Real-time Payments Use Cases and Opportunities in 2019
The world of payments is aflame with talk of real-time payments and how it will revolutionize payments capabilities in the United States. 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 about the business case for a faster payments system and 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 is currently one solution in the market, and one recently announced to be in the works. It is 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, person-to-person payments (P2P), and business to consumer (B2C) disbursements. While all of these payment services can be completed today by other payment methods, the value in using an RTP system comes with the enhanced data capabilities available with each transaction, the certainty of payment receipt and the immediate availability of funds for the receiver.
The RTP process involves a receiving bank, a sending bank, and a pre-funded Federal Reserve account. Real-time payments are executed through a credit transfer payment message within the RTP network. The transfer is initiated by the sending institution, received by the receiving institution, and finalized in under 15 seconds.
The three main components of RTP functionality are receive, send, and request for payment (RFP). There are also other supporting messages for exchanging data and other information.
The Federal Reserve FedNow Service
The Federal Reserve announced yesterday that they will start developing a new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality to support faster payments in the United States, to be called FedNow, and should launch in 2023 or 2024.
For more information on the FedNow service, and some thoughts on its effect on the market, check out What is FedNow and How Does It Impact The Clearing House’s Real-Time Payments?
Now that we have a good understanding of the real-time payments services, we can look at some of the key use cases. It’s not hard to understand why most people focus on the speed aspect of real-time 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 business payments or 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.
In addition to the enhanced speed of the actual money movement, another characteristic of real-time 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 financial institution ready for real-time payments? Find out with our 2019 Real-time Payments Readiness Report.
This begins to change with the introduction of real-time 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.
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 real-time payments.
Most of the largest financial institutions are connected to real-time payments and are already beginning to work on use cases across their portfolio. Smaller institutions have also connected, and are targeting the RTP functionality toward their core business, whether that be commercial, small business, or retail.
Regardless of your role in the ecosystem, the availability of real-time payments will impact institutions of all sizes over the next 10 years, and dramatically affect the financial services industry. 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.