Now in his eighth month as CEO of The Clearing House, David Watson noted to PYMNTS CEO Karen Webster that there’s significant promise — and a long road ahead — for real-time payments in the United States.
There are two dimensions to consider, he said, in tracking and scoring the readiness and the progress of faster payments. And, if one’s scoring those dimensions on a scale of one to 10, according to Watson.
“In terms of the capabilities we can offer, we’re at about a seven. In terms of the takeup, the use and the explosion of those payments, we’re at about a one or two,” he said. “It’s a long journey to change an infrastructure and a settlement model.”
TCH’s real-time payments platform, RTP® Network, has been around for almost six years. The platform reached its 500 million payment milestone, per a July announcement. That same month, the FedNow® Service went live. There are two real-time payment rails in existence, yet to be interoperable — that’s going to be a work in progress — but looking toward the same horizon.
The journey may be taking longer than some observers thought back in 2017 when RTP went live. But Watson’s sanguine view of what’s to come has been informed by looking at real-world experience in real time, where Europe and various nations around the globe offer up a harbinger of how things evolve. Even with government mandates in place across the pond and internationally, real-time payments did not see groundswells until certain “trigger events” happened. In the case of India, a trigger point was demonetization.
In other cases, COVID-19 was and has been a significant tailwind.
The U.S. is different because innovations, connectivity and use cases tend to be driven by the market. And there’s another unique aspect stateside, given the fact that there are two real-time network operators.
With two real-time services and platforms on offer, the question remains as to whether financial institutions (FIs) will jockey to pick a rail and whether FedNow and TCH will compete for differentiation.
“I, of course, look to have friendly competition with FedNow,” said Watson, who added that “at the end of the day, my goals are the same as the Fed — which is ubiquity of instant payment settlements and a quorum of payments coming over the instant payments networks. That’s the journey we’re all on.”
The Fed has been around since the early 20th century; TCH traces its roots to the beginnings of U.S. banking itself (and the largest commercial banks still own it) back more than 170 years. There’s been no overlaying of standardization, messaging and protocols, said Watson, so any movement toward real-time interoperability will be a long-term one.
“I want to make sure that, with my cousins at the Fed, that we’re not fighting over a tiny piece of the pie when the goal is to grow instant payment settlement across the industry,” Watson said. “Neither of us is in this game for profits.”
He predicted that there will be hockey-stick-like growth in instant payments over the next five to 10 years as various trigger points are met. Receivers will put pressure on a spectrum of senders to embrace real-time payments.
But the pace will be more marathon than sprint, Watson said, chiefly because there is a bit of lag in the mix, tied to the need for more understanding and education surrounding the payments themselves. There’s still the perception that all faster payments settle instantly, but in actuality, as Watson explained, there’s a delayed settlement with many faster payment options that happens behind the scenes.
Watson said that at the moment, given the nascent demand for real-time, banks, providers and enterprises can still mix and match different rails for different payment types depending on the use case.
“Whether that’s the traditional ACH with a delayed settlement, whether it’s the real-time payment settlement, whether it’s even the card rails, there’s ‘different horses for courses,’” Watson observed. But time changes all things, and the rails that are sufficient for some payments now may not make sense for that same transaction in a decade.
The use cases in which consumers are most interested — instant wage access, P2P and even insurance payouts — demand real-time settlement. Faster payments to merchants also demands real-time settlement. The certainty of knowing one can access the money right away will become ever more important. Those will be the trigger points of the future. The corporate treasurer who finds that their FI doesn’t support fully instant send-and-receive capabilities will likely switch providers.
The individual who’s unable to break free from the shackles of the two-week pay cycle and get paid when the shift is up will look to gain access to funds in real time.
But what’s needed to reach real-time ubiquity is critical mass — for the credit unions and banks to sign up and start using instant payments. Watson said that the FIs are considering or tackling the technical integrations with various enterprise resource planning (ERP) and accounting systems to ensure that accounts can receive those payments instantly.
“We’re seeing the spike in pipeline and engagement on our side at The Clearing House,” Watson said.
Most faster payment transactions are tied to lower dollar payments, within the range of a few hundred dollars, and as transaction limits remain in place (the limits are now at $1 million for RTP).
The greenfield opportunity is significant in the bid to replace paper checks and cash down to the micropayment level, said Watson, who added that comfort with using instant payments will grow as there’s a level of standardization in anti-fraud efforts and risk scoring across the industry.
As consumers and businesses become more comfortable with instant payments and settlement, it’s likely that request for payment (RFP) will see significant advances with utilities, real estate firms and other use cases.
RFP, said Watson, “changes the conversation of payments — where the power goes back to the person who owns the account and their ability to push funds out with instant settlement — rather than funds being drawn out of their account without the owner knowing when.” TCH, for its part, is seeing notable demand for RFP across a variety of scenarios, such as C2B and B2C transactions.
Looking ahead, Watson said, “the momentum and scale for instant payments comes [from] the areas with unmet customer needs,” a pantheon that includes everything from earned wage access to ad hoc payments.
“Instant payments settlement is the future,” Watson said, “and it will be, de facto, the way to settle transactions cheaply, with certainty and with transparency.