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Payments are measured by many attributes — speed, cost, ubiquity, security. Of these, speed is probably the one that has the most room for improvement. In a world where an e-commerce purchase can be made and the product delivered within the hour, it seems more than a little archaic that the time between payment and settlement for many transactions is still measured in days.
The case for real-time payments isn’t just about instant gratification, however. Truncating settlement times has enormous benefits to FIs, businesses and even governments. A 2008 analysis by Australia's Center for Economics and Business Research (CEBR) found that real-time payments in regions without a central payments infrastructure and where funds are available the following day could improve GDP by as much as 1%.
However, real-time payments technology also has the potential to cannibalize existing revenue streams such as wire transfer, and some FIs are loath to disrupt the status quo.
One of the clearest reasons for the introduction of real-time payments is a shift in consumer expectations. In an on-demand culture where not just digital, but physical content and goods can be delivered within minutes, consumers expect parity across all aspects of their lives.
As an example of how consumer attitudes are shifting, a 2015 Mercator Advisory Group survey found that more than 60% of digital banking customers wanted bill payments to be instant, or within the hour, with the majority choosing instant.
With a highly competitive landscape for real-time payments developing outside the bank ecosystem from third parties such as Square, Venmo, Ripple and Circle, banks need to recognize and embrace this trend or risk being left behind. Real-time payments will increasingly be table stakes.
FIs in the U.S. are recognizing the importance of real-time payments. According to a recent survey by Ovum, half of U.S. banks and credit unions see real-time payments as a priority in the next 18 months and of those, 28% say they will increase budgets by more than 6% over 2017 levels.
However, this market isn’t a top priority — the biggest priority among U.S. institutions is mobile banking (58%), followed by cybersecurity (56%) and online banking (53%), according to the survey. Further, U.S. FIs have lower priorities for investment in real-time payments compared to the rest of the world — the U.S lags behind other nations by nine percentage points. However, this attitude isn’t unique to real-time payments: The U.S. lags the rest of the world across all of the prioritization categories in the survey.
In countries where real-time payments have been introduced, there is a very wide discrepancy in the average transaction value, demonstrating that real-time payments are not just for small ticket items and P-to-P, but are increasingly for much higher value transactions.
At the low end of the scale, the average real-time transaction value for Sweden is equivalent to $65. At the high end of the scale, Brazilian real-time payments average $3,841.
What is interesting here is that the transactions don’t represent the relative income levels per country — one would expect that Scandinavian transactions would be of a higher value than Latin American transactions but this isn’t the case. What it highlights is that as real-time payments gain familiarity and trust, the use cases broaden. This may cause indigestion for some FIs that see real-time payments as stepping on the toes of cash-cow revenue streams from wire transfer and ACH.
While U.S. FIs may not necessarily be "all in" when it comes to real-time payments, the benefits for businesses are extremely compelling in a number of areas.
Faster payments enable a wide range of enhanced services for businesses and their staff including weekly or daily wage processing and urgent payment dispersal for dynamic inventory requirements. The main benefit, however, is likely to be from decreased cash and check handling.
In a 2016 study by the Association of Financial Professionals (AFP), 62% of finance professionals expected the impact of faster payments to be positive or extremely positive, with just 4% predicting that faster payments would have a negative impact. However, a sizeable third of financial professionals said that faster payments would have no impact.
Checks in particular are core to B-to-B transactions today and are ripe for retirement in favor of a more digital and business-friendly replacement. In a 2014 Javelin Strategy & Research survey of 1,000 US businesses, from micro businesses with revenue of under $1 million up to large middle-market businesses with revenue up to $500 million, checks were the major form of disbursements made to suppliers, representing between 48% and 62% of the payment mix.
Even with recent innovations such as remote deposit capture for checks, the process remains cumbersome. Replacement of B-to-B disbursement checks presents a massive opportunity for U.S. businesses to reclaim payment velocity and to reach parity with a growing number of countries that have long ago made the transition to real-time payments.
Moscow-based JSC Post Bank has established a merchant acquiring agreement with JCB International to allow JCB cardholders to withdraw cash from all of the bank's ATMs and make payments at Post Bank point-of-sale terminals in Russia.
For years, business models based around micropayments have been touted as an alternative to advertising, offering a new form of revenue for all kinds of content creators, enabling users to pay for the exact quantity of services they consume. They have even been suggested as a way to create alternative insurance products, for example forms of car insurance where drivers pay per journey.