Are Real-Time Payments the Secret Weapon of U.S. Banks?

Real-time payments, which are defined as an immediate or close-to-immediate interbank clearing of a transaction, is a familiar buzzword in the financial world, and by the end of 2020, it may be the key to retaining clients. 

Today, more than 40 national real-time payment (RTP) systems are live around the world, and another dozen are in various stages of implementing RTP capabilities. 

Japan is currently the front-runner in this race after creating the first solution in 1973 and was quickly followed by Korea and Switzerland. Numbers for national real-time payments schemes have grown more than 60% since 2017, and the battle is intensifying as the U.S. strives to catch up.

The U.S. outlook

The Clearing House (TCH), owned by 26 banks in the U.S., built and launched a RTP system in 2017, which was developed using ISO 20022 XML messaging format. To make it successful and accessible to financial institutions across the country, TCH provided banks the flexibility to implement the functionality in parts or connect with their data center either directly or through third-party service providers that could help provide RTP connectivity to the financial institutions.

At the same time, an RTP advisory board with representation from both big and small industry players, was created to solicit industry feedback on adoption of real-time payments. It is notable that nearly 20% of banks have fully enabled their clients with real-time payments, but there are many that have yet to implement similar solutions because they are either not clear on the technology aspect or the price and servicing models. 

On a technical front, banks must decide if they need a new technology stack to handle all payments, including real-time, or if they should create a parallel technology stack specifically designed for RTP. Which approach a bank takes must meet the institution’s strategic, long-term goals.

The pricing and servicing aspects are equally important, as many banks are struggling with how to convert real-time payments into a viable revenue stream for both retail and corporate clients. 

The cost associated with offering real-time payments is the fixed cost of systems and a recurring cost of scaling and managing the application. At the same time, because of open banking initiatives, payment service providers are not only eating away at the bank’s market share but are also using the bank’s platforms to provide these services. 

Given the competitive marketplace and challenges with implementing real-time payments, banks are slowly and carefully making investment decisions to retain — and attract — customers.

RTP use cases

For consumers, the digitization of the economy and rise in mobile banking are ushering in the new era of real-time payments, and banks need to provide these services or risk losing customers.

Imagine finding that perfect classic car you’ve been searching for, but it is Monday and the owner lives nearly 200 miles away. You don’t want someone to scoop in and buy your car before you can go see it. With real-time payments, you can instantly send a down payment to secure a viewing, go for a test drive later in the week. 

Real-time systems operate 24/7/365, so despite being outside of business hours, consumers can simply open the bank app on their phone and pay the respective amounts in real-time, automatically providing the payee with payment notification.

In this use case, real-time payments enable consumers to pay conveniently online and receive goods or services as quickly as possible, while suppliers benefit from the certainty of their payments and quick liquidity. 

For corporations, the usage of globally accepted ISO 20022 standards help companies manage payments from an integration and data perspective. However, there is a lot required from the perspective of security and solutions before companies can adopt this new way of initiating and receiving payments. 

Banks must live up to the expectations of corporate clients as well by not keeping this instrument as simply an alternative payment means for retail customers. 

For international real-time payments, there is a perceived risk, as these payments are generally large in value and involve wider risk assessment and controls. However, international real-time payments can help corporations manage cross-currency fluctuations and increased liquidity. 

There is still not enough maturity regionally to justify providing cross-border solutions to corporations, making this use case very unlikely in near term.

However, given all its limitations, RTP services can help reduce the volume of payment exceptions and avoid the use of expensive payment methods in international markets. This would allow international players to better manage their foreign exchange risk and cash-flow forecasts, using tools similar to intraday cash pooling arrangements. 

For compliance, in some parts of the globe, requests for real-time payments are a priority for the legal departments of the banks. Regulators see this as an opportunity to support economic growth, and as an alternative to available payment networks, which would decrease dependency on cash and help reduce financial crimes.

For open banking initiatives, it is still not clear to many banks how real-time payments can be used with other banking products. However, open banking APIs would enable bank systems to talk to each other in real-time to make instant payments, which would include reporting and reconciliation. Open banking’s influence and importance on banking activities continues to grow, and we’ll be taking a closer look at this impact in a future blog post. 

For now, it is important to understand that as these APIs help non-banks access banking services easily, the use cases might expand to provide other innovative payment related services, such as an aggregate view of account balances maintained in different banks or sweeping of funds between these accounts for real-time liquidity purposes. 

Realizing the return on investment 

As banks move toward real-time payments, they will have to undergo significant technology investments to modernize legacy systems or develop a parallel robust system to handle various types of payments. New investments emphasize the need to identify the business opportunities that will deliver a positive ROI. 

Fintechs are already playing a prominent role by providing innovative payment solutions that allow customers to shift away from banks for their payment needs. Competing with these companies and retaining customers has become a major challenge for banks. Real-time payments may prove to be an option to at least retain existing customers and provide them access to the more innovative products and existing banking services through open banking initiatives. 

In part two, we’ll review some of the significant challenges banks have to implementing real-time payments, as well as the key lessons learned so far. 

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