Today, settlement of payments in the United States can take two to three days. Even fintech and mobile app providers who deliver an appearance of immediate payments to their users employ traditional banking rails behind the scenes to settle transactions which, in many cases, result in a suboptimal experience for the receivers. These constraints impede the always-on, 24×7 nature of today’s business and lifestyles, resulting in a gap opening up between customers’ expectations and the realities of US payments.
By the end of 2017, there will be a growing range of initiatives to speed up payments in the market. The move toward faster payments is being encouraged by the Federal Reserve through its Faster Payments Task Force and at the same time other market participants are making important advances.
NACHA (the former National Automated Clearing House Association) is introducing same-day automated clearing house (ACH) rules that will ensure a ubiquitous same-day capability for virtually any ACH transaction it carries. Last October, Early Warning Service’s fraud prevention and risk management combined with digital payments network clearXchange to build a real-time payments solution open to banks and credit unions. In addition, The Clearing House (TCH) – first established by leading US banks in 1853 – is building an industrial strength clearing and settlement system to support real-time payments (RTP), enabling consumers and businesses to send and receive payments instantly, directly from their accounts at financial institutions.
No looking back
As the momentum behind RTP in the US builds, banks and other financial institutions of all sizes and in all regions of the country are evaluating the options and planning their strategies. Some banks remain unconvinced of the business case for investing in RTP capabilities – and even of whether their customers actually want them.
Banks have also been unnerved by some of the sky-high estimates for how much it will cost to implement RTP. Figures such as US$60m to US$90m have been quoted for some of the largest US banks.
Indeed, we would caution any bank against a decision to delay joining the RTP revolution. Experience in other geographies has shown that once bank customers – whether consumers or businesses – experience true RTP, they never look back. Furthermore, in an era where consumers are accustomed to the convenience and immediacy of online services and mobile apps, the idea that payments take days to settle is something that customers will not put up with for long – whether they’re individuals or businesses.
As countries around the world have discovered, RTP is an innovation with implications that go far beyond enabling faster transactions. Everywhere it’s been introduced, RTP has been recognised as an enabler of new modes of commerce, bringing significant benefits both to the banking industry and society at large.
Until RTP is introduced into a given market, it is easy to underestimate its impact for customers. Of course, for some and in certain circumstances, having verification that money is on its way – and will arrive in two to three days – will be enough. However, many customers need to check their balance before withdrawing money from automated teller machines (ATMs).
In addition, in some cases moving money quickly is imperative: for example, think of a small business paying a supplier to ship goods immediately, or someone sending money to family members to pay for a cab home in the case of an emergency.
Yet RTP is about much more than just speed. Through real-time settlement and notification to the payer, it not only provides certainty that the money has arrived, but also removes the temporal risk created by the traditional time delay between payment and settlement. Also, it opens the way to integrate a host of value-added services around the core transaction, such as electronic invoice presentment and payment (EIPP) and the inclusion of tracking numbers to keep tabs on shipments.
In developing its RTP solution, TCH set out to build a platform for future innovation in payments products founded on four key principles: conformance with global standards, ubiquity, extensibility and adaptability.
To overcome the challenge of creating a ubiquitous RTP system in the US – a market with such a vast number of financial institutions -TCH designed its solution to ease the access and enrollment issues that could impact some institutions; especially smaller ones.
In order to reach this broad market, TCH is committing itself to a partner model with a range of third-party providers who can help even the smallest and most local financial institutions to gain the type of access that best suits their business and customer base.
With TCH’s system, smaller institutions will be able to connect directly to larger banks, credit institutions, and partners – including D+H – which are set to play a major role in enabling it to reach the rest of the market. TCH has also engaged with the technology community, both to help broaden access to the wider market, and to build links to system members at an early stage so that they can start innovating products and services which can be offered to their customers over the RTP infrastructure.
For banks and other financial institutions looking to prepare for TCH real-time payments (or any RTP initiative for that matter) the key is to avoid thinking of it as a technology change. Instead, banks should consider their customers’ point of view, and think through what unmet needs RTP could satisfy, both in terms of financial value and service experience. How will customers want to use the service, and what for? What impacts will it have on their everyday lives or business operations? What use cases represent those to be harvested first?
Answers will vary by customer segment and by bank. But these insights will enable banks to develop ideas for the products and services they can offer to realise these opportunities. By understanding customer needs and the solutions to meet them, banks can then use this understanding to drive the technical build-out.
Further details are available in ‘Real-time Payments and Settlements Comes to the United States’, a new white paper from D+H, The Clearing House, and PNC.
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