When the primary motivator for adopting a new technology or business practice is to avoid being left behind, implementation is usually slow until the moment when everyone realizes the pack is on the move.
This is the case with real-time payments, talked about for decades, and in serious development in the U.S. for about three years. Around the world, real-time payments — also referred to as instant payments — have become much more common, often propelled by government policies. There are at least 40 active real-time payment schemes in operation around the world, with 16 others in the works, according to an EY Global article.
The U.S. has not lacked in payment innovations, many of which result in faster payment transactions, like same-day ACH, but there has not been a widely used framework for truly instant — and final — transactions applicable to consumer and business payments. Now the industry has come to a pivotal moment, however. One which banks and credit unions must consider in their strategic planning.
Consider that the number of financial institutions aligning with the RTP Network — the proprietary real time payment system launched by The Clearing House in 2017 — went from 19 large institutions at the beginning of 2020 to 30 at the beginning of June and should double again by the end of July. Sure there are roughly 10,000 depository institutions in the country, so those numbers may seem paltry, but onboarding can be done quickly by third-party companies.
TCH’s Steve Ledford, SVP of Product Strategy and Development, says that just one of the bank technology providers that support the RTP Network — Jack Henry & Associates — has more than 100 financial institutions in the process of initiating the ability to at least receive real-time payments. Some vendors are able to bring on as many as three institutions in one day, Ledford states. And multiple tech companies now support the technology.
“Some might say using real-time payments means you aren’t using something else, like wires. But new use cases could increase the size of the payment pie.”
— Adriana Hastings, Huntington Bank
On the other hand, the bigger institutions have a tougher road getting set up for real-time payments.
Huntington Bank, for example, took about a year to ramp up the ability to receive real-time payments from the RTP Network. “RTP has the ability to impact so many areas,” says Adriana Hastings, Treasury Management Director. “We had to make changes in multiple systems to be able to share that complete picture of customer transactions.” Hastings did note that they were also working on RTP send capability in parallel during that time, which will be the next phase to roll out, followed by messaging. Sending real-time payments is more complex than receiving and Hastings says that capability won’t be ready likely until early 2021.
“We didn’t want to make it one monolithic event where we would have had to wait for years to get the first benefits,” she says regarding the phased approach.
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Although there is not complete agreement on this point, many people in banking would consider person-to-person (P2P) payment solutions as part of real-time payments. The rapid growth of Venmo, Zelle, Square Cash and other P2P applications, as well as digital wallets like Apple Pay, confirms the appeal of near-instant transactions. Users of these mobile apps now expect to be able to make a payment or send money in seconds.
And in the business community the coronavirus pandemic put huge strains on cash flow and on supply chain operations. This had the effect of raising interest in any solution that would help speed up the movement of goods and money, including real-time payments.
As further testimony to the coming of age of real-time payments, the Federal Reserve itself announced in August of 2019 that it was launching its own RTP facility called FedNow. It is expected to be ready in 2023-24.
What’s Included in ‘Real-Time Payments’?
The terminology of the payments world can be confusing. For example, is “faster payments” the same thing as “real-time payments”? And is RTP the same as RTP? (trick question).
Ledford says that “faster payment” refers to any type of payment that is faster than some previous type of payment that’s been around for a while. Examples include same-day ACH and the card-network programs (Visa Direct and Mastercard Money Send) that send credit transfers over the card networks, in which payments typically arrive in two to 30 minutes.
By contrast, real-time payments first and foremost not only have to post, but also settle within seconds, according to Mercator Advisory Group Payments Analyst Sarah Grotta. Another key requirement of real-time payments is that they must be irrevocable. Once the funds, leave your account that’s it, says Grotta, who co-authored a report on real-time payments in March 2020.
Other attributes noted by EY include immediate availability; 24/7 access (versus business-day-only processing); credit push versus debit pull; and, depending on the scheme, extensive transactional details and messaging.
As for the trick question: RTP, of course, stands for real time payment. It is both a generic term and a brand, however. RTP on its own is the generic term. The branded version, “RTP Network,” is the creation of The Clearing House.
P2P Will Soon Have True Real-Time Capability
What about Zelle and company — where do they fit in the payment lexicon? Grotta considers them faster payments, not real time. “How fast the transactions are depends on the app you’re using,” she notes. Standard Venmo is an ACH transaction, for example. But if you pay a little extra you get that transaction more quickly through Mastercard Send or Visa Direct, Grotta explains. “With Zelle,” she continues, “I get the funds posted to my account within seconds. However, the settlement on the back end is not real time. That’s done by ACH. It’s moving to real time, but it’s not there yet.”
“We think that real-time payments will increasingly become the way that P2P moves.”
— Steve Ledford, The Clearing House
Steve Ledford, who considers P2P payments “absolutely” to be part of real-time payments, tells The Financial Brand that The Clearing House is in the process of working with Early Warning Systems (which operates Zelle) “so that real-time movement of funds can be made part of the Zelle experience.”
Financial institutions should be starting to offer Zelle using real-time payment by the end of the year or early next year, says Ledford. “We think that RTP will increasingly become the way that P2P moves.” He predicts that P2P will be “a very strong contributor to the overall growth of the RTP network.”
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The Main RTP Retail and Business Use Cases
“Initially everybody, me included, thought real-time payment is going to be great for business-to-business transactions,” says Grotta. “But it’s not exactly happening how we thought it would.” It’s business-to-consumer (B2C) transactions such as payroll, insurance disbursements, refunds, and rebates that have been growing faster.
The analyst points to two reasons why the B2B side has been slower to catch on. “First of all, businesses haven’t reconfigured their accounting software in order to fully manage a real-time payments transaction,” Grotta maintains. Their systems are set up for wire transfers or ACH payments.
“You’ve got to do a whole lot of wires in order to make up for the cost to reconfigure your accounting infrastructure.”
— Sarah Grotta, Mercator Advisory Group
Secondly, the current RTP limit is $100,000, Grotta states. “For some businesses that really doesn’t excite them. When they want to move money fast they’re moving millions of dollars. And so they’re going to keep using wires.” Wire transfers are more expensive than RTP transactions, she agrees, but adds that “You’ve got to do a whole lot of wires in order to make up for the cost to reconfigure your accounting infrastructure, if you’re a large corporation.”
Steve Ledford has a different take. “B2B is actually one of the significant uses of the network now. More of the originating companies on the network are using B2B payments than they are business-to-consumer payments. But the number of B2C payments is much higher because there are more consumers.” If you do a payroll, you go out to thousands of receivers, he points out.
Ledford also notes that TCH saw a big growth in B2B real-time payments during the pandemic. “We think a lot of companies reevaluated their supply chain and realized they needed faster, more precise ways of making payments,” Ledyard states.
In any event, all parties contacted see many possible use cases for real-time pay. An emerging example is gig economy payments, according to Huntington Bank’s Hastings. Ride share and food delivery workers, she says, want to get paid as a task is completed rather than waiting a couple of days or longer.
What’s In It for Financial Institutions?
Payment revenues overall have been under pressure for some time. Will RTP reverse that? P2P won’t, in Sarah Grotta’s opinion. “The market price for P2P transactions is zero,” she states “That was set by Venmo and the rest of the market acquiesced to it. So, that’s just a customer loyalty, customer retention case.”
She does see opportunity on the business side where RTP will become some sort of a solution within the cash management suite of services.
Adriana Hastings expects that real-time payments will be a combination of a relationship builder and revenue generator. “Some might say if you’re using real-time payments you are not using something else, like wires. That is one way to think about it,” the banker states. But she believes the new use cases plus “scenarios we haven’t thought of yet” could increase the size of the payment pie.
In addition, Hastings believes the new messaging capabilities that the TCH real-time product allows will be very meaningful. “Right now everything we do is transaction-based. I send you money or I receive money and that’s it,” she observes. “RTP in effect allows there to be a conversation with the payment. You can’t do that anywhere else.”
In addition to those points, Ledford notes that financial institutions are keen on the idea that RTP will help them attract deposits. “It’s one of those things that can seem counterintuitive, but the easier it is to take money out of your bank or credit union the more likely it is that you’re going to keep more of it there for a longer period of time,” says Ledford.
Is RTP Now in the Category of ‘Snooze You Lose’?
“We are getting to the point where some level of real-time payments is a must,” Grotta believes. That certainly applies to P2P solutions. Mercator Advisory research found that more than 60% of the population is using at least one P2P service and many are using more than one. Given that, says Grotta, “you can’t really say ‘We don’t have one’. You’ll be on the outside looking in.”
For B2B real-time payment applications, Grotta says it could depend on what sort of financial institution you are. “There certainly is a concern that if you wait too long, you may find your business customers have gone somewhere else,” the analyst cautions. However, she does think there is a little bit more time on the business side.
Huntington Bank’s Hastings doesn’t see RTP capability as a differentiator per se. “As an industry we have to adopt and to embrace real-time payments to help us move forward, she states. However, I think that how we provide it should be a differentiator. In other words, how do we present it? How easy is it for a customer to complete an action? Does it take a lot of steps or is it confusing? That to me is the differentiator.”
“Customers are going to go to whoever satisfies their needs,” Steve Ledford maintains. “Increasingly that fact is becoming a competitive imperative. If you want to be a financial institution that thrives in the 21st century, you need to offer 21st century products.