August 9, 2019
TABLE OF CONTENTS
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 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.
Levvel’s 2020 Real-time Payments Report is here. Read the report today.
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 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.
Levvel’s 2020 Real-time Payments Report releases on October 28, 2019. Pre-register to be among the first to read the 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.
Chief Strategy Officer
Senior Financial Services Consultant
Senior Financial Services Consultant
Scott Harkey is Levvel's Chief Strategy Officer while also leading the Payments and Financial Services work. He has 15 years of banking experience including leading the technology team that implemented digital wallet products at Bank of America along with 10 years of technology merger integration and IT operations outsourcing work at Wells Fargo. Scott brings a unique “insider” point of view combined with a proven track record of delivery to banks, technology providers, and merchants exploring the digital payments space.
Chris is a Senior Financial Services Consultant who works across a variety of companies and industries to create strategic payments advantages. He has over eight years of experience in managing emerging payments and digital platforms and served as a subject matter expert in tokenization, digital product management, and open banking. Chris spent five years at BBVA Compass, most recently leading business-efforts in the launch of Android Pay and Samsung Pay, as well as managing their mobile wallet offering. The last three years have focused on tokenization, Zelle, and real-time payments strategies within organizations of different sizes and needs. He currently resides in Charlotte, NC with his wife and two children.
Kara Ford is a Senior Financial Services Consultant who works with financial institutions, merchants and enterprises of all sizes to help them identify and implement their payment strategies. She comes to Levvel with 7+ years of experience in banking as a payments professional with deep knowledge in financial services offerings for commercial and retail customers. She has focused the last three years on P2P and Real-time payments with a focus on product strategy, architecture, and implementation of the services for customers.
Now that 2020 has arrived, the reality of RTP adoption has begun to outpace planning for implementation. The RTP conversation is no longer around should it be implemented, but rather of use cases that have been missed to better serve customers.
Throughout this series we'll provide answers to frequently asked questions surrounding product management for RTP, such as managing the product(s) long term, dealing with cannibalizing current products, and more.
TCH’s RTP adoption is rising. A recent study noted 74 percent of small and large institutions are considering RTP or have begun implementation. Although a large majority are adopting RTP, there are many differences for RTP within small or large FIs.
In 2019, we participated in the RTP Buildathon, sponsored by The Clearing House, Oracle, Yodlee, and The Carolina Fintech Hub. Our task was creating a compelling use case for leveraging the RTP rail and building a working prototype to demo our idea.