Is now the time for real-time payments in the U.S.?

23 May 2024

Following NACHA’s annual Smart Faster Payments Conference in Miami, Arjeh van Oijen, Head of Product Management for Icon Solutions, explores the key trends shaping the rollout and adoption of real-time payments in the U.S.

More rails doesn’t have to mean more problems

In the absence of regulatory mandates forcing banks’ hands, uptake of FedNow and The Clearing House’s RTP remains patchy – despite an enthusiastic response from banking customers.

A key barrier for many banks is that implementing solutions that can manage the demands of real-time payments is currently proving too costly, time-intensive and risky. Another complicating factor is that RTP of TCH and FedNow of the Federal Reserve are not interoperable, like this is the case with the different SCT Inst related CSMs in Europe (RT1, TIPS, STET, Worldline, Iberpay, etc.). This means that banks need to become participant of both RTP and FedNow to have maximum reachability.

A more pressing problem is the fact that many banks are behind on the migration of the FedWire Funds Service to the ISO 20022 messaging standard. With the deadline now less than 12 months away, the significant operational overhauls needed are taking on a new urgency.

While a short-term focus is undoubtedly needed, banks should also explore the opportunities to prioritise and harmonise ISO 20022 migrations across all domestic payment rails including FedNow, RTP, FedWire and CHIPs – while also addressing one-leg-out and cross-border transactions to ensure closer alignment with regional and global markets. This can help to realise the full benefits of real-time payments, making the juice worth the squeeze from an investment perspective.

Request for Payment emerges as a key use case

While proactive regulatory agendas have inarguably pushed Europe and other regions further down the road to real-time payments, the market-led approach of the U.S. is enabling innovation and delivering enhanced payment experiences.

For example, both FedNow and RTP include support for Request for Payment. By allowing payees to initiate requests for payment within a secure messaging channel, and with the ability for data to travel with the payment request, Request for Payment services enable new flexible ways for money to move between people, organisations and businesses.

By supporting Request for Payment services, early-movers in the U.S. are maximising their investment in real-time payment capabilities and gaining significant competitive advantage. The upshoot is that adoption of Request for Payment is leapfrogging Europe.

Legacy payments present opportunities for innovation

Somewhat conversely, strong customer demand for real-time payments and innovative overlay services such as Request for Payment is coupled with the enduring popularity of legacy payment methods.

Consider cheque usage. Although it is declining, a recent report by the Reserve Bank of Atlanta still found the number of cheques per capita in the U.S. is over 30 – compared to 0.06 in Germany.

For banks, this is creating issues – such as the increasingly costly battle against cheque theft and fraud – that could be addressed by increasing adoption of real-time payments. And while the common adage is that a new technology must be ten times better than the existing solution, advances enabled by artificial intelligence (AI) are increasingly moving this into the realm of the possible. Yet if banks are to meaningfully influence and shape customer behaviour and preferences, they must focus on their capability to offer truly differentiated services that add value.

Accelerating down the road to real-time payments

The good news is that the discussions at Smarter Faster Payments made it clear that banks are taking action and looking to accelerate their payments transformation. Many are exploring strategic options to consolidate payments processing applications into a single platform that is agnostic to payment type, currency, scheme and clearing settlement mechanisms.

This approach breaks down siloes, helping to implement new RTP functionalities within a much shorter timeframe by leveraging pre-processing / order management layers. Costs can also be lowered significantly,  along with the associated risks.

Taken together, this puts banks firmly in the driver’s seat – enabling them to control their destination and the rate of acceleration as they set out on the road to real-time payments.

Arjeh van Oijen