Faster payment is about certainty, not speed
Whether you call them faster payments, instant payments or real-time payments, the terminology around the initiative is plagued by poor word choices.
As an industry, we can’t agree on a single name; more to the point, speed is not even the most important attribute of this new service. That honor belongs to “certainty,” which is not even addressed directly, but has to be surmised from the fact that credit transfers can be initiated at any time, are effective immediately and are irrevocable.
Understandably, the term “irrevocable” provokes angst within the payments industry. Where is the dispute resolution we are used to with ACH and cards? How will inevitable errors be handled? What about fraud? Will going to court become a regular occurrence?
These concerns are understandable, but not warranted. Let’s get a few things straight:
All “real-time Payments” are domestic (or at least single jurisdiction) and are thus covered by the consistent set of laws already on the books. For example, in the United States, UCC 3a, Reg E and a few others definitively apply.
The majority of the payments will likely be related to business transactions, and businesses are always eager to deepen their relationship with their customers in all situations. In fact, we are now beginning to hear that some businesses will create innovative solutions that will further reassure their customers in the safety and soundness of their payments.
Although “real-time Payments” schemes do not specifically provide a rule for automatic returns, modern schemes have the messaging infrastructure for automating the dispute resolution process (within the bounds of rules and regulations) and have clarified participant responsibilities and the liability regime to the extent possible.
Focusing on concerns related to irrevocability obscures the fact that “irrevocability” is just one facet of “certainty” and ignores the benefits that come with that. And still, irrevocability trumps speed as a key factor. In the United Kingdom, about 10% of faster payments are forward dated, so immediate execution is not the driver for them. Instead, the driver is certainty, or knowing that a payment happened or did not. And if it did not, there is time to address the issue and re-issue the payment.
And with certainty of timely execution comes a reduction in complexity and cost for banks and their customers, because procedures and controls are significantly simplified. This is particularly true in the area of reconciliation, where the effort is significantly reduced (if not eliminated outright). Similarly, cash management/cash forecasting benefits because funds are available immediately and stay available (i.e. cannot be recalled without receiver’s agreement).
So, what’s in the name? Some argue that adding another cash management term is irrelevant and confusing to the end-user. The mechanisms behind payments should be invisible (who worries about how their electricity is generated and delivered?). If we have to use a name, let’s just use “payments.” That, in fact, was the feedback from an impromptu focus group of 30+ people that convened at the topical talk on Real-time Payments at NACHA PAYMENTS 2017 conference.
However, with massive marketing budgets dedicated to branding individual solutions, we should expect the terminology used around “real-time payments” to become more elaborate. In that reality, we as an industry will be better off if we can agree to focus on words that speak to customer needs (“certainty”) rather than to the needs of their legal teams (“irrevocability”).