OBSERVATIONS FROM THE FINTECH SNARK TANK
Years after other developed countries have had real-time payments in place, they’re finally coming to America. The Federal Reserve recently confirmed that FedNow, the government’s version of real-time payments (RTP), will launch this summer.
Two big questions remain: 1) How will RTP evolve, and 2) What impact will it have?
Real-Time Payments Confusion
It’s clear that not everyone is clear what FedNow is. In an embarrassingly incorrect tweet, Democratic presidential candidate Robert F. Kennedy, Jr. referred to FedNow as a central bank digital currency (CBDC), and claimed that “CBDCs grease the slippery slope to financial slavery and political tyranny.”
FedNow is not a CBDC—it’s a payments service, not a form of currency, and it doesn’t eliminate cash or any other current form of payment.
There’s also some confusion about who will adopt the new payment service.
A Forbes article on FedNow claims that the key factor governing its success will be whether consumers, businesses, and institutions adopt it or not. This isn’t entirely accurate. Consumers and businesses won’t “adopt FedNow.” In fact, they’ll probably never know what FedNow is.
The key factors governing FedNow’s success are: 1) How many financial institutions will adopt and deploy FedNow? 2) What types of payments services (i.e., use cases) will they use FedNow for? 3) How successful will those institutions be in marketing those payments services to consumers and businesses?
Bank Demand For FedNow and RTP
A study conducted by Cornerstone Advisors found that 13% of banks and credit unions have already deployed real-time payments and that another 30% plan to go live with them in 2023.
Of the financial institutions that intend to launch RTP this year, 36% plan to use FedNow, 28% will go with both FedNow and The Clearing House (which has been providing real-time payments to financial institutions since November 2017), and 13% will opt to deploy just TCH’s offering.
Among the banks and credit unions who plan to launch RTP after 2023, one-third will use FedNow, but 60% have yet to determine their RTP strategy.
FedNow Use Cases
What will financial institutions do with FedNow?
Among banks—who tend to have a higher percentage of businesses (vs. consumers) in their customer base than credit unions do, business-to-business (B2B) payments and account-to-account (A2A) transfers are the most popular use cases for RTP, followed by expedited payroll payments.
Among credit unions, A2A transfers, expedited consumer payments, and recurring bill payments are the most popular use cases for real-time payments.
What Do We Need Real-Time Payments For, Anyway?
To understand what banks need to know about RTP, I spoke to Peter Davey, SVP and Head of Product Innovation and Labs at TCH. Davey shared what he learned from TCH’s rollout of real-time payments back in 2017:
“When we launched, we felt that B2B payments would be the primary use case to move over to the network. We were mistaken—a lot of it ended up being B2C payments.”
Davey thinks it will be different in 2023, however:
“A lot of businesses are going through their own modernization processes. They’re looking for ways to make payments frictionless within their back office. They don’t want to do a lot of manual reporting and banks have to service those needs by creating API interfaces to ERP systems and third-party integrators.”
The Send-Receive Challenge
Do the banks that have already deployed RTP have a head start? Maybe not. Davey points out that most only have the ability to receive real-time payments, not send them. This is an issue because, as Davey explains:
“The send-side products are what customers are going to want. If I just had a loss on my car or home, I can receive a payout from my insurance company in real-time. But if I need to make payments to companies covering my car or home repairs, how do I get money to them in real-time? They will want immediate use of the funds to enable them to service me.”
Davey concludes that:
“If banks don’t have the access or the tools to be able to send transactions, then they’re really just going to end up being net receivers of those transactions at the end of the day, so you’re not modernizing the full procure to pay process that you’d want to be able to do within the B2B space.”
How Will Real-Time Payments Evolve?
According to Davey, there are multiple ways in which RTP can evolve:
“The Fed and TCH have been cooperators and competitors for a long time. We inter-operate fairly well today, whether it’s on a technical side like the ACH Network or at the back office of a financial institution or through the banks’ core providers. We’ll see that same dynamic with FedNow, where the banks’ core providers will provide the tools to connect to both networks. And in a real-time manner, they’ll decide whether to send it over the TCH network or FedNow. It could be more complicated if a bank gets a better rate for sending a payment over the RTP network versus FedNow.
It’s going to depend on who has the endpoints. Right now, TCH has a network that’s five years old, we have the endpoints. When the Fed launches in July, how many endpoints will they have and how quickly can they grow those endpoints?
As providers like Fiserv, FIS, and Jack Henry are successful selling RTP to their customers, if they’re able to easily turn on both networks, we’ll see growth on both networks, as opposed to one outpacing the other. And then it’s going to come down to basic economics as to why a bank or credit union would use one over the other.”
What Banks and Credit Unions Need to Do Now
Growth in real-time payments needs to be looked at from a couple of perspectives:
- Payment volume versus bank adoption. With many of the largest banks already on the TCH platform, RTP volume on that network will probably dwarf the volume on the FedNow platform for a good number of years. But growth in the number of institutions on the FedNow platform will likely far outpace the number of banks TCH adds to its platform over the next five years.
- Use case volume allocation. There are many possible use cases for RTP. The question about which platform—TCH or FedNow—will grow faster is moot. The important question is which platform will be better for any particular use case—and whether or not that use case generates incremental revenue for the banks or not.
The vast majority of banks and credit unions who have yet to deploy RTP rely on third-party technology providers for payment processing, and those providers will be the ones to hook the institutions up to the RTP networks.
But what banks and credit unions need to do today is determine: 1) Which RTP use cases will be most important to their base of customers; 2) How much (if anything) to charge for the new payments service; and 3) How to market (i.e., communicate and sell) the new service(s).
For many financial institutions, this is easier said than done.
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