The year 2020 has been an unexpected one, to say the least — not least of all for the payments ecosystem. This year was supposed to be a tipping point for real-time payments adoption in the U.S., yet progress hasn't been as advanced as many in the industry would have liked.
Interestingly, said Manish Gurukula, CEO of Alacriti, it's not the pandemic that has slowed the country's path toward faster payments. Rather, a series of complex roadblocks unique to the U.S., which were in place long before COVID-19 hit, are responsible for the faster payments slowdown.
Speaking with PYMNTS' Karen Webster, Gurukula explained which factors hold the country back from achieving maturity levels seen in other markets like the U.K. and India. For financial institutions (FIs), he said, there is still plenty of work to be done to not only prepare for the rollout of new real-time payment services, but also to accelerate the U.S.' real-time payments journey.
The Tallest Hurdles
The faster payments ecosystem in the U.S. is unique compared to other markets in the world due to a general lack of regulatory pressure.
"The U.S. really has had no regulatory push compared to the U.K. or the EU, India and the broader APAC regions, where local authorities have mandated this option," said Gurukula. "UPI in India is the poster child for real-time payments success today, in terms of adoption. And it was a completely government-driven initiative."
While financial institutions have limited sway over the government's involvement in the development and rollout of faster payment services, they can play an important role in this process if they overcome another major hurdle the U.S. continues to face: legacy infrastructure.
A reliance on outdated technologies is a multifaceted challenge, one that leads to what Gurukula described as "technology debt" as FIs struggle to invest in the cloud and upgrade their infrastructures.
"Most of the existing banking technology infrastructure is monolithic and designed for batch-based processing of ACH and wire payments," he said. "Enhancing these infrastructures to support end-to-end, real-time payment services is a major challenge. It results in a longer time to market."
Until recently, Gurukula added, this challenge was exacerbated by "infrastructure ambiguity," with a lack of clarity or guidance as to which payment rails upon which banks should develop their faster payment services. That, coupled with the massive undertaking of migrating to a real-time processing ecosystem, has kept faster payments ubiquity out of reach — for now.
Finding The Most Valuable Use Cases
Financial institutions of all sizes have expressed interest in adopting real-time payment capabilities — but as they push through upgrading infrastructure to implement such services, they have also faced the challenge of understanding how best to monetize.
As such, Gurukula noted, identifying the use cases for real-time payments with the greatest potential for immediate adoption can be an important strategy in guiding FIs' modernization initiatives to support faster payments ubiquity. Look toward the push-to-debit payments capability as an example of how use case identification can support adoption.
"What happened there was that Visa and Mastercard had push-to-debit transactions available for a very long time," he said, adding that the use case with Uber and Lyft drivers being able to withdraw funds from wallets into their bank accounts as one example that drove push-to-debit services in recent years. “Similarly, in the case of real-time payments, there are some use cases that could potentially accelerate adoption."
Among the largest are real-time disbursements, particularly in the insurance space. This potential was recently on display as auto insurance providers began issuing reimbursement checks to their customers, a process that could have ended in a far more enjoyable experience had providers been able to disburse funds into client bank accounts in real time.
And for InsurTech companies like Lemonade, while technology has enabled automation of claims processing and other workflows, payouts are still limited by legacy payment rails that don't allow for disbursements on holidays, weekends or anytime outside of traditional processing windows.
Other potentially valuable use cases include disaster relief payments to individuals and small businesses, as well as other payout contexts within the gig economy.
Hitting The Gas Pedal
By readying infrastructure for real-time payments and developing services around use cases with the greatest potential, FIs large and small can support faster payments adoption even where regulatory mandates don't exist. There are indeed some use cases that may take a bit longer to develop — in B2B payments or online bill pay, for example. Yet there are also plenty of opportunities to add value to both commercial and retail bank customers, particularly as financial service providers explore the opportunities for real-time payment rails to not only move funds faster, but also to enhance the movement and visibility into transaction data.
With the Federal Reserve's FedNow service on the horizon, Gurukula said the U.S. has finally seen that regulatory-like push that has proven to be a powerful driver of adoption in other markets worldwide. Yet with faster and real-time payment services available today, FIs can make 2021 a year of accelerated adoption.
"There has been a general slowdown in terms of real-time payments implementations, but going into 2021, we'll probably see an acceleration in adoption with some of the major processors," predicted Gurukula.