How Can U.S. Banking Grow Instant Payments Faster?
FedNow, a year out of the chute, is adding institutions quickly and The Clearing House's Real-Time Payments network continues to build volume. But some say instant payments haven’t yet hit escape velocity. Can banks speed it up? Should they?
By Steve Cocheo, Senior Executive Editor at The Financial Brand
Among banks and the rest of the payments fraternity, instant payments stirs a strong mix of emotions, including optimism, skepticism, pessimism, elation, frustration and consternation.
In fact, in multiple interviews The Financial Brand had with payment experts, a long take would be followed by "Sorry — I get really passionate about this issue."
The passion about payments is rooted in disagreements about the potential in the U.S. for instant payments as a product, the impact of marketing in moving things faster (or not), and the role of financial institutions and payments companies in creating payment products and tools that use instant payments rails.
Frequently, payments people talking about FedNow (and instant payments in general) compare it to putting up a new suburban subdivision. The rails providers, the Fed and The Clearing House, have put in the streets, sewers, water lines and electrical service, but many homes have yet to go up.
"We have a long way to go," says Peter Davey, venture partner for payments and identity at the Alloy Labs Alliance and a payments veteran. He says instant payments capabilities have been built, but many tools must be crafted before consumers and businesses can make best use of the technology. Picking up on the infrastructure analogy, he says many institutions still have to come up with faucets for the water lines.
From the archives: FedNow Turns Instant Payments into a Must-Have for Banks and Credit Unions
FedNow’s First Birthday Drives Debate Over Instant Payment Progress
FedNow, the Federal Reserve’s entry into instant payments, debuted a year ago. Anniversaries are often times of celebration, but the cheer is a bit muted.
In a blog observing the anniversary, Mark Gould, chief payments executive for Federal Reserve Financial Services, operator of the FedNow payment rail, spoke conservatively. "Instant payments in the U.S. are still maturing and new use cases are evolving quickly," he said.
Much has been made of FedNow’s signing up around 900 banks and other players to take part, but more than half of those organizations are in receive-only mode.
The number of receivers keeps rising, but the number of senders isn’t rising nearly as fast, Davey points out. He previously served in innovation posts at The Clearing House, and did some of the work that resulted in creation of FedNow’s rival, the Real-Time Payment network, which debuted in 2017 and now numbers around 600 participating institutions.
Davey predicts that if more institutions don’t start sending, FedNow will stagnate. A common analogy used in payments is that you need both pitchers and catchers to play the payments game. And while receiving brings in deposits, it produces no revenue.
"We’re probably in the second inning of the game in regards to FedNow."
— Doug Brown, NCR Voyix
Indeed, a late June 2024 blog on the FedNow website is headlined: "Now is the time to enable send with the FedNow Service."
"‘Send’ has been a big bottleneck," says Heman Daswani, business solutions consultant at Temenos. "It is a big reason why there is not so much payments volume going through FedNow by this point." (The Federal Reserve has not released volume figures to date.)
Reflecting on the need for senders, Doug Brown, president at NCR Voyix, said in a podcast on PYMNTS.com that "We’re probably in the second inning of the game in regards to FedNow."
In the same podcast, Drew Ingo of Ingo Payments said that FedNow was currently irrelevant to many of his corporate customers, larger firms like GEICO and Caesar’s. Many of the institutions that have signed up are smaller, he said. "But FedNow will be relevant," he said.
In some quarters, the feeling is that the U.S., way behind the world’s curve on instant payments, needs to catch up faster. In other quarters, there’s an air of realism. One year is a blip in terms of adoption rate.
"Everybody’s out of patience, right?" says Trevor Nies, SVP and global head of digital at Adyen, payments company and acquiring bank. "But how often is a brand-new payment infrastructure introduced in the United States? It’s pretty rare. And think about RTP, the real-time payments rail built by the conglomerate of banks, the clearinghouse. It was built seven years ago and it’s still nascent today. But it is starting to make some traction."
Read more: Instant Payments: How to Navigate the FedNow Revolution
Market-Driven Adoption Can’t Force the Pace
Instant payments in the U.S. started from a different place than many faster payments success stories, points out Peter Tapling, payments veteran and managing director of PTap Advisory.
"Here in the U.S., we’re being market-driven," says Tapling. "‘Market-driven’ is code for ‘We’re not going to tell anybody to do anything’."
By contrast, in Brazil, where Pix is a big success story, Tapling points out that institutions above a certain size had no choice: The government mandated participation in sending, receiving and giving customers tools to access faster payments,. In the U.K., he continues, the implied threat of regulation chivvied the nation’s big banks to take part. In India, elimination of smaller denomination currency begat the need to adopt a quasi-cash digital instant payment capability.
"Technology is a major stumbling block. You don’t just flip a switch to go into instant payments."
In the U.S., there has been a flurry of signups for FedNow and continuing growth in transactions at the older RTP network, but "onboarding is the easy part," says Davey. Vendors in the business point out that receive-only mode doesn’t demand the processing and compliance muscle that send mode does. Full-scale implementation requires tying in the instant payments process with anti-money laundering and Office of Foreign Assets Control compliance expectations, according to Booshan Rengachari, founder and CEO at Finzly, the payments processing firm.
Technology is a major stumbling block. You don’t just flip a switch to go into instant payments.
Temenos’ Daswani points out that an institution that wasn’t already involved in sending for RTP faces "a big lift."
"If FedNow is their first endeavor in instant payments, they have to revamp a lot of infrastructure and processes on their side to be able to do the 24/7/365 processing, and to be able to screen payments against sanctions and for anti-fraud in real time," Daswani says. And for many smaller institutions, the technology shifts go beyond their own walls, given their dependence on outside core providers and the like.
"If banks only ever did things that people were asking for, we’d still be exchanging shells on the beach."
— Peter Tapling
Observers say this challenge makes some CEOs, especially at smaller firms, hesitant to invest yet, focusing money on things with a more immediate ROI. Yet instant payment enthusiasts say now is the time to get on board because businesses, and, increasingly consumers, see everything in terms of instantaneity.
Tapling jokes about a relative who, in spite of already having Amazon Prime service, will always pay an extra fee for same-day delivery even when the item isn’t urgently needed. She told him that this allows her to check the matter off on her mental list. "It’s a fee that you pay for ‘cognitive offloading’."
But more directly, he thinks CEOs content with receive-only or the actual sidelines have to amp up.
"If banks only ever did things that people were asking for," says Tapling, "we’d still be exchanging shells on the beach."
Read more:
- P2P Apps Now Dominate Payments Between Individuals, Eclipsing Cash
- Apple Shifts Focus As It Drills Deeper into Payments
- Where is Visa Headed with its ‘Flexible Credential’ Concept?
- When Will Mobile Banking Finally Kill the Plastic Credit Card?
What Role Should Marketing Play in Instant Payments’ Future?
Instant payments isn’t your typical product where the manufacturer sells a customer base on the need for the product. FedNow and The Clearing House provide the rails that make the payments possible, but they aren’t promoting the payment use cases to consumers and businesses. Those are up to institutions and payments companies. In fact, notes Temenos’ Daswani, "the Fed has a stance that it is ‘use-case agnostic’." The Fed doesn’t engage in any customer-level product design, which is seen as the province of banks and other providers.
But does the industry, writ large, risk invisibility without marketing? In conversations about marketing instant payments, there’s little agreement, and more argument.
"It’s been the most quiet launch in payments history."
— Richard Crone
Richard Crone, veteran payments consultant and son of a payments pioneer, gets exercised by the silence about instant payments.
Speaking specifically about FedNow, he says that "It’s been the most quiet launch in payments history." He says only a government entity like the Federal Reserve would launch a product so quietly.
Crone says FedNow branding should be out there, like stickers on the branch windows of banks and credit unions that offer instant payments and emblems on websites and apps. He says nothing has been done — and that The Clearing House hasn’t done any better. (He actually backs a designator for institutions that don’t take part in FedNow, too.)
"Instant payments is unbranded, and nobody promotes unbranded payments services," says Crone. It’s an investment, but an essential one, he says. PayPal spent $150 million to garner their first 10 million customers, according to Crone. It helped set the company on the course to be the payments giant it is today. In contrast, he says, he’s never seen such a soft sell as that for instant payments. He suspects there is also reluctance to promote a new service that could undermine fees paid for wire transfers.
Read more: How and Why Navy Federal Got Aboard Instant Payments
Listen to an instant payments webinar: FedNow – To Send or Not to Send? There Really Is No Question!
What Do People Really Want?
For his part, Tapling thinks branding instant payment services won’t move the needle, at least not among consumers. Ordinary people don’t think in terms of such concepts. Many, because of person-to-person payments, think that payments are already instant.
They do want what instant payments provides, Tapling says. He suggests any banker who doesn’t think so should spend a few hours listening in at their own contact centers. There, they will hear many people calling about payments — payments that didn’t go through, uncertainty over whether a bill got paid in time, the need for a cashier’s check during a weekend when the customer’s branch is closed.
"None of those customers are asking for ‘instant payments’," says Tapling. "But they could all take advantage of the capabilities of FedNow and RTP. So no one is going to ask for this, but when they see it, they’ll want it and want more."
The Clearing House’s Jim Colassano sees consumer and business education, rather than marketing per se, as the key to building volume.
"The Clearing House thinks growth in volume on the Real-Time Payment network could approach the ‘hockey-stick’ phase."
"The best marketing that banks can offer is to actually make that capability available to their clients through their payment origination channels," says Colassano, SVP of product development. "Ideally, payments will happen so transparently and so instantly that you won’t even think about it."
Others think that, among consumers, the slow but often certain process of word of mouth will be very meaningful. Finzly’s Booshan Rengachari, for example, thinks a conversation between two friends over coffee or a beer will be the kind of venue where people will begin to hear what one person’s bank can do that the other’s can’t. He says people will move to the pioneers.
Similarly, he thinks that among potential business users, the best exposure will be in calls on the firms by their banks’ relationship managers.
Many observers see instant payments ultimately being more important to businesses, always trying to maximize cash in hand and control outbound funds. Dean Ingo says he’s already heard from his firm’s clients about instant payments: "So, it’s a different, faster interstate highway that goes to the same place. Are you going to charge me less?"
Colassano thinks that interest rates will be a boost for business use of instant payments.
"When we launched the RTP network, interest rates were effectively at 0%," says Colassano. "Now that interest rates have risen, cash flow becomes that much more important to businesses of all sizes, large and small." RTP has seen substantial growth in volume over the last couple of years and Colassano says the effort could be approaching a "hockey stick" phase.
Read more: Consumers Have Embraced Digital Wallets. But They Also Want Them to Be Better
Or Is Visibility an Essential for Faster Payments, Really?
The contrarian argument is that this service can best serve many users as a form of embedded banking. This school of thought holds that many potential beneficiaries of instant payments won’t care about how their money moves faster, just that it does.
This can occur in two ways.
Within the financial institution itself, instant payments technology could simply become the way many transactions move, suggests Colassano. Tapling says there is evidence that once people experiencing the speed, that will become their default choice. Many of the people interviewed believe that, essentially, everybody wants everything yesterday, so faster is always better.
Peter Davey thinks embedded instant payments will be especially important for business customers.
Providing good APIs (application programming interfaces) that outside developers can use for accessing the banks’ capabilities — they have the entrée to the payment system via the Fed — means that the institutions won’t always have to do the heavy lifting on the product tech development side, says Davey.
"I believe the future of payments is embedded and integrated," says Davey.
As said earlier, it’s still early innings. Still to come are developments that will build out the capabilities, such as greater standardization as well as interoperability, the ability for payments to switch between the FedNow and TCH rails without introducing any delay in the "instant."