The Fed is expected to launch FedNow, its real-time payments system, this month, but banks may take a little longer.
“Three to five years?” I asked Erika Baumann, director of the Datos Insights (formerly Aité-Novarica) commercial banking & payments practice.
“I don’t think it will be that fast,” she said. Unlike many other countries which have adopted real-time payments, U.S. regulators do not require banks to implement real-time payments.
“We are working in an environment with no mandates. The U.S. has 6,000 to 10,000 financial institutions. To get banks to move from batch to operate in real-time, that’s serious with a lot of risks. It’s not easy to develop an entirely new rail for payments. You have financial institutions that haven’t even put faster payments on their roadmap. And by the time the banks do get around to making this a priority, they can’t just flip a switch. Nothing happens that fast in this industry, especially in the United States.”
In June the Federal Reserve published a list of 57 early adopter organizations that had completed formal testing and certification on the FedNow Service in advance of its launch in late July. The list included 41 financial institutions, 15 payment processing vendors and the U.S. Department of the Treasury.
Baumann approaches the list of vendors with caution.
“I would hesitate to say that they are ready. The commitment is there, but until a vendor goes live with a bank I wouldn’t consider that a success.”
The country already processes a considerable number of real-time payments through The Clearing House (TCH). Owned by 22 of the largest commercial banks, it was first out with real-time payments, called RTP, in November 2017.
The largest banks went live early and quickly, Baumann said. When TCH announced its fifth anniversary of operations earlier this year it said RTP reaches 65% of DDAs, a reflection of the size of its participating banks.
“Today the RTP network’s real-time payment capabilities are accessible to financial institutions that hold close to 90% of U.S. demand deposit accounts (DDAs), and the network currently reaches 65% of U.S. DDAs.”
Smaller banks were slower to sign up for RTP— a lot didn’t trust The Clearing House. Then when the Fed announced it would open a second network for real-time payments many smaller banks decided to wait for it, Baumann said.
Most of the banks that have gone live on RTP will go live with FedNow, while some smaller banks may go with FedNow only, Baumann added.
She knows that some smaller banks think the big banks will use RTP to take advantage of them, but she doesn’t think that’s true.
“TCH’s goal is ubiquity, it wants to get as many payments going through its system as possible.” The pricing for both systems is nearly identical, she added, but getting a system up and running can be costly.
Financial firms need resources — technology and people to implement it — and that is a catalyst for some mergers, such as BBT and SunTrust, added Baumann, who expects more bank M&A.
“A prime reason was to use some best-in-class technology to keep up with the industry.” And the industry isn’t just other banks, it included fintechs, she said.
“In a study I did for Finastra, my research showed in North America 61% of banks know 10% or more of their payments volume has moved to a fintech — the value-added service of running the actual transaction has moved to a fintech partner. Banks say they know they have work to do.”
Businesses say they are going to fintechs directly because it is too hard to submit a payment file with their banks, and they want access to real-time payments.
“Corporations are becoming less concerned with the how — they just want an efficient service, at a reasonable cost and speed. They are less concerned with the rail. They want to transact and have it available in an automated process.”
Companies have choices in addition to The Clearing House’s RTP and soon FedNow, she added, such as push to card from Visa Direct and Mastercard Send, Zelle and digital wallets like PayPal. A single payment process won’t fit all use cases. Push to card works well where the debit card information in already in hand.
“If you have made a return of an item purchased on Amazon and funds have to come back, if they have your debit card they can push the refund to you. It’s a great experience and makes sense. Visa and Mastercard have market opportunity and room to grow, but it’s a different space from RTP. That’s why we won’t have one payment type that rules them all.”
In banking, a new process doesn’t replace an older process, it is just added to the financial processes inventory.
“We still have checks, and even though the total percentage of checks has gone down, we don’t do an even mediocre job of replacing old processes, we just add. You still have businesses asking if they should move to digital payments, and ACH has been around for 40 years!”