Even the most convenient, feature-filled payment rails will fall flat if nobody can be convinced to try them.
Such systems can offer everything from swifter settlement times to easy payment status tracking, but such benefits require widespread adoption.
Consumers and businesses do not want to use new payment networks unless they believe others are already using them, creating a chicken-and-egg problem. Payers have to know that payees will accept certain payment methods before making purchases, and payees do not want to invest until they know payment instruments are in demand.
Consumers and businesses alike tend to cling to established payment methods until frictions or alternative methods’ appeals become significant enough to inspire change. Payment scheme providers must consider how to encourage adoption, especially if operating in countries lacking a government mandate for financial institutions (FIs) to sign on.
Banking association and payments company The Clearing House (TCH) has been confronting such concerns as it advances its real-time payment (RTP) offering in the U.S., according to Steve Ledford, TCH’s senior vice president of Product Strategy and Development. Ledford recently spoke to PYMNTS to explain how companies can design faster payment schemes that stand out from existing systems yet are easily adopted.
Businesses and consumers need persuasion to use certain systems over others, but providers can only make such appeals after customers can access the rails. Building adoption momentum thus starts with customers’ FIs. Companies must offer several different ways for FIs to connect to their systems. Larger banks may have teams of technical specialists and sizable budgets to make resource-intensive direct connections into faster payment schemes, but that approach will not work for all FIs, Ledford warned.
“The U.S. has 11,000 FIs of various sizes — many more than in any other jurisdiction in which [real-time payments rails were launched],” he said. “There was not going to be one method to access the system. In a lot of other countries, a few of the larger FIs access the network and other FIs access through them. That [arrangement] was never going to fly in the U.S.”
TCH paid particular attention to community banks’ and credit unions’ abilities to connect with faster payment schemes. These smaller players are less likely to have the necessary resources to make direct connections, and recent developments have given TCH incentive to prove RTP’s functionality for smaller FIs.
The federal government deliberated in 2018 and 2019 over developing its own real-time payment system, FedNow, to compete with RTP. It decided that it would launch such a system by 2024, stating that a government-created system would better support smaller FIs than TCH’s RTP, especially given that the latter describes itself as being owned by “the largest commercial banks.”
Ledford noted that many small to mid-sized FIs prefer to gain access to faster payments rails via gateway providers that have already gone through the integration process so as to spare them from handling that work themselves. Another popular connection method relies on core banking system software providers, which integrate with payment rails and extend access to all FIs using their software. Both approaches grant FIs access while other parties manage the technological undertakings.
Real-time payment rails can gain ubiquity once third-party developers start leveraging them for new apps and other services. Payments providers can encourage such growth by ensuring their rails are easy to work with, such as by implementing ISO 20022 for payments messaging — a standard that developers often use for other web and mobile application projects, according to Ledford.
Making connections is only half the battle — the other portion involves enticing developers and FIs to use these new rails. Motivation is especially important in the U.S., where FIs already have access to speedy — albeit not instant — rails. Such a situation creates a need for added features, Ledford said.
“[A successful new rail] couldn’t just be something that’s a little faster than same-day ACH,” he explained.
Offering new capabilities is one way for a payment rail to stand out. Ledford noted that such services could allow companies to send payment request notifications, for example. Real-time payments systems should not debit accounts, as the immediacy of such transactions gives no time for corrections, meaning funds could be taken from the wrong users in the wrong amounts. Payment request messages blend credit payments’ security with digital controls by enabling payees to determine exactly when they want to prompt customers to send funds. Payers who receive the requests can then decide to comply and issue the funds in real time or decline the transaction.
Payment system providers should also design their systems to support numerous use cases, he said, adding that the networks should be made into platforms that FinTechs and other parties can leverage for a variety of payments purposes. Such actions ensure that the offerings remain relevant to emerging needs and unanticipated uses. The growing demand for real-time employee expense reimbursement and instant payroll has surprised TCH, for example, but RTP’s flexibility means it can be leveraged for such purposes without any adjustments to the network.
The instant payments ecosystem is quickly evolving, with new uses and entirely new rails continuing to emerge. Such payment systems must earn strong and populous user bases before they can fully transform commerce, but achieving that level of uptake rests on smooth adoption processes and compelling use cases for FIs. Providers would be wise to follow these principles when envisioning how to drive the future of commerce and finance forward.