With RTP, banks stand to be able to compete better. Arguably, the larger banks—who have been controlling the on- and off-ramps and running the toll booths on the current real-time network ecosystem—would seem to lose out. However, they might stand to gain the most: the more data, information and payments that move across the network, the more value those banks can bring to the network. Rose observes that these banks may make less on fees for shepherding the movement of money through the system, particularly as competition starts to determine the price of payments. But they may make more on new, data-driven customer solutions that are built on the rail and increasingly secure enough for larger dollar amounts (through steady technology advancements).
The addition of TCH’s RTP system to the ecosystem promises to “democratize” real-time payments, making them affordable and accessible to all banks (including smaller banks, community banks and credit unions). Long dependent on whatever systems their core processors used, smaller banks may actually be able to “jump the shark” by taking advantage of the technology shift and the ability to easily add new payment types.
Businesses will have more flexible, secure and efficient ways to make payments through their commercial bank accounts, in a way that keeps pace with how vendors, employees, gig-economy workers, and customers expect to pay and be paid. All while removing friction, improving cash flow and simplifying operations—like currently cumbersome reconciliation (aka “did I get what I paid for?”). Businesses can operate with greater agility.
Think about Uber’s instant-payments-to-drivers model. Now, imagine Coca-Cola paying all of its drivers at the end of the day for delivering and restocking the company’s Coke machines. Or a family-owned light manufacturing business being able to dispense with cash entirely when dealing with its network of suppliers. Everyone in either transaction wins. (The Clearing House has a great example of RTP-enabled payment-on-delivery here.)
Real-time payments can help modernize corporate Treasury operations (“the real-time treasury”), long bound by compliance/regulations complicated by too much paper and sneaker- net. Real-time liquidity, cash-flow forecasting and FX management are all processes that will likely benefit from ubiquitous real-time payments, although it may take some time to transition from the current well-documented, well-understood Treasury processes that govern B2B payments. In the future, there may be new overlay services that combine these processes.
Consumers will have even more options to pay and get paid faster “my way,” with less hassle and risk. For example: Request for Payment could provide the ability to “renegotiate” payment terms for people living paycheck-to-paycheck, avoid expensive traditional emergency-cash or payment options, or optimize cash flow if they are working multiple jobs.
Fintech innovators have a powerful, market-ready technology upon which to build new apps for these and other applications.
THC’s RTP system, its data, Request for Payment, and emerging third-party services are well-timed to help banks and corporate Treasury operations with much-needed digital transformations, many in progress: a powerful business catalyst.
Where things could go “off the rails” (pun intended)
So what could go wrong in this rosy scenario? Three things are top of mind.
Fraud: Faster payments will inevitably lead to faster fraud, as we’ve seen over and over in the past. Fraudsters go where the money is; look how quickly and creatively they mobilized to attack Venmo. Banks and businesses will suffer if they try to manage real-time payments using current fraud measures and technology. By applying artificial intelligence (AI) and machine learning (ML) to the wealth of conversational and transactional data being generated by real-time payments, banks, businesses and their proxies (core processors) will be able to up their cyber-fraud games to address real-time challenges. (Watch this space, as well as what’s happening in the U.K. and Europe, where irrevocable payments are already in play.)
Human error/fallibility: With real-time settlement, consumers and businesses will need to understand that real-time really means real-time. This will take education. Until now, most real-time-appearing payments, such as credit cards and even Zelle, have actually been real-time messages with a promise to pay built in. The “payment” happens in real-time, but the actual settlement (money movement) takes place in the background on a different schedule, governed by a well-accepted but often burdensome set of rules honed over the last 40 or 50 years. New rules will be needed for things like recipient validation, for example.
Regulation: After long saying that it would leave real-time-payment innovation to private industry, the Federal Reserve (the regulatory body that also provides Fedwire) will introduce its own, competitive RTP network (FedNow) in 2023 or 2024. Meanwhile, The Clearing House is naturally concerned about protecting its investment in building the RTP system while adhering to a competitive flat-pricing pricing model. Whatever happens, we need a real-time payments ecosystem, not a collection of stand-alone RTP networks, emphasizes Rose, with regulations that keep up with the new real-time payment rails. Competition is good, but everything needs to be interoperable, which is where Open Banking (with its emphasis on APIs) and standards like ISO 20022 come in.
Revolutionizing Payments, Reinventing Business
Ubiquitous mobile technology enabled Uber to reinvent the taxi ride, by removing its stress and uncertainty, including the scramble to pay at the end. Uber made the payment invisible. Similarly, Open Banking plus an interoperable, real-time payment ecosystem will help businesses remove the anxiety from B2B and B2C transactions, by making payments invisible.
With real-time payments as building blocks, businesses can focus on meeting business goals—like attracting better employees by paying faster or, conversely, improving liquidity by holding back—instead of focusing on the payment mechanics. Whether it’s your Uber experience or paying employees or vendors advantageously, the payment just flows.
Real-time payments are a watershed moment in the U.S. financial system, particularly for business payments. Let’s hope that the Fed, regulators, banks, businesses, and financial technology vendors/innovators jump on the opportunity, for all our sakes.
Read Part 1 of this series for real-time payments defined.
For further insights into the payments industry and beyond, subscribe now to SmartPayments.com and stay up-to-date on the latest trends and topics. You can also check out The Payments Podcast, where experts weigh-in on real-time factors impacting the payments industry.