The Federal Reserve’s FedNow real-time rail debut is imminent.
Financial institutions (FIs) including banks and credit unions have been using services from Zelle to rails like the RTP Network from The Clearing House (TCH).
Jim Colassano, SVP, RTP product management at The Clearing House; Meghan Oakes, VP head of products and services enterprise payments Americas at FIS; and Dan Baum, head of payments product, FedNow said the stars are aligning to move money faster, across a variety of use cases, appealing to a wide swath of users.
Banks and enterprises are committing to instant payments. The consumer hesitation to make instant payments a core feature of their financial lives will be brief. Businesses will migrate away from checks and wires and will find that straight-through processing will transform commercial payments, said Oakes.
“And in two years hence,” said Baum, “instant payments will be every conversation … we’re going to need to be agile enough to keep up with the demands of the industry.”
Ubiquity may take time, but ubiquity is on the horizon.
The impetus is there to lay the groundwork and infrastructure for faster payments, said the panelists. Our world, after all, is becoming more instant. We interact with text messages and real-time communications to enable instant communications. And, increasingly, we expect to have transparency and real-time confirmation of where our money is, where it’s headed, and that the people and businesses that we pay have got the funds in hand.
As Oakes noted, “we want insurance claims to be paid out in instant fashion, we want other things to be processed in instant fashion.” Added Colassano, “Consumers are taking their personal experience [with faster payments] as they become business owners and are starting to adopt real-time payments.”
What was once viewed as cutting-edge innovation when TCH launched in 2017 — and it would take some time to catch on — has become a real demand for real-time solutions. The early use cases of meeting payroll, paying gig workers and getting money funded into digital wallets has given way to a greater demand to have more real-time, digital tools at the ready to tackle soaring interest rates and other macro pressures.
Colassano went on to observe that the exogenous pressures have spurred an embrace of instant payments in the B2B realm, especially as individual transaction limits have been increased to $1 million.
“Real-time payments and precision payments allow you to target pain points,” he said, “and on the B2B side we see businesses starting to take advantage of early payment discount by making payments instantaneously even on the weekend. I like to call the transactions ‘precision payments.’” The volumes crossing TCH’s network, overall, bear testament to the demand — where last year there were 172 million transactions processed, tied to about $72 billion in value. Growth rates have been in the double digits across the last several years and are being given a tailwind by B2B use cases, said Colassano.
But for the FIs and the providers seeking to satisfy that demand from consumers and enterprise clients, an incremental approach is often the best strategy — there’s no need to boil the proverbial ocean, Oakes said. An FI, she said, can take the first step and cement its ability to receive instant payments, and then seek to be able to initiate those payments.
“I can take one step to get on the rail,” she told PYMNTS, “and then grow from there.”
The connectivity is key, of course, where getting the infrastructure in place has proven to be a momentous undertaking in partnership between the private and public sectors. For the instant payment schemes around the world, the labors of the past few years are bearing fruit.
As Baum remarked, “Instant payments, broadly speaking, have been demonstrated to show benefits across the globe. The jurisdictions that have implemented these payments and that have been in the market as a whole have shown improvements in gross domestic product — and at a more micro level, we expect benefits to accrue at the consumer level, the small business level and for large corporates.”
To that end, he said, the Federal Reserve is following through on its intention to connect financial institutions in every community directly into the instant payments network. And, he added, “we’re working with our colleagues at the clearinghouse to create a ubiquitous network, a network of instant payments capability such that any American consumer or business can pay any other American consumer or business … we’re on the cusp of being able to exercise that.”
No matter the use case, there’s the need for richer data to accompany those transactions, and the panelists noted that ISO 20022 will take its place as a global standard for messaging between FIs. Baum contended that the standard is being embraced globally and domestically across all payments rails, and has the benefit of being an “open standard … that has information that can be shared.”
Shared information, in turn can aid the “innovation layer that addresses the pain points in payment, and gives flexibility for the end users’ providers,” Baum added. The flexibility, he said, can and will improve cross-border payments between enterprises and apps.
And at a more micro level, said Oakes, we’ll see the ability for forms to automate back-office accounts payable and receivables functions in an instant fashion, matching subledgers reconciliations with speed. The positive ripple effects will unlock credit lines and eliminate paper checks.
“As this unfolds, grows and becomes table stakes for everybody, it will be pretty impressive,” Oakes predicted.
No discussion on instant payments would be complete without discussing fraud. The conventional wisdom may hold that faster payments equals faster fraud. But that sentiment does not match up with reality.
“It’s a nice tagline,” said Colassano. “When we’re talking about instant payments, we’re talking about credit ‘push’ situations. And those transactions are inherently safer than a direct debit today where someone can come into an account and pull money out.” Though some observers are concerned about the irrevocability of those payments, the transactions themselves run across secure bank rails, which are some of the most secure payments channels in the world. Banks, he added, are examining ways to educate their consumers about thinking about instant payments as akin to cash payments, and to act accordingly.
“We do have an obligation as networks and as banks to protect our clients, but part of that protection is making sure that your customers are properly educated so they can make an informed decision when they press that button after reading all those pages that say, ‘please make sure you know that person,’” said Colassano. From a technological perspective, Oakes said that rolling out standard APIs (as FIS is doing) to help FIs integrate to their choice of fraud provider can ensure additional layers of safety and security for instant payments.
Conventional wisdom might hold that each of the panelists come from a competing point of view, but Colassano, Oakes and Baum noted that the journey toward instant payments is a collaborative and mutual one, where Colassano noted “there’s a massive amount of upside in this space, and I welcome the introduction of FedNow.” Baum remarked that the FedNow and TCH have worked to make sure that there are no technical issues for any originator who would want to use both networks.
“Over time, we’re going to be competitive partners,” he said, “and we will learn to differentiate our services such that we can gain competitive advantages… This will be healthy for the industry, and will improve the services that we’re both providing to our clients.”
Instant payments will scale, said the trio, chiefly because certain use cases demand that scale and providers will lose clients if they don’t offer that functionality.
Baum said 90% of businesses have said that the availability of instant payments will be an important part of their banking decisions moving forward. As many as 80% of consumers are actively using faster payments solutions. And 70% of users have said they will consider faster payments as a consideration of whether they are satisfied with their financial services providers moving forward.
For the providers, said Colassano, “instant payments capabilities are an additional arrow in the quiver — it’s the perfect solution not for every payment problem, but a good portion of them.”
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