Status of Real-Time Payments in the U.S.
The Federal Reserve has set a 2020 target for real-time payments to be available to every U.S. consumer and business. Meanwhile, many large banks have signed onto The Clearing House’s real-time payments network launched last November, with hundreds of smaller institutions expected to follow.1 Estimates are that half of all U.S. accounts will be reachable via real-time payments by the end of 2018.2
However, American Banker points out there are a number of issues that banks need to resolve before being able to meet the U.S. payment systems 2020 deadline, including management (should they outsource real-time payment infrastructure or manage it internally?) and the exact shape of instant payment services to offer customers.3 And then there is pricing: Banks are looking to set a rate somewhere between wire transfers that cost anywhere from $5 to $25 and ACH (Automated Clearing House) transactions, which typically don’t cost more than $1.4
Real-Time Payments 101
Global markets’ increasing need for speed alongside potential business benefits of faster payments is driving the interest in real-time payment services. Such services generally include the following characteristics, according to an Accenture report:5
- Funds are debited from the payer's account and made available in the recipient's account within seconds.
- Payment status and confirmation are also available immediately.
- Payments can be made 24 hours a day, 365 days a year.
- Many systems are based on the ISO 20022 standard, which facilitates the exchange of payment-related information that can simplify reconciliation and enable straight-through processing.
Operational Advantages of Instant Payments for Merchants
Retailers small and large are taking notice of real-time payments, not just as a customer benefit and competitive need, but as an operational imperative. A May 2018 report from the research house Ovum found that 78 percent of merchants believe real-time payments will increase efficiency, up from 59 percent in 2017, and 78 percent think it will allow them to cut costs. More specifically, Ovum found real-time payments could enable greater efficiency in liquidity management, negotiating more favorable rates with suppliers, and expediting payments for short-term or temporary workers. The research showed that the largest merchants (those with revenues above $5 billion) were seeing the biggest benefits from real-time payments: 81 percent expect cost savings. Those in the telecoms and retail sectors expressed the highest expectations that real-time payments will drive cost savings (87 and 86 percent, respectively).6
Retailers were also bullish about using instant payments to enhance customer service. Across all markets, 78 percent of survey respondents expect to improve customer experience with real-time payments, particularly in time-sensitive areas such as refunds and disbursements, up from 59 percent in 2017.7
Ovum recommends that larger merchants update or change their IT development roadmaps to take advantage of real-time payments opportunities, while others should press their banking partners to unlock real-time benefits for them.8
The Real-Time Payments Business Case for SMEs
So how might instant payments potentially improve SME businesses? According to payments technology solutions provider Hyperwallet, there are three main areas:9
- Moving away from paper checks: Real-time payments will offer the ability to link invoices with the relevant transactions and lower overall cost.
- Processing regular payroll: A business can now wait until the last hour to process payroll and gain additional working capital if required, giving businesses 3-5 additional days of working capital.
- Domestic transfers via wires: Real-time payments support transfer of the same information as wires (at lower cost); but, at least for now, they don’t support the high transactional amounts of wire transfer (into the millions of dollars).
Moreover, real-time payments have the potential to simplify retailers’ transactions with consumers and wholesalers/suppliers, note FIS, another payments technology supplier. Instead of waiting for a consumer’s payment to clear before placing that customer’s order and then sending payment to the wholesaler for fulfillment, retailers can request a customer’s order, receive payment, and send their payment to the wholesaler all on the same day – with no impact on cash flow while improving the customer experience. FIS says merchants win in this scenario two ways: They free up working capital from supply chains – capital they can now use for growth – and they drive loyalty and satisfaction with their customers.10
