By Nick Denning
There is a lot happening in the payments world in 2022. As bankers try and digest a steady stream of news related to faster payments, it can be overwhelming to try and keep straight what all the different terms mean, what solutions ride which payment 'rails' or networks, and what actions banks should take in a complex payments landscape to attract and retain customers. The following article strives to help clear the air, and get your bank pointed in the right direction for instant payments success.
THE 'WHAT' BEHIND INSTANT PAYMENTS
What an Instant Payment Is and Isn't
An instant payment is a payment that clears and settles in real time, or near real time (in seconds, not minutes or hours). The payments are irrevocable, with funds immediately available to the payee. Within the United States, instant payments are transacted by financial institutions, leveraging instant payments 'rails' or networks.
Both the sender and the receiver of the transaction must be a participant of the respective instant payment’s rails. Whether your organization is already on the instant payments path, or just starting to plan your journey, most institutions will use one or both of the following for instant payments participation:
Real-Time Payments (RTP): The Clearing House’s RTP network launched in 2017. RTP was the first set of domestic instant payments rails and is accessible to financial institutions via direct connection or third-party service providers.
FedNow: The Federal Reserve’s instant payments rails, FedNow, scheduled to launch in 2023, will also be available to financial institutions via direct connection or through a third party.
Payments products, solutions, and capabilities can then be built around underlying connections and instant payments usage. Not all money movement solutions are purely instant payments solutions, however. There may be a variety of rails and networks leveraged 'behind the scenes', and payment type is not always a customer-facing component of the transaction or experience. Similar to how consumers and businesses access the ACH networks today (they rely on financial institutions as intermediaries), the same holds true for instant payments.
Take Early Warning Services’ Zelle, for example. The money movement service facilitates person-to-person or peer-to-peer (P2P) transactions, and banks can integrate the service into their mobile banking platforms. Behind the scenes, Zelle transactions may ride instant rails, or ACH. Venmo, another popular P2P service, similarly uses a variety of rails in the background. In addition to leveraging instant and ACH rails, Venmo allows users to pay a fee to initiate immediate balance transfers using a linked debit card. These transactions, known as 'push-to-debit' or 'push-to-card', ride card network rails, and funds are usually available in minutes (considered faster, but not instant payments).
As transactions on the domestic instant payments rails are initiated by participating financial institutions, banks are uniquely positioned to help drive adoption and deliver related value to consumers and businesses.
Now that we’ve explained what instant payment is (and isn’t), let's discuss why banks should care.
THE 'WHY' BEHIND INSTANT PAYMENTS
Exploring the Business Case
The pandemic has further accelerated the broad shift to digital and contactless payments, with expectations relative to payment speed and experience continuing to increase at a significant rate. While instant payments still represent just a fraction of domestic payment volume, they are increasing rapidly. According to a Mercator Advisory Group 2021 study, 45% of consumers conducted or received an instant payment, indicating there is clearly a demand.
In terms of demand from business customers, consider the following noteworthy stats from a recent Federal Reserve Market Readiness Brief:
Two in three businesses would factor access to faster payments into whether to switch banks
Nine in 10 businesses expect to be able to send and receive faster payments by 2023
Three in four businesses consider it important their bank offer faster payments
Sixteen percent of businesses say they'd be willing to pay additional fees for instant access to funds after initiation
This demand is not confined to businesses. Consider these consumer stats:
Three out of 10 consumers say access to real-time payments is a key factor when determining which financial institution will win their business (PYMNTS.com)
One in three consumers would be willingly pay fees to receive their payments in real time (PYMNTS.com)
Roughly 24% of consumers believe it is important to be able to move money between financial accounts instantly (Mercator Advisory Group)
With this much pent-up demand, and as customer expectations for speed and convenience continue to evolve at a rapid pace, the instant payments pendulum will swing quickly once FedNow is launched, and more financial institutions are connected to instant payments rails. So, a thoughtful and timely approach to instant payments over the next 12-24 months is critical. As banks contemplate the underlying business case for instant payments, they should weigh the following:
Meeting customer expectations: Consumers’ daily digital experiences have already begun to shape their expectations. This is expected to continue as instant payments offerings ramp up in the next two years. If customers feel disadvantaged with respect to speed of payment/experience, retention challenges will be encountered.
Attracting new customers with value-add use cases: As previously noted, many consumers and businesses will factor instant payments options into their banking decisions. Being able to offer this service will position your bank to capitalize on this demand. For example, the Fed’s Market Readiness Brief notes that two in three businesses cite managing cash flow as working capital as a ‘top concern’, and instant payments can significantly aid in addressing these challenges.
Creating new revenue streams: All indications suggest that businesses and consumers are willing to pay a premium for value derived from instant payments. So, it stands to reason that the use cases that resonate most with your customer base can serve as an additional source of revenue growth.
During a webinar last November, The Clearing House highlighted the following instant payments use cases that are being leveraged with success:
Account-to-account transfers, and digital wallet funding/transfers
Loan funding and title company payments
Traditional payroll and gig economy payments
Business-to-business payments (B2B)
There are several use cases already bringing value today, and the future opportunities are endless as volume and participating institutions begin to scale. Customer engagement and analysis will be key as you scope your strategies and figure out which ones should be prioritized.
Now that you have a clearer sense of what instant payments are and why they are important, let’s talk next steps.
THE 'HOW' BEHIND INSTANT PAYMENTS
Next Steps on Your Implementation Journey
Despite the launch of the RTP network, and the official arrival of instant payments in the U.S., many banks are waiting for FedNow to dip their toe into the instant payments waters. Now, as we barrel toward mid-2022, the time to act and move forward with your instant payments plan is now! ICBA Bancard recommends the following next steps to ensure your bank is not left behind.
Develop a payments strategy and roadmap: Before making firm plans or moving forward, it's important to determine exactly where implementing instant payments fits on your payments roadmap. Based on internal strategies, priorities, and resources, ensure plans are in place to prepare for and implement instant payments, as appropriate. Ensure clear accountability is established for implementation and success.
Explore RTP as an option: Even if you are waiting for FedNow to send instant payments, consider getting set up on RTP as a 'receive-only' participant. The level of effort required to configure receive-only is likely less than you anticipate, and there are several advantages: establish positive instant payments momentum within your institution, offer valuable experience with instant payments in a lighter receive-only mode prior to scaling with FedNow, and support communications with customers around what you are doing now and your plans to move forward within the payments space.
Conversations with customers are apt to give you a valuable head start on prioritizing use cases once you are sending and receiving on FedNow. Banks are often surprised by how much volume they receive once implemented! As noted in a recent report from Mercator, The Clearing House is projecting about half a trillion dollars in annual transaction value by 2024, so there is clearly significant volume expected.
Talk to your core and third-party providers about requirements and review information on The Clearing House website, “The RTP Network: For All Financial Institutions.”
Begin preparing for FedNow: With the pending launch of FedNow next year, now is the perfect time to begin preparing for implementation. Two great places to start are the FedNow Explorer and the FedNow Readiness Guide. The Explorer is a dynamic and interactive tool with a host of educational and training resources, on FedNow and instant payments more broadly. The tool gives you the flexibility to explore material of interest on your own, or you can request a guided journey based on selected criteria. The FedNow Readiness Guide is a comprehensive readiness document aimed at ensuring your bank is ready and able to implement the service effectively.
Talk/Collaborate: Talking to your core and other providers about requirements and timelines for implementing instant payments is critical, particularly for institutions leveraging third parties for connecting to instant payments. Levels of readiness may range from provider to provider, which may influence both timing and resource requirements for your bank. Consider whether your bank may benefit from a new vendor relationship to enable instant payments, and if so, initiate related discussions. ICBA Bancard has partnered with ICBA ThinkTECH alumni Finzly to offer a solution for community banks. Visit www.icbabancard.org or reach out to our Client Relations team to learn more.
As previously stated, talking to your customers is also important to determine appropriate use cases so you can prioritize accordingly.
Stay engaged: Instant payments should be an active project within your bank. There are many ways to stay engaged and informed moving forward. Join the FedNow Community (frbservices.org) to get updates and ask questions, look out for ICBA/ICBA Bancard hosted webinars and events related to instant payments, and watch our free webinar recordings on preparing your bank’s instant payments journey.
Let us know how we can help! We are here as a resource during your payments journey, so please don’t hesitate to reach out to us at [email protected].
Nick Denning is senior vice president of payments industry relations at ICBA Bancard and can be reached at [email protected].