The next phase of real-time payments
Fearful of being the last one standing, banks and credit unions of all sizes will become more aggressive about real-time payments — or risk getting left in the past.
Instant availability of payroll funds, insurance payouts, disbursements, mortgage transfers and property sales and emergency funds access will become the norm, driving further fintech development and payments industry consolidation.
The avalanche is already beginning, as waves of larger financial institutions go live with The Clearing House’s Real Time Payments (RTP) network. The first community bank is piloting RTP and dozens more smaller institutions are poised to follow in early 2020.
But banks aren't the only ones that stand to be disrupted. Real-time payments can force significant changes in the way the federal government handles payments in the next few years, according to Ronda Kent, assistant commissioner for payment management who is chief disbursing officer of the U.S. Treasury’s Bureau of the Fiscal Service.
She noted that 95% of U.S. government payments are delivered electronically, primarily via ACH.
“As we look out at today’s payment landscape there are two dominant features — changing technology and changing consumer expectations. The Fiscal Service envisions a future payment industry where everyone expects to be mobile and connected,” Kent said.
There may be quite a few unintended consequences from the move to RTP, and one of the first areas where these will come to light is small business, where benefits and costs are often magnified, said Farhan Ahmad, founder and CEO of Bento for Business, a payments platform for SMBs.
“The goal for small businesses is optimizing payments for a variety of reasons, and for many companies accuracy and control will still be more important than being instant five years from now,” Ahmad said.
Small businesses in particular will move slower in adopting real-time payments because of the potentially high cost of errors and fraud in instant, irreversible payments, he predicts.
“Main street businesses will put control and visibility ahead of speed, and they will adopt RTP only where it makes sense,” Ahmad said.
“A lot of smaller banks were skeptical about who was driving RTP, but now they have come to the realization they trust the guiding principles behind faster payments, and as they watch big banks adopt RTP they will follow,” said Rusiru Gunasena, senior director at Jack Henry & Associates, which is enabling the first community bank RTP pilot through its JHA PayCenter hub.
With the Federal Reserve proposing to develop its FedNow instant-payments network by 2024, it’s created a swirl of debate about potential interoperability and even necessity that seems to be accelerating RTP adoption. The spread of the bank-run Zelle network will also play a role.
“We now have millions of transactions flowing through the Zelle and RTP networks, and by 2025 we think it will be billions, with broad choice in the way payments are sent and received,” Gunasena said.
Surprising use cases will emerge for RTP over time. Few expected that rent payments would be one of the strongest categories of Zelle payments, Gunasena said. He expects to see real-time bill payment catch on in the next few years as consumers and businesses cut out slower paper- and ACH-based processes for faster clearing and settlement.
Ride-hailing and other gig economy employers have been early RTP adopters, and Gunasena expects that within five years real-time payroll will spread to other industries.
“People want to get paid as soon as the job is done, and with RTP that will be possible,” he said.
Real-time payments enable richer data to accompany payments for invoices and remittances, which may radically improve options for B2B payments. New RTP options could also hurt third-party software providers and consulting firms whose role until now has been helping corporations speed up legacy payments with their own makeshift tools.
“Real-time payments will dramatically disrupt financial services in the U.S.,” predicted Suresh Ramamurthi, chairman and CTO at CBW Bank, an early backer of the digital bank Moven, which has also partnered with Ripple Labs.
Real-time payments could be the fatal downfall for legacy payments like checks, and ACH debit payments will also be greatly impacted, Ramamurthi predicts. Banks still fearing fintechs will suddenly see the benefit of strategic partnerships to ensure success in faster payments, he said.
“Banks will be forced to create APIs enabling customers to push funds for bill payment, and we will see a big emphasis on real-time risk management," Ramamurthi said. "Real-time data will support this, enabling financial institutions to analyze nearly every aspect of a transaction within seconds, including what other payments a customer has recently made and potential concerns around a specific transaction.”
Omaha, Neb.-based banking software provider Baldwin Hackett & Meeks doesn’t expect real-time payments will put many companies out of business, and it won’t necessarily go as smoothly as some predict.
“RTP has been a long time coming, but it’s going to be a long time until it replaces existing practices, and even if FedNow rolls out it won’t be without a certain amount of struggle and serious, extensive negotiations among major players in the banking industry,” said Jack Baldwin, BHMI’s chairman.