a cloud-based software-as-a-service platform that will enable account-to-account transactions for businesses, consumers, and governments over real-time payment networks.

Essentially, the company says, RealNet will function as a “network of networks” that uses a smart-routing decision engine to identify the fastest, most cost-efficient payments option for a given transaction in real time – whether ACH, same-day ACH, Wires, and RTP – and automates the end-to-end process.

FIS’s announcement lists a number of informative use cases including: instant settlement and payout of insurance claims, same-day payment and access to wages, and replacing government funds and contract worker payment via check into instant delivery.

ACI Worldwide’s Jeremy Wilmot observes what’s likely to come next: “While the universal top line remains that P2P and consumer-to-business drive the majority of transaction volume growth, business-to-business use cases promise to create high margin opportunities and drive higher values of transactions through real-time payment networks.”

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