As faster payments proliferate, is there a business case for banks?
If the deployment of faster payments came with a guarantee to boost a financial institution's bottom line, more banks and businesses would likely invest in bringing their legacy systems into a new age.
Faster payments come with that possibility, but don't come with that guarantee.
Any success stories should begin soon, considering the Federal Reserve has revealed its intentions to start the FedNow faster payment settlement process in the coming years, Same-Day ACH continues to grow and The Clearing House continues to attract customers with its Real-Time Payments rails.
"When looking at corporate customers and some of the benefits and value-added services available to them, that is where you start seeing a business case in real-time payments and a return on investment," said Bridget Hall, real time payments leader at ACI Worldwide. "It helps create more of a story around why the bank should be enabling and investing in real time payments."
In the past few years, faster payments technology has seemingly moved along at a faster clip than the evidence that financial institutions and corporations can use RTP and other rails for revenue generation.
As such, the potential for faster payments technology to equate to fee-based services in the B2B or B2C landscape is just now being realized, Hall said.
"At the most recent Faster Payments Council meeting, the discussion was about when ACH first came out and how it found its first use case in tax refunds, and that caught on with businesses and consumers because you could get a tax refund sent right into your account, instead of waiting for a check," Hall added.
In that same way, insurance companies are seeing major benefits in being able to offer immediate disbursements, and banks can leverage faster payments capabilities in securing certain partnerships that would offer faster payments for a fee.
"It really is up to the banks, merchants and large corporations to see what they can develop as use cases for this service," Hall said. "The really neat part about this is that the framework is there, or being built to work in other countries, and the framework and rails have no limits in terms of coming up with use cases."
Over time, non-banks and large corporations that move a lot of money would partner with a bank to utilize faster payments technology, Hall added. "Use cases are unlimited when you think about it, as other ideas can come up on top of other services and use the same infrastructure."
An example of this type of thinking is unfolding with the ISO 20022 messaging standard that the Swift standards organization has been pushing for its network banks. Swift's Global Payments Innovation seeks to get all banks using similar processes and messaging to get full efficiency from legacy systems and add new technology as needed.
The ISO 200222 messaging standard attaches data about the transaction to the money transfer, eliminating the need for a recipient to have to be informed via e-mail about a payment being sent and for what reason — and then cross-checking that information against the transaction coming into an account or banking app.
However, banks continue to struggle with creating a solid business case for faster payments with a clear ROI, said Erika Baumann, senior wholesale banking analyst for Aite Group.
"Banks need to know how to make money off an investment, and businesses need to understand the value proposition, and they are largely dependent on banks to educate them on this," Baumann noted.
With no immediate regulatory or compliance mandate forcing adoption of faster payments, the transformation will come at its own pace — one that is based significantly on real-time payments being very new, and existing payment rails being very old.
As consumer demand grows and other banks adopt faster payments, those not yet on the rails will be at a disadvantage, Baumann said.
"Businesses are starting to use faster payment capabilities as a differentiator," she added. "I drove by four fast-food restaurants and one had a sign that said, 'work here and get paid today.' That establishment will likely get first pick at talent."
The value of faster payments to small businesses is becoming more apparent. "As more banks enable send-and-receive capabilities, even if small businesses aren't using send right away, they can benefit from collecting payments faster," Baumann added. "That is really critical for small businesses."
While return on investment is a key consideration for banks, the other key challenges for faster payments — interoperability and addressing legacy system impacts — won't be resolved quickly.
That said, announcements from banks about hooking into faster payments technology are coming at a steady pace now.
Wells Fargo this week said it was adding access to The Clearing House's Real Time Payment rails through a mobile app for its customers, expanding on last year's service launch at the bank that included the RTP network for retail and wholesale customers. And HSBC said it plans to support sending payments on the RTP network in early 2020; it has supported receiving real-time payments since July 2019.
Banks should be thinking about long-term strategies and approaching it proactively, rather than reacting later, Hall said.
"When a bank says that real time payments sound really exciting, their next question is what do we do next?" Hall said. "We know the legacy system is an obstacle that banks have, and it has been for years. But where the bank wants to be depends largely on what its customers want out of real time payments."
Banks have to consider what is the best way to start within their legacy system and advance over time, Hall said. "If they are doing things in a thoughtful way to get where they want to be long-term it works far better than doing something today that wouldn't easily be expandable."
Overall, like many other aspects of payments technology adoption, patience is most important, Aite's Baumann said. "Keep in mind that ACH has been around for more than 40 years now, and what we are putting in place with faster payments will likely have even greater longevity."