Faster Payments in 2019: Use Cases and Opportunities
The world of payments is aflame with talk of Faster Payments and how it will revolutionize the industry. The Federal Reserve assembled a task force to explore it, and every vendor in the space is hosting webinars and sending out marketing emails describing how they have solved for it.
Yet behind closed doors, many wonder if we really need a faster payments system or how they can monetize it. The reality is that it will be some time before the payments industry figures out the best use cases for faster payments, but the companies that position themselves to capitalize early will see tremendous new opportunity once the industry eventually fully adopts the new tools.
There are a few flavors of faster payments available in the U.S., and it’s useful to quickly review them:
The Clearing House RTP Network
The bank-owned Clearing House has created and gone live with a new network that clears and settles payments in real time. Today, approximately 15 financial institutions have gone live on the RTP network with the expectation that every financial institution in the U.S. will be able to access the network by 2020. Unlike wire and ACH, the RTP network is available for real-time payments 24/7/365 days a year.
Real-time payment product offerings support use cases varying from examples like expedited bill payment, enhanced cash management, vendor payments, peer-to-peer payments (P2P), and business to consumer (B2C) disbursements. While all of these payments can be completed today by other payment methods, the value in using RTP comes with the enhanced data capabilities available with each transaction, the certainty of payment receipt and the immediate availability of funds for the receiver. For more on real-time payments, see our guide for RTP strategy and decison-making for mid-tier banks and credit unions.
Zelle is an inter-bank, peer-to-peer payment solution for consumers and businesses to send money to other individuals within minutes. To send money, the sender only needs an e-mail or phone number of the receiver to start the transaction regardless of their financial institution and without the need of their routing and account number.
Today, over 200 financial institutions are connected in-network to Zelle. This means that money is sent on a good funds model, made available to the customer immediately and later received via ACH by the receiving institution. If a customer wants to send money but their financial institution does not participate in Zelle, customers can use the Zelle app to initiate the payment and the transaction is processed via Visa or Mastercard rails. Learn more about how you can create an integrated payments experience with Zelle.
Same Day ACH
NACHA, responsible for the development, administration, and governance of the ACH Network, updated their operating guidelines and rules to require banks to support additional clearing windows throughout the day. This means businesses can initiate an ACH payment in the first half of the day and have it arrive at a participating bank by the end of the same business day—otherwise, the ACH process is the same. It is important to note that, international transactions (IATs) and high-value transactions (above $25,000) are not eligible for same day ACH. Fortunately, 99% of ACH transactions on the network are same-day eligible.
Card Network Push Payments
Visa and Mastercard have begun referring to their real-time outbound payment products (Visa Direct and Mastercard MoneySend) as Push Payments. These products allow businesses to send money in real time to another debit card. Customer disbursements via a push payment have been well received by consumers. They enjoy the familiarity of providing bank information or a debit card as a secure way to transact with a business.
Ripple, IBM, Mastercard, and others have developed closed-loop money transfer networks that utilize blockchain for mostly international money transfer.
Now that we have a good understanding of the different flavors of faster payments, we can look at some of the key use cases and how to begin planning for them. It’s not hard to understand why most people focus on the speed aspect of Faster Payments given the nomenclature of the products.
Speed is a key trait that can be useful to frame the discussion, and monetizing speed is obviously intuitive in B2B use cases. There will be many cases in which a business or corporate customer is willing to pay to receive funds faster; however, the same may not be true on the sending side. Many businesses model their cash flow around the float they get from delaying payment until the last possible minute, and cost savings that offset that revenue will be required for broad adoption.
Interestingly, individual consumers are actually starting to expect real-time money movement thanks to P2P payments services (for example, Zelle and Venmo) and other products. For that reason, banks will have a hard time convincing consumers to pay for faster funds availability in most use cases.
In addition to the enhanced speed of the actual money movement, another characteristic of faster payments that is often overlooked is the certainty of delivery and real-time status on both ends of a transaction. Current payment flows in the B2B and corporate environments often involve a multi-step process with POs, Invoices, Checks, ACH, and other individual payment interactions that are not systematically tied together.
Is your FI ready for real-time payments? Read our 2019 Real-time Payments Readiness Report to find out.
The market for technical solutions to simplify this process is massive with ERP (Enterprise Resource Planning) systems, automated invoicing tools, and expense management products all helping to manage part of the process, but none fully solve the needs of most businesses.
This begins to change with the introduction of faster payments. The real-time network from TCH, for example, includes room in the message structure to send remittance info (PO, Invoice Number, etc) as part of the payment or acknowledgment message. Similarly, they also offer the ability for a payment recipient to request more information to supplement the transaction.
These capabilities not only present opportunities for the existing payment vendors but also will enable net new tools from entities who wouldn’t normally be able to offer them. Banks, for example, could utilize the new tools made available to offer more full-service invoice or accounts payable management for their small business customers. This is just the tip of the iceberg in terms of new payment automation capabilities that will be possible.
The examples above should start to paint the picture of how disruptive the US shift to Faster Payments will be. To further illustrate the far-reaching touch of these new payment methods, one should think about the potential impacts to things like payroll disbursements, insurance payouts, tax rebates, gig economy compensation, small business supplier payments, utility payments, tip disbursements, expense reimbursement, and disaster relief funds. These areas are all actively being worked to incorporate faster payments.
Regardless of your role in the ecosystem, the availability of faster payments will impact your business over the next 10 years. Those that invest time now to understand the opportunities and how to best position for them will be the most successful and fully capitalize on them.