Request for Pay – What Does It Mean For Financial Institutions?
What do banks – one with $60B+ in assets, one a mid-size regional bank, and one, a small innovative credit union – have in common with payment networks and the ‘Big 4’ consulting firms? They were all part of the first ACI #PaymentsForBreakfast event in North America! The theme was real-time payments, but the focus was more specifically on Request for Pay.
What is Request for Pay?
Real-time payments are becoming the new normal, and digital transformation is the next step in revolutionizing banking in the U.S. A key product in this arsenal is Request for Pay (RfP) – an instant payment that enables a simple, instant and seamless payment experience for both the payer and receiver.
Request for Pay acts like a real-time Direct Debit, but in this case, it allows the payer greater control of their transaction; the ability to check their balance, choose the specific account from which they want to pay, delay a payment, question the amount, or opt to pay in part. The benefit for the recipient is the certainty of funds, thanks to a reduction in ‘bounced’ Direct Debits, which has the potential to reduce costs and improve liquidity. Banks are incentivized to offer “Request for Pay” by receiving a transaction fee, which not only compensates for loss of revenue from more traditional payment methods such as cards, but also helps them to future-proof revenue streams.Citibank’s whitepaper [PDF] is great primer on this – the diagram below shows a sample payment flow.
Sample payment flow for 'Request for Pay'
Our #PaymentsforBreakfast audience in Chicago was very engaged throughout the highly interactive session. We talked about the difference between Request for Pay and other alternative payment methods, the need for millennials (and all generations) to maintain control over their finances, and finally, the barriers to adoption faced by Request for Pay.
The session examined three types of use cases:
Peer-to-Peer or Person-to-Person (P2P)
This is the simplest of the use cases considered. An example would be when I forget to take out cash to pay our babysitter, and so they ask for a request for pay before they leave. This raises challenges, such as whether the payer and payee have different banks, and how this might disrupt the payment. For instance, is there a requirement for banks to put a “freemium” model in place as part of their roll-out? There are also questions around how the message gets delivered. In other parts of the world, the request for payment can be made via WhatsApp. However, this would be a challenge in the US market due to the need for additional tokenization layers. Current evidence has shown that consumers are willing to use mobile-centric apps to exchange money, but ensuring separate banks work together (beyond Zelle) will be an interesting and key development. Our #PaymentsForBreakfast audience saw much of the value for the banks coming from the data, and the advances in data-mining and predictive analytics providing better cross-sell opportunities.
One scenario here would be a lawn service company pinning a bill to your back door, asking for payment via check or cash. In this situation, the audience discussed issues around ease of payment, and how automated reminders could prove to be an attractive component of RfP for smaller businesses.
The same case study, using a lawn service company, was also used for B2B – where the request for pay would be sent to a corporate. But in this instance, it was concluded that the payment requests would have to be integrated into internal systems, such as invoicing and accounts payable.
Generating Extra Revenue Streams with Request for Pay
Whilst it was agreed that P2P was not an area where banks could charge, because consumers now expect services for free as part of their personal banking service, potential was seen for B2B. In this instance, it was felt that nominal fees could be charged for RfP based on the capture and storage of data, particularly for small businesses focusing on their retention strategies. Small businesses don’t typically have a deep integration with their back-office capabilities, so they are looking at ways to make their business more efficient – and a core element of this is their business banking. In fact, in a study carried out by YouGov in 2017, 74% of small business said that real-time would improve how they receive payments from customers.
The benefits are also there from the payee point of view, as 55% said it would help improve the way they pay vendors and suppliers. Overall, 65% of small and medium-sized business said that if they weren’t offered real-time, they would consider switching banks. This shows a clear demand, backed up by our audience in Chicago, who were quick to identify how the consumerization of banking and payments would help overcome business inertia and obstacles.
The Bigger Picture
A survey conducted during our recent webinar ‘How can banks unlock the value of ‘Request for Pay?’ (attended by 150 financial institutions) again demonstrated there is a growing appetite to provide RfP in the corporate space, with more than half of the US banks surveyed viewing the value and volume for RfP most likely coming from corporate customers rather than consumers. Even so, 7% said they were ready to go live imminently across all use cases, and 45% were exploring and finalizing their strategy to ensure a competitive advantage with all their customers.
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