Faster payments are complex, but consumer demand is high
Processing transactions quickly enough to serve digital commerce comes with arduous upgrades and complicated choices, but that's only the stick. The carrot is people like faster payments, so there's plenty of opportunities to boost payment revenue.
Banks that can get to the other side of the faster payment migration can address problems that usually lead to ROI, such as offering merchants consumer-friendly innovation through existing bank relationships.
"One of the pleasant surprises about faster payments is that customers love it, and adoption is higher than we had expected," said Tim Ruhe, vice president of payment strategy and partnerships for Fiserv Enterprise Payment Solutions.
Financial institutions that have launched real-time payments, and have added Zelle P2P, are experiencing 100% to 300% annual growth in adoption, Ruhe said.
The Clearing House reports steady adoption since it launched RTP nearly three years ago. The Federal Reserve continues to piece together its rollout strategy for FedNow, its version of real-time payments and settlements.
The bank-supported Zelle P2P transfer app continues to pick up steam, particularly during the COVID-19 pandemic, and any number of other instant payment services and apps continue to be introduced.
The message is pretty clear for those contemplating a shift to faster payments. "It tells us that the customers like this stuff," Ruhe said during the recent Chicago Payments Symposium, hosted by the Chicago Federal Reserve. "You are somewhat expecting that, but it was a nice lesson learned when launching faster payments."
The popularity among consumers makes it easier to explain to banks that real-time payments is a natural progression of payments networks.
"The business case is really end-user demand and competitive necessity," Ruhe said. "Behind that is the education of the end user, and instant payments really are just an option to speed up stuff they already do."
Even though Zelle's digital P2P transfers are a relatively new and different service, the other advancements in faster payments address the type of payments being made regularly, Ruhe noted. ""Once you make a payment, it is made and there is no three-day lag or a dispute window. In that regard, real-time payments are a lot like cash."
Faster payments developers still have plenty of obstacles to address — avoiding confusion in the marketplace, establishing ubiquity, making the technology easy to use, thwarting fraud and pushing interoperability.
With its wide range of voices and expertise, the council tries to give every stakeholder a say with an underlying mantra of expanding payment options, rather than pitting one payment form over another, or seeking an end to older methods like checks and cash.
"With anything new, there can be potential confusion in the space, as there are many solutions in the marketplace that make payments faster, witih one in place today and another maybe coming tomorrow," said Reed Luhtanen, executive director of the council. "They have a lot in common but also have a lot that can be slightly or very different in terms of when money is available and when it can be used."
Because of that, the council has to "really dig in and create educational materials about how different payments work" and come up with words and phrases that apply to all models and helps people understand what they are signing up for, while also realizing it is not the same as sending a check, Luhtanen added.
BNY Mellon was among the first bank networks to get involved with The Clearing House RTP and with Early Warning on Zelle. The bank discovered it's vital to avoid confusion among messaging standards and operating rules as faster payments become more readily available for cross-border transactions.
"Cross-border is a natural evolution of where we are going with faster payments, when you look at what is happening globally, where in some places they are getting faster payments up with nearly 100% ubiquity," said Carl Slabicki, head of strategic payment solutions at BNY Mellon. "The key is to use common standards and make sure we are using the same language and formatting for the basic communication base of the network."
It's even more important to get communication correct because the rules vary based on jurisdiction, according to Slabicki.
Banks in the U.S. are pushing faster payments by adopting RTP and providing feedback for FedNow.
The e-commerce and digital payment boost that's come during the COVID-19 pandemic is pushing consumers to Zelle or PayPal's Venmo and other options for immediate payments in the gig economy, but more traditional and recurring practices such as paying bills will be the essential proving ground.
"Bill pay evolved 30 years ago with a push model, where banks pushed payments to service providers, but it has slowly evolved to more of a biller direct model and a debit pull," said Eric Dunn, CEO at Quicken. "In many cases, this now occurs with the consumer interacting with the biller on the biller website; with the biller doing a debit of an account."
There's an opportunity to improve the web experience more, creating an integrated experience between customer and biller, Dunn said, adding recurring billing is another strong area for faster payments.
"Bill pay is a large market and everyone uses it, so I think it is a great fit for faster payments," Dunn said. "It is not easy to hook up to ACH for billing and when FedNow launches, a recurring billing engine would be a great use case."
Strategy for success
The desire to stay abreast of current technology and not be left behind by other banks or fintech providers is a motivating factor for many banks, even smaller ones, to look more closely at the benefits of faster payments. But it doesn't happen without giving it the serious thought it deserves, said Kathy Strasser, executive vice president and chief operating officer of IncredibleBank.
"Payments are not talked about as a strategic priority, so the No. 1 lesson learned is that you have to start with education," Strasser said. "You have to educate because a lot of people in the community bank or credit union space don't understand real-time payments and the differences between the products."
Making payments a key part of a strategic plan is an easier sell for smaller banks when they realize they don't have leading-edge capabilities.
Without it, community banks will "see erosion of income, deposit growth and customer retention … all of the things that bankers understand," Strasser added. "You have to develop your payments strategy around where you want to be and learn how customers are using the different payment methods being offered."
It becomes an even easier selling point when breaking it down in a way that anyone can understand.
"We look at success through the lens of our customer," Fiserv's Ruhe said. "Whether I am a consumer, a small business or a corporate, I can pay or get paid by anyone I know or owe, instantly and safely. When we can deliver that to our end-user customers, that is success."
Beyond that, those considering faster payments should also realize that the model quickly "moves payments from actions to interactions," Ruhe added. "This is the perfect time to interact more with customers."