Real-Time Payments Adoption in the US: the non-mandated technology adoption – potential risk or benefit for US banks?

The Clearing House’s (TCH) central processing scheme in the US has recently started Real Time Payments (RTP) testing for the clearance and settlement of funds between banks. The event is significant and will kick off several ‘early adopter’ RTP launches throughout Q1 2018, followed by a larger general industry adoption throughout the remainder of the year and into 2019.

Without question, the adoption of RTP in the US (and Canada) will create the largest RTP market by value and volume globally, potentially also pioneering cross-currency and cross-border RTP between banks. The conventional wisdom is that large scale adoption of RTP payments services will also drive Open API product innovation within banks and Fintechs, thus further driving down the costs of investment.

TCH’s stated goal is a steady rate of bank adoption in 2018-19 toward sector ubiquity.  But are banks investing in the adoption of RTP as a priority against such a foundational industry goal?

Yes, and no. There are several reasons why US Banks’ RTP technology strategy and spending are seemingly taking on a different pattern from their global peers at similar stages of RTP development and adoption.

To better understand this, Icon Solutions partnered with consultants Ovum to conduct an in-depth study of the North American market (a follow up to our previous European market focused RTP and PSD2 spend report, published earlier this year). This new research focuses specifically on US and Canadian commercial banks, and the results show significant differences in IT spending in support of RTP adoption over the next 5 years.

At first glance it may suggest that the North American markets are not prioritizing RTP, an area where only 50% of US banks are planning to increase spending over the next 18 months. Priorities may even be widely divergent between the US and Canada in their adoption – with cash management services being cited by 67% of US banks as an area for increased spending, while only 20% of Canadian banks plan to increase their spending in this area. However, in reality it reveals a more concentrated focus on RTP spending in the US, along with the deployment of next generation differentiation strategies.

There is no ‘mandate’ for banks to adopt RTP in the US as there has been in other countries such as Australia, the UK and Singapore (source: Instapay.today). The research broadly indicates that the technology strategy and spending patterns exhibited by US Banks do not match the priorities of other global geographies which have had clear mandates to implement RTP and ISO20022 financial messaging standards.

Current IT spending in the US suggests that direct investment in RTP initiatives are not yet a strategic priority for US banks, when compared to Canada and the rest of the world. This has led many banks to conclude that there is ‘no business case’, ‘no client demand’, or ‘no source of new revenue’.

RTP adoption key enabler of new products and services

The study reveals a set of key findings and trends that US banks may find particularly insightful:

• Major IT expenditure within US banks is geared towards the fundamental requirement for RTP infrastructure in order to provide new services. This reveals the need for a strong architectural vision and governance to assure all programs and multiple stakeholders are aligned to a common RTP vision. This presents potential risks as well as benefits for US banks pursuing a compartmentalized RTP strategy.
• TCH has developed a fundamentally new architecture for its central RTP clearing and settlement processing reflecting the difference in service demands for RTP. Banks need to come to this same understanding of the commitment and the costs involved in fine-tuning batch systems to ‘accommodate’ RTP.
• RTP is a strategic opportunity, not a compliance issue. Banks are moving away from the prior notions that RTP is a simple gateway addition to their existing payments hub. Instead they are finally seeing RTP as a game changer and differentiator, as last generation low value payment volumes get absorbed by RTP.
• RTP rich transaction data is about much more than capacity for message transformation as some solution providers have highlighted. Many of our clients are indicating a tremendous increase in analytics investments to power a new wave of ‘AI’ services to clients.
• RTP is the enabler of Open Banking/API innovation. New innovative and targeted services will depend upon RTP for delivery to consumers.

RTP: a launchpad for future innovation

RTP infrastructures are the catalyst for acceleration and should be central to the investment plans of all banks. Care is needed to move the transition from old architectures to new frameworks that address areas where service offering capabilities have lagged customer expectations.

Truly Agile development designs, such as Icon’s Instant Payments Framework (IPF), will speed banks’ custom solutions time to market. The quality of processing flows within any RTP solution will need to reflect the requirements of scheme packs and the efficiency of any overlay services that banks or 3^rd parties require. IPF’s fully tested and scaled high quality process sets, speed time to market through reduced testing, rapid prototyping and the opportunity to deliver innovative new client services.

The analysis of the US and Canadian markets provide a snapshot of the RTP investment pattern that is being replicated around the world, showing the need for banks to continue to invest beyond core payment capabilities to deliver the next generation architecture capable of supporting dynamic services to corporate clients.

Current investment trends point towards a rapid adoption of RTP capabilities, global standard financial messaging in the form of ISO20022 and product innovation around APIs, OB and AI. Against this fast-moving background, banks need to adopt a more proactive approach to technology and IT or risk missing out on the huge potential that undoubtedly lies ahead.

If you would like to read the full Ovum report “The rise of Real-time Payments in North America”,  download the whitepaper today.