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Real-Time Payments Have Arrived

Faster payments are quickly becoming a reality as banks join TCH’s Real-Time Payments platform, but much more work remains to be done.

By James D. Aramanda

The Clearing HouseIn November 2017, The Clearing House launched the first completely real-time payments system in the U.S. and the most modern payments system in the world. On that date, the first payment ($3.50) was sent, cleared, and settled with finality in just two seconds. Bank of New York, which sent this first payment, also transmitted a message using the system’s rich-messaging format to quote Carl Sagan: “Exploration is in our nature.” This first-ever payment was immediately followed by much-larger transactions. The network, RTP, has been operating continually ever since, with volumes continuing to grow. At the end of May 2018, eight major banks were live on the system: U.S. Bank, Bank of New York Mellon, PNC, JPMorgan Chase, Citibank, SunTrust, and BB&T. RTP is on track to reach more than 50% of banks and credit unions by the end of 2018. This is a strong start for this revolutionary new system. There is much, however, that remains to be done.

TCH is committed to the goal announced by the Federal Reserve-sponsored Faster Payments Task Force last July of implementing a payments system that is faster, safer, more efficient, and ubiquitous by 2020. This is an ambitious goal, to say the least, especially since the United States has the largest economy and most well-established banking system in the world. To meet the task force’s goal of ubiquity by 2020 requires an industry-wide commitment. Participants from throughout the industry must all work together toward this important goal, and each of us has a role to play.

Why is the 2020 goal important? One reason is that the value of a network to all participants increases exponentially as it reaches a broader group of users – something known as the network effect or “Metcalfe’s Law.” Reaching ubiquity quickly will accelerate the benefits of this system to consumers and businesses; will help financial institutions and technology providers start earning a return on the investments they have made on faster payments; and it will bring the benefits to the economy as a whole by accelerating the cash flow for businesses and by freeing up working capital that will make U.S. industry more globally competitive.

Building a new system to enable faster payments promises to transform commerce for both consumers and businesses.

Working together on faster payments is not just about speeding the settlement of a payment. Building a new system to enable faster payments promises to transform commerce for both consumers and businesses. Customers expect instantaneous transactions when they purchase goods or services, and the payment behind the transaction should be no different. Consumers will enjoy the financial peace of mind that comes from an option that promotes more timely bill payments and faster receipt of funds from payroll, insurance claims, informal “gig economy” work, and shared expenses.

Core Payments Networks
The role of TCH is to operate RTP as a core payment network. Like our other payment offerings — ACH, Wire (CHIPS), and Check Image Exchange — RTP transports payment data, clears payments, and settles payments among participating financial institutions. Messaging, clearing, and settlement are the essential plumbing of any payment system. Like plumbing, the core payment network is usually hidden. RTP is not the customer-facing portion of the payment system. The role of RTP is to give those who provide bill payment, peer-to-peer (P2P) services, disbursements, and business payable/receivable products a safe, fast, efficient, and reliable platform to move money and data.

Value-added Networks
Layered on top of the core payment networks are other systems that add functionality to tailor payment services to improve user experience for different customers. The Zelle network, operated by Early Warning Services (EWS), which gives financial institution customers the option to send money by providing the receiver’s email address or phone number, provides users with a common, intuitive experience. Other providers operate bill payment networks and business-to-business invoice/payment networks.

RTP will be an excellent choice for consumers making timely bill payments and for small businesses to pay their employees, contractors, and suppliers.

For faster payments to achieve their potential, value-added networks must take advantage of the full range of capabilities offered by the core networks, such as RTP. In addition to real-time funds transfer, for example, RTP can deliver bills and invoices through its powerful Request for Payment message. Its extensive and flexible data-carrying capability can also be leveraged by value-added networks to enhance their services. TCH is actively working with value-added network operators to integrate RTP into their offerings.

Financial Institutions
Of course, payment networks are of no use if they can’t reach end users. Consumers, businesses, and governmental institutions entrust more than 11,000 banks and credit unions with their money and expect them to provide payment services. Ultimately, financial institutions will provide innovative solutions that enable customers to pay bills, manage receivables, pay their employees, send money to friends and family, and expedite supply chains.

In doing so, financial institutions will be aided by their technology providers. Although some banks and credit unions develop their own payment applications, most rely on IT companies that specialize in creating third-party software or services for the industry. These companies are already working to incorporate faster payment capabilities into their products. TCH is supporting their efforts to ensure that banks and credit unions in the RTP network can take full advantage of its capabilities.

Non-bank Payment Service Providers
Non-bank payment services, often specializing in a single application or market segment, play an important role in the U.S. payments market. These include firmly established e-commerce giants as well as small but nimble FinTech startups. For some (such as PayPal, Square, Western Union, and MoneyGram), their main business is payments. For others (such as Apple, Google, Samsung, Amazon, and Facebook), payment services complement their core product lines.

These payment services typically rely on banks for access to payment networks such as the ACH, Visa, and MasterCard. We expect them to use faster payments, including RTP, through banks as well.

Extending the Network
The United States has the largest and most diverse network of financial institutions in the world, with more than 11,000 depositary institutions providing payment services. These players range from global and regional banks to branchless online deposit takers, community banks, and credit unions of all sizes.

Achieving the goal of ubiquitous reach for faster payments by 2020 is a daunting goal. No single operator or provider can do it alone. Both core payment networks and value-added networks will need to rely on intermediaries to reach thousands of financial institutions. That is why TCH is working closely with partners that can leverage their existing networks of banks and credit unions to extend the reach of RTP. These include third-party service providers that do core deposit processing, payment gateway and hub vendors, hosted payment application providers, EFT networks, corporate credit unions, bankers’ banks, and credit union co-operatives. Financial institutions will have the option of connecting to RTP directly or through the provider of their choice.

The Role of Regulators
Our current body of payments regulation evolved to meet the requirements of legacy payment systems. As payments increasingly move in real time, regulations need to catch up. TCH has found that financial regulators uniformly agree that faster payments are a positive development that should be encouraged. Regulators face the challenge, however, of adapting regulations that were designed for debit-based payments that are processed in batches with deferred settlement to the needs of immediate, final credit transfers. End users will expect fast, frictionless, efficient, and certain payments, and they will be impatient with delays or impediments imposed to comply with dated regulations.

The Role of Customers
The Faster Payments Task Force was unique in that it was not limited to financial institutions, networks, regulators, and payment technology firms. Representatives of consumers and business played an integral role in developing the road map to faster payments in 2020. Consumers and businesses will also be the key to success because their decisions about how to send and receive payments will define the market for faster payment services.

Those of us in the payments industry can help guide customers to make good choices, using the payment option that is best for each situation. For example, RTP will be an excellent choice for consumers making timely bill payments and for small businesses to pay their employees, contractors, and suppliers. An irrevocable real-time transfer should not be used to pay for goods and services to be delivered in the future by parties you don’t know or don’t trust. Education is an essential part of any faster payments product’s rollout plan. Frictionless real-time irrevocable payments and “click-to-pay” bills delivered directly to smartphones are vastly different from what consumers and businesses are used to with traditional payment options. The industry needs to provide guidance on how to safely and effectively use this powerful tool. The benefits are enormous – but as with any new tool, good instructions are needed.

Good design of customer-facing faster payment products is also important. A well-designed bill payment, P2P, or commercial payment experience can help customers use faster payment services safely and intuitively while reducing the need for customer support and training. Banks are already rapidly building new, easy-to-use payment products that leverage the RTP platform. (See “Real-Time Payments Now a Reality” by BNY Mellon’s Carl Slabicki on p. 66  for more on how BNY Mellon is building out RTP-enabled products.)

All Together Now
Reaching ubiquity for faster payments in the U.S. by 2020 will be an enormous undertaking. The entire banking industry is investing billions of dollars to create a payments network to support commerce in the digital age. TCH is committed to doing its part. To reach our common goal, however, will require all stakeholders to work together.