Fast is good, faster is better, fastest is best. In the accelerated world we live in, we shouldn’t expect anything less when it comes to moving money around.
As we currently stand, the use of real-time payments by financial institutions and businesses has seen strong growth in recent months. Real-time payments in the U.S. is being spearheaded by the Real-Time Payments (RTP) network—a real-time payments platform that all federally insured U.S. depository institutions are eligible to use for payments innovation.
In 2017, The Clearing House (TCH) launched the Real-Time Payments (RTP) network and today it has many large U.S. banks—such as Citibank, Bank of America, and PNC—as active participants, allowing it to reach over 50% of U.S. transaction accounts. These numbers are expected to balloon rapidly in the coming months and years as the real-time payments revolution continues to take shape.
The sudden increase in real-time payments is partially a consequence of the Covid-19 epidemic that has forced many banks to embrace digital transformation and make changes to their digital payments infrastructure at a faster pace than ever before. In fact, as one report points out, the Covid-19 epidemic has truly accelerated the use of RTPs across many industries.
Yet, real-time payments or instant payments as it is also referred to, and their underlying systems, have been around for decades. Japan introduced the first one in 1973 called The Zengin System.
The Real-Time Payments (RTP) network in the U.S., however, is the first new payments system launched there in the last 40 years or so. Surprising as it may seem, the U.S. is actually behind when it comes to the development and adoption of real-time payments compared to other countries around the globe. That is now changing. Whether it is a result of evolving trends, competition, new mandates, regulatory pressure, or some other factors; the reality is that the U.S. is showing progress in this space.
But this isn't and hasn't been easy. Many large banks face the challenge of integrating real-time payments and transactions into their outdated legacy systems, with the hopes of squeezing value and benefits from these implementations. And then there are some banks that are apprehensive as they continue to stay away from any major digital transformation overhauls. But those financial institutions that recognize the benefit of improving their back-end systems and their digital-first payments infrastructure, and with it, their real-time payments rails, stand a chance of seeing long-term gains from a financial and reputation point of view.
RTP is a big step forward and an improvement from other computer-based electronic networks for processing transactions such as same-day ACH. Real-time payments actually clear and settle within seconds, i.e. “real time”, and individually; whereas same-day ACH payments are cleared in batches and finally settle after the payments clear, which can take up to several business days. For that reason and other advantages real-time payments offers, it is very likely that it will eventually replace slower payment processes going forward.
Although there is a broadening appeal for real-time payments, we are in the early stages of its expansion. Currently, there are over 50 other countries that have their own versions of live real-time payment systems - such as India’s Unified Payment Interface (UPI) which is a real-time payment system regulated by the Reserve Bank of India. More countries and systems are expected to follow suit soon.
This year a large majority of financial institutions in the U.S., are prioritizing the development of real-time payments as they come to realize the associated internal benefits and opportunities this will bring—such as better cash flow management, boosting working capital, and improving operations.
And it's not just banks that are moving onto these networks to provide quicker digital payment solutions. With the proliferation of Open Banking, smaller regional banks and credit unions, as well as FinTechs and third-party providers, are jumping on the RTP train.
3 Key Reasons Why Banks Should Embrace Real-Time Payments
1. Customers, Customers, Customers
Banks are beginning to adapt their business models to address the needs and demands of their customers and industry, and aiming to deliver a better value proposition and promise that puts the client at the center.
It's been proven that real-time payment capabilities help enhance the customer experience and can help financial institutions build stronger relationships with them. For example, it can significantly improve the experience of refunds and disbursements. This is a continuing pain point for both consumers and merchants, with card refunds usually taking at least a few days to process and clear. Who has time to wait for that?
In addition, poor cash flow management is a recurring issue that many businesses suffer with and causes some 82% of small businesses to fail. Because of the immediacy of sending and receiving payments using the RTP network, financial institutions and merchants can benefit from having better control and visibility of their accounting, cash management, and liquidity. As a result, this improves their operations and business administration.
As Adriana Hastings from Huntington Bank explains when talking about their clients: “Real-time payments is a tremendous leap forward in meeting their needs for greater speed, security and efficiency in payments.”
As for commercial banking clients, RTP helps with budgeting as they can better manage and keep a closer eye on their balances and financial situation. Furthermore, overdraft fees, check cashing fees, and other costly processes will likely become a thing of the past as real-time payments become the standard.
2. Stay Competitive
Banks will need to upgrade their existing operating models, processes, and systems, as well as adopt state-of-the-art digital technologies, in order to remain competitive against other innovative financial institutions and new entrants. This goes hand in hand with proactively building relationships with clients, improving their personalization and services, and exceeding customers expectations at all levels.
It's never been easier for customers and clients to switch to other financial institutions if they feel their bank isn't up to par with their needs. Customers are increasingly asking for more transparency, lower fees, and quicker turn-around times when it comes to payments, whether domestically or internationally. Real-time payment options for customers is no longer a nice-to-have, it is one component of their digital transformation process that banks will inevitably have to offer. If they want to avoid losing customers to competitors that have better payment options and features, and more user-friendly and modern platforms, the time to act is now.
3. Revenue Growth
In the long run, RTP should help banks optimize the services they offer corporations, such as payments automation and data services. By doing so they will also tap into new revenue streams. According to a report by Deloitte, 50% of businesses would be willing to pay a fee to receive payments immediately.
In addition, banks with the ability to conduct real-time transactions would be able to service new types of customers and businesses that they might have overlooked or underserved before. Today, many U.S. businesses and retail customers use non-traditional financial services platforms because they often offer fast money transfers that many incumbents don't. If banks modernize their infrastructures and extend these sought-after services and offerings to this demographic, they can increase revenues by acquiring new clients.
Real-time payments present significant opportunities as well as long-term advantages for banks and other financial institutions. Although there is certainly a lot of work yet to be done, significant technology upgrades and the progressive digital transformation banks are currently undergoing, while putting the client at the heart of these changes, will power the continued use of real-time payments. Moreover, the surge in online and mobile payment transactions and increasing customer demand for better services, will ultimately help define and transform the future of all payments and with it the banking system as a whole.
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