The future success of real-time payment platforms owned by the Federal Reserve and the largest US banks depends on the ability of financial institutions and fintechs to find real uses for the technology.
Real-time payments are still in their infancy in the US: THe Clearing House, a company owned by Bank of America Corp.; JPMorgan Chase & Co.; Citigroup Inc.; Wells Fargo & Co.; and other major banks launched the country’s first real-time payment platform, or RTP, in 2017, while the Fed planned a production rollout of its own planned platform, the FedNow service, from May to July 2023.
RTP has grown steadily since its launch, but its $19.7 billion in payments processed in the third quarter was only a tiny fraction of the $1 trillion US payments market.
The planned launch of FedNow has rekindled discussions among banks about faster payment offerings, but many banks, especially smaller ones with limited resources, are unsure of the operational setup and monetization potential, Marc Majeskesenior vice president of a payment company Alacriti Inc. said in an interview.
“I think there’s hesitation in the market right now,” Majeske said. “For the first time, the bank may be looking at doing 24/7 transactions. So their first question is, ‘Should I hire people for the weekend?'”
In reality, The clearing house and the Fed both work directly with financial institutions or reach out to them through emerging fintech providers such as Alacriti and Volante Technologies Inc. or by major banking software providers.
Most after-hours liquidity management and implementation efforts can be aided by these technology providers, Majeske said. Once the payment platforms are operational, the main job of the banks would be to settle the transaction records in their internal accounts with their sub-accounts on the platforms.
From connectivity to use
Despite the hesitation of some banks, The Clearing House pushed for connectivity. It has 274 participating banks and credit unions — 85% of which have less than $10 billion in assets — and has connected 62% of checking accounts in the United States to the RTP network. As a result, these accounts are live with RTP and can receive transactions in real time.
But connectivity is not the same as actual usage, said Majeske, who previously worked at the Clearing House on the RTP launch. For banks, investing in real-time payments involves setting up the data transmission technology and maintaining credit and debit records. For consumers and businesses, the most successful payment apps often come in the form of a button to click during checkout.
“Adoption only really happens when meaningful, value-added use cases are built on top of that infrastructure, and beyond that they must be measurably better than what already exists today,” said Jordan McKee, director of fintech research and advisory group at 451 Research of S&P Global Market Intelligence.
“For me, speed isn’t necessarily a value proposition on its own,” McKee said. “It must be even bigger than that.”
Exploration takes off
One strategy for developing real-time payments use cases is to identify scenarios where customers are willing to pay for the convenience of faster payments.
“I call it the FedEx model,” Majeske said. “If I go to FedEx and want to ship a box to you and it has to be there the next day, I’m willing to pay for it because of convenience. I think you have to look at payments the same way .”
The Clearing House has started to see value-added services growing rapidly on the RTP network, including some in niches other than the uses the platform was originally designed for, said Elena Whisler, senior vice president. Sales and Relationship Management at The Clearing House. in an interview.
Instant pay for gig economy workers is one example, she said, adding that the service responds to a trend in the gig economy where workers expect access. to wages earned on demand, rather than on a traditional bi-weekly cycle. During the second quarter, Instant Pay accounted for 15% of total volume on RTP and grew 104% from the prior quarter.
The launch of FedNow could also improve blockchain-enabled payment systems, allowing banks to settle payments using blockchain instantly at any time, said Kevin Greene, CEO of Tassat Group Inc.
“FedNow will just be a messaging protocol. Banks then have to figure out how to connect to FedNow. And then they have to figure out how to connect that to their customers,” Greene said.
The last time American banks embraced the ubiquitous electronic payment rails was with the launch of the Automated Clearing House, or ACH, network in the 1970s.
The platform, which handles direct deposits and direct payments, took seven to 10 years to ramp up, and banks had to learn about security and fraud prevention, Majeske said. Likewise, the penetration of real-time payments should be a major overhaul, but the market is now accepting changes faster thanks to tech companies catering to tech-savvy users, he added.
Since RTP and FedNow do not interact, most banks should implement both over time. Both have nearly identical pricing structures, but one advantage of FedNow is that it can take payments from banks’ main accounts with the Fed.
In a 451 Research survey released in September, 45.6% of 1,670 respondents said they would likely open a new account with a banking service provider that supports real-time payments.
“I don’t expect half of consumers to open a new account overnight to gain access to real-time payments, but it does indicate that this experience has some consumer interest,” McKee said of 451. .