- The Federal Reserve recently announced it would launch its own faster payments system in 2023-24, and it will compete with The Clearing House’s RTP network.
- Different payment speeds with escalating costs will co-exist for the foreseeable future to fit the needs of various situations.
- Financial technology companies will continue to come up with new ways to move money and manage finances, which ultimately benefits consumers and businesses.
Faster payments in the U.S. are still in their adolescent years, which means much growth and development lie ahead. And that maturation should generate more competition and choices, ultimately benefitting business owners.
One of the biggest developments came in early August when, after a public comment period and much speculation, the Federal Reserve announced it would launch its own real-time payments network. The FedNow Service will allow consumers and businesses to transfer money in seconds 24/7. FedNow is projected to launch in 2023 or 2024, and it will compete directly with The Clearing House (TCH)’s RTP network(opens in a new tab). The RTP network went live in 2017, and TCH says more than 50% of U.S. bank accounts can now access it.
The Fed announces a competing real-time payments system
These two networks serve the same basic purpose; the primary difference is that FedNow is a public sector option run by the country’s central bank, while the RTP network is operated by TCH, which is owned by a group of large, private banks. The Fed has suggested starting its own faster payments system will drive down costs and ensure equal access(opens in a new tab) to payments technology for all financial institutions, though TCH counters that its flat pricing model puts institutions of all sizes on a level playing field(opens in a new tab).
FedNow is a public sector option run by the country’s central bank. The RTP network is operated by TCH, which is owned by a group of large, private banks.
The announcement of FedNow could actually lend momentum to the RTP network, according to Steve Ledford, senior vice president of products and strategy at TCH.
“One of the things that was a bit of a speedbump up until recently was it was not known whether the Federal Reserve was going to be launching a network that would be doing essentially the same types of things,” Ledford said. “We now know that the Federal Reserve will be launching this network, but it’s going to be a number of years from now … and even then, it would be just starting and it would take many more years to get fully up and going and extend their reach.
“I don’t really know what the impact’s going to be, because by then we’ll be fairly well-established. So I don’t know if there’s anything that they’re going to bring to market that would cause somebody [i.e., a bank] to want to change.”
Instant payments still finding their footing
Real-time and same-day payments still make up only a small fraction of the millions of transactions that happen in America every day. However, no one expected widespread adoption right away.
Many people – especially those who bank with smaller institutions or credit unions – do not have access to the RTP network. That may change soon, as TCH says its new payment rails will be ubiquitous by the end of 2020.
Once instant payments catch on, they could take off quickly.
“When you reach a certain saturation or the ability to send, there’s a hockey stick moment and when that hits, [financial institutions] want to make sure [their] investment plans are aligned to that,” said Trevor LaFleche, Fiserv’s senior director of product management for enterprise payments solutions. “With the number of different ways you can send real-time payments in the U.S., making those decisions [about which services to adopt and when] and timing that right is the challenge presented to a lot of financial institutions.”
Different speeds for different situations
Even if instant or same-day payments take off, they will not suddenly overtake other methods of moving funds. The system used to send money will vary situationally, based on how quickly a person or company needs the money.
“Just like Amazon – you want it same-day, you want it next-day, you want it in five days’ time – there’s different price points and different markets they’re serving with those offerings,” LaFleche said. “Going from ACH, to Same Day ACH, to real time, they’re sort of giving you the options of how you want your money to move.”
Even if instant or same-day payments take off, they will not suddenly overtake other methods of moving funds.
In other countries that have supported faster payments for years, the real-time rails are more popular for net-new payments than others, according to LaFleche. If the U.S. is anything like these countries, then companies that pay employees via direct deposit ACH, for example, will likely not move those payments to a new system. Those payments are routine, recurring and scheduled far enough in advance to afford traditional ACH’s 2-4-day processing window. However, a distributor may adopt a real-time payment service to pay a supplier when it takes ownership of goods, because this is a more fluid situation in which the payment cannot be scheduled weeks or months in advance. Here, it pays off (literally) to use a real-time service for the payment.
Visa’s Matt Friend points out that consumers and businesses in the U.S. have had a number of payment options for years, like wires, debit cards, credit cards, prepaid cards and, more recently, digital options. Instant payments simply add to that repertoire.
“It’s another payment tool in your toolbelt that’s going to continue to evolve and be used in new and different ways, just like when the internet came along you had new and different ways to use your card,” said Friend, vice president of global faster payments strategy at Visa.
What’s next for payments
The Fed building its own faster payments infrastructure is only the beginning of competition and innovation in this space. While LaFleche notes the development of FedNow prevents “a monopoly position” for any real-time payments system, he points out that it poses additional challenges around interoperability. Without interoperability, an instant payment sent through the TCH’s RTP network couldn’t be received by a bank using FedNow, or vice versa.
Financial services companies that started online may have a leg up on the competition and will surely continue to generate new offerings, as well. Big players like PayPal (which owns Venmo) and Square already support instant deposits and could build additional solutions that cater to different use cases than existing faster payments networks.
The Fed building its own faster payments infrastructure is only the beginning of competition in this space … and financial services companies that started online may have a leg up.
Faster payments will also raise new possibilities. Open banking, the concept of financial institutions sharing financial information with customer-facing applications via APIs, could revolutionize the financial world as well, financial services technology expert Scott Derksen says. One example of that potential is a bank consortium called the Marco Polo Network. With one of its solutions, Marco Polo provides companies with working capital financing by identifying specific accounts receivable that are eligible for securitization. The customer selects the appropriate ones and the technology builds blockchain assets on the network, which it sends digitally to one of the financial institutions for immediate funding.
The bottom line
As real-time payments continue to gain traction in the U.S., it should relieve businesses and consumers of some of the financial challenges(opens in a new tab) they deal with today, which could generate a larger economic boost. The emergence of new options, including the Fed’s faster payments rails, should only deepen that positive impact.
That is the key takeaway: All this innovation in the payments space should improve the financial welfare of consumers and businesses alike on a daily basis.