The payments revolution in the US

Next Gen Insights | Glenn Geil |
24 September 2019

How real-time payments are changing the game

With Money2020 around the corner, I have started examining the sessions I hope to attend. This will be my fourth time at the conference, and I am looking forward to connecting with my clients, meeting new industry professionals, and gaining new insights about the rapidly changing payments world.

One session that has caught my attention is ‘Real-Time Payments: Let the Attack Begin’ which plans to examine the new wave of competition being brought by non-traditional financial players which will challenge The Clearing House’s (TCH) pipeline. In an interesting twist on the subject, the Federal Reserve announced on August 5th that they ‘plan to develop a new round-the-clock real-time payment and settlement service to support faster payments’.

I find the competition between TCH and the non-traditional players interesting and hope to explore that more at the conference. What I find particularly fascinating today is why moving to Real-time payments (RTP) is the current hot topic in the US, when it has been old news for much of the rest of the world. In fact, some countries have had RTP for over 10 years. So why is RTP just coming to America? While technically, it has been available for a couple of years since The Clearing House, a consortium of some of the country’s largest banks and various technology companies, went live with RTP for an initial set of banks and features in 2017, it is only now that RTP is starting to gain any meaningful traction.

Why the slow acceptance? After all, this is a significant update to a payments system which has been in place for over 40 years. When you think of the advancements in other aspects of our life in the past 40 years, it seems implausible that most money is moved between accounts in the same manner as it was in the 70’s.

I believe there are three key reasons for this.

First, the current system is not broken. It is archaic and rooted in legacy batch systems, but it continues to work well for situations where payments can be planned and initiated in advance. It is “good enough” for most current use cases. Furthermore, there are products that use the legacy rails for settlement, but offer “real-time availability”, which have filled the void for many of the current RTP use cases.

Second is the lack of a government mandate to move to RTP. In most countries that have embraced RTP, government mandates ensured acceptance and utilization to the point of ubiquity. Once at that point, consumer and business adoption could take off. A government mandate also meant that an organization’s business case for adopting RTP (a significant expense) was much easier, as complying with regulations is an easy case to make. Mandates also have the benefit of not forcing future product decisions to be based on fully recouping the investment. In the case of mandated RTP, the massive investments were not reflected in the pricing of RTP products and services, further spurring consumer and business usage.

In the US, however, there are no mandates. Thus, investments in RTP must compete with other revenue producing business cases and must show a reasonable return on that investment, either in reputation or profit. While the biggest banks can build a case based on the reputation of being a market leader, smaller banks must rely on profitability. Finding profitable use cases for RTP in the US is challenging and has slowed the investment in RTP for all but the biggest banks.

The third reason for slow adoption is the fintech-introduced concept of free usage for consumers. It started with Facebook and Google and spread to banking in the early 2000’s, thanks to debit card interchange fees. While interchange rates have varied, the consumer mindset of “free” has not. Almost any consumer service that supports a financial transaction is free for the consumer. Real-time payments are no exception, and very few, if any consumers would ever entertain paying a fee to conduct a real-time transaction. This puts the burden of income generation on businesses, which are willing to pay a fee, but only when “real time” is absolutely needed, which is a small subset of overall payments.

Without a mandate to force adoption, and an unlikely financial return on any investment, it is not difficult to see why RTP projects aren’t at the top of the financial institution’s project list.

All of that being said, consumer expectations continue to evolve, and it is reasonable to expect that it won’t be too long before the 24/7/365 mentality becomes a real requirement for all banks, regardless of size. The gig economy for example, is a recent disruption that is rapidly pushing the real-time mindset. This then naturally starts to have a similar impact on the B2B sector. If your consumers pay you in real time, and you pay your workers in real time, it is a logical extension that you would expect your vendor and supplier payments to move to real time.

There are two key features that will ultimately ensure the success of RTP. That is data included with the payment, and the enablement of a Request for Payment (RFP). With RTP, comes the ability to include the invoice/billing data supporting the payment, and RFP allows for a biller to send a payment request that includes invoice/billing data and the remittance details so that an affirmative response is all that’s needed to make the payment in real time.

RFP will allow a biller, let’s use a utility company as an example, to send an electronic request for payment directly to their customers, who can respond using any device and make the payment as a credit push. The request includes the utility usage information, so there is no need for a separate bill to be generated. The consumer responds to the RFP with a “pay” response and the utility payment is settled in real time.

For the biller, this saves time and money. There is no need for printing paper invoices, paying postage and matching payments, and checks to the bill. For the consumer or business receiving the bill, there is no setting up a separate payment path and scheduling the payment. Simply press “pay”, and the payment and all supporting information is sent back to properly post the payment. No longer will it be required to set up the biller in a bill payment product, or to provide the biller with account details to pull the money via a direct debit, with this second point being the most critical.

The convenience of a RFP will definitely be an enticement for some, but what I see as the big gamechanger will be the ability to move away from funds being pulled from a consumers account. Today, many billers and all subscription products pull the money from the consumers account at a time set by the biller. The consumer has no control over the exact timing and actual amount pulled. Should an error occur at the biller, either with timing or amount, the consumer pays the price and has the responsibility to drive the corrections. In addition, a debit might come in one day earlier than expected, causing overdrafts or other issues. And then there is the issue of sensitive data leaks and the possibility of fraud. In general, allowing funds to be pulled from accounts or cards is a necessary evil that consumers will jump at the chance to eliminate. Imagine a world where every bill and subscription is managed with a monthly request for payment. This serves as the reminder to pay, allows the security to ensure the payment is valid, and affords the flexibility to ensure funds are in the account before pushing “pay”.

Not all billers will jump at the chance to move to a RFP world, but I believe that consumer and competitive pressure will drive their adoption. I see a future where
there is no valid use case for taking money from a consumer without that consumer’s explicit confirmation at the time of the transaction. Once in that future, the merchant experience will also change, as the consumer mindset will have shifted away from authorizing a merchant to pull funds from their card, to one of pushing funds to that merchant.

As our world continues to evolve, driven by technology advancement, having the capability to rethink how we pay for the services we use as consumers, as well as the services we deliver as employees or businesses needs to evolve too. The gig economy has provided a legitimate need for real-time payments with instant availability of funds. And in the B2B world, there are many use cases where payment must be confirmed prior to or at the point of service delivery, but payment in advance is not a practical option. For example, a large delivery to a job site needs to be accepted prior to payment, but payment confirmed before the delivery can be completed. A RTP at the point of acceptance solves the current complications associated with that delivery.

While we watch more banks and features roll out through TCH, and await more detail on FedNow, a couple of things are becoming clear. The full impacts of RTP and RFP are likely 5+ years away, but if financial institutions, billers, merchants, and their payment facilitators start to plan their IT investments to take full advantage of these benefits, they could be first to market with game changing offerings which will increase market share, improve customer loyalty and satisfaction, increase security, and ultimately improve profitability.

Glenn Geil

SVP Payments Delivery

Glenn has over three decades of experience in both retail payments and banking. He is responsible for delivering strategy and development services to Endava’s global payment industry clients ranging from PayFac’s and Acquirers to Real-Time Payment facilitators and Crypto-Currency exchanges. When he isn’t challenging himself to help clients create innovative payment solutions, Glenn likes the challenge of hiking up the likes of Rainbow Mountain and Machu Picchu.

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