In this fast-paced, highly mobile, Internet-everywhere world, it’s not surprising that U.S. consumers and businesses have come to expect their transactions to post in real time. And soon, industry insiders say, they might finally get their wish.
Helped along by technology development and industry/regulatory leadership, the issue of making payments faster is coming to the fore, say payments experts at the upcoming BAI Payments Connect 2014 in Las Vegas. “We’re seeing a lot happening in the payments space in and around interbank payments – a lot of payments options emerging,” says Sean Rodriguez, senior vice president for payment industry relations for the Federal Reserve System, who will be speaking at sessions on real-time payments and managing the fraud risk in real-time payments.
The Federal Reserve itself lit a fire under the debate last September by publishing a public “consultation paper” on payments system improvement that discussed the absence of a ubiquitous, near real-time payment system in the U.S. The Fed pointed out that private-sector innovation has led to approximations of real-time payments, but these require payer and payee to belong to the same network or define “real time” around timely notification rather than availability of funds. The Fed is now looking “more broadly” at the payments system from end-to-end to help financial institutions to see the bigger picture, according to Rodriguez. “Of course, the conversation gets more interesting when talking about what you mean by speed and efficiency,” he adds.
Outside the U.S., countries including the United Kingdom, Sweden, Poland and Singapore already have real-time payments systems in place. While these countries’ payment infrastructure may lack the complexity of the United States, they point the way to where the payments industry is heading, according to Mitch Siegel, principal at KPMG, which is advising on Australia’s transition to real-time payments. “The trends are such that this is coming, it’s just a matter of when and where it fits in the landscape,” Siegel says.
New Revenue Growth?
Some of the pressure for faster payments comes from outside the industry. “The demand exists; consumers want real-time payments,” says Peter Gordon, senior vice president for money movement and general manager for Jacksonville, Fla.-based FIS’s PayNet. PayNet’s real-time payments service, which leverages the infrastructure of the NYCE network, boasts more than 170 financial institution clients and Gordon expects the number of demand deposit accounts covered to grow to 50 million by the end of this year.
Gordon points out that the entry of non-bank payments players such as PayPal and Square and the success of Bitcoin is turning up the heat on financial institutions. “The real situation is that there is a competitive threat,” he says. Steve Ledford, senior vice president for products and strategy for the Clearing House Payments Company LLC, says mobile technology, which is all about quick and convenient access, provides another impetus for real-time payments. “Customers are ready for it more than in the past.”
With this growing consumer demand, banks are now more eager to consider faster payments as an area of new revenue growth, particularly since that growth has been pinched in other areas by regulation and the sluggish economy. “A lot of people might be willing to pay for faster payments so there’s an opportunity for banks to monetize it,” Siegel says.
And there’s the Fed’s unmistakable wish to push this conversation forward. “The Fed is nudging the industry forward without regulating it; they’re trying to get the ball rolling, but doing it with a soft hand,” says Siegel, who compares the Fed’s involvement in faster payments to its role in promoting the Check Clearing for 21st Century Act. “The Fed is being politically smart about how they do this.”
Ledford agrees that the Fed is “moving forward the conversation and making real-time payments a priority, helping focus the entire industry on this issue.” However, unlike many countries in other parts of the world with a stronger central bank, “the Fed can’t make this happen on their own,” he adds.
And such a momentous task is not without its challenges for banks. “There are still a lot of people who would ask, ‘What’s the business case for doing something different?’ They don’t always appreciate that customers will want or need this,” Rodriguez says.
Siegel says that the necessary upgrades to payments and core systems will be costly in an era when bank Information Technology (IT) budgets are already stretched thin. “From the perspective of some of the large U.S. banks, this is still a bit of a distraction, so there’s been some initial hesitation to commit to anything.” Siegel says many banks do not see customers clamoring for real-time payments as much as they see vendors pushing for it.
Once banks are motivated to offer real-time payments, he adds, they will have to deal with potential fraud vulnerabilities and consumer expectations. A move to faster payments will “shorten the window for bad guys to insert fraud in the process,” which may affect risk mitigation, Siegel says.
Also, U.S. consumers will have to embrace what European consumers have long accepted: the irrevocable payment. “The U.S. customer thinks, ‘I can just stop payment by canceling an ACH or stopping payment on a check. There’s a different mindset when it’s final as soon as you make payment,” Siegel says.
In the meantime, Gordon says, “standards need to be developed, network operating rules established and guidelines created to determine liability.” He estimates it could take two to three years to put in place a widespread, real-time payments infrastructure in the U.S.
Ms. Hoffman is a contributing writer to BAI Banking Strategies based in Ansbach, Germany.