The difference between fast and real-time
A few years ago, the question “how fast is fast” was being debated across the globe, with many organizations feeling that faster was good enough and hoping to get away with incremental improvements to existing systems, while others took the view that faster meant moving to real-time, so a new set of rails was required.
In the US the debate was roughly split between NACHA taking the former position and pushing same day payments, and The Clearing House on the other side backing real-time payments.
Fast vs. Real-time, why the difference matters
The reason why many were content with faster payments is partly because of the perceived lack of use cases for real-time payments. The attitude has remained for a long time that payments were rarely ever time critical and that same-day payments were sufficient. In reality, there are a number of use cases for real-time payments, both from consumers’ and businesses’ point of view. Some of the examples commonly cited are of parents needing to urgently send funds to their daughter/son who are far away at university, or of small businesses whom, in the so-called “gig economy”, are keen to receive payments straight after finishing a job. An equally important benefit of real-time payments is certainty – knowing immediately when a payment is initiated if it succeeded or not and that funds are available for the beneficiary to use. And, there are many other cases where real-time payments can prove to be valuable, and we won’t even go into the added benefits that stem from the rich data carried along with the payments, though we did write about this previously.
The “killer app” for true real-time payments is to replace card payments. A recent study estimated that Amazon could save $250 million annually in card fees by moving to real-time payments, and other companies such as airlines could save even more. For this purpose, only “real” real-time – complete within seconds – will do.
Today, the consensus is that real-time payments are the target. We now talk about “real-time” payments rather than “faster” payments, and whether “real-time” means three seconds or five seconds is not what matters here; the important point is that clearing cycles measured in hours or even minutes do not qualify as real-time.
What does it mean to operate in “real-time”?
In the US, The Clearing House’s ‘RTP’ scheme operates on the basis that the end to end real-time payment process must happen in under 15 seconds. What’s more, real-time payments require 24/7 availability, no stopping, not for out of business hours, not for weekends – real-time is always on.
Because of this, implementing real-time payments is much more than simply adding a new payment system gateway. Real-time payments require orchestrated process flows from payment request initiation, validation and checking, requesting to the clearing and settlement system, receiving the response, and notifying the parties.
All this must happen within a few seconds, 7x24x365 – which often exceeds the capabilities of existing legacy environments that were designed for batch or “best efforts” processing.
And, the reality is that to enable real-time payments, all the supporting systems must move to real-time, too. Systems must be as responsive to sudden shifts in workloads as the payment system or be insulated from those shifts by the stand-in processing in the new platform.
So, the challenge that banks face when implementing real-time payments is how to quickly and cost effectively integrate real-time connectivity and processing to speed time to market.
New world. New rules. New you?
Last November, when bank-owned TCH launched RTP®, the first new US payment infrastructure in over 40 years, there was no ambiguity about its intentions. The new rails constitute a seismic change in the US payments landscape and, with an ambitious goal for reaching ubiquity by 2020, the question is no longer “if” or “why” but “how will we get there”.
To quote Jim Aramanda, CEO of The Clearing House, “RTP has the potential to revolutionize the way payments are made in the U.S.”.
And while it brings with it a wealth of opportunities for innovation and new products, a revolution can bring disruption and risk in the short term – it demands changes, significant ones, which can be daunting for banks, especially those smaller ones whose implementation expertise, resources and budgets might not easily stretch to what, at first glance, looks like a discretionary, non-urgent “upgrade”.
Ultimately, will your bank be able to keep pace in the 24/7 real-time world?
It doesn’t have to be risky or costly, it doesn’t have to be a revolution, but rather an evolution of your existing operation. We’ve heard many express the concern that banks will need to overhaul their infrastructure, throw everything out and start from scratch, but that’s not actually true. Your existing infrastructure serves its purpose, it does what it needs to do. What you need now is a platform dedicated to real-time payments to sit alongside your existing systems. And guess what, we’ve got just the thing.
It’s called IPF.