Real-Time Payments Hits Its Stride in the U.S.
The recent announcement of FedNow in the U.S., the launch of cross-border services like SWIFT gpi, and multiple real-time payment systems including The Clearing House’s (TCH) RTP system and Zelle underline the fact that real-time payments are here to stay. The need to deliver real-time payment services to customers has never been more pressing for banks, credit unions, processors, acquirers and fintechs. However, the U.S. payments ecosystem – and its infrastructure – must keep pace with global markets to remain competitive, and interoperability between real-time payment systems will be key.
The end goal is to drive successful implementation, adoption and monetization of real-time payments. However, there are three challenges – common to all global markets – that the U.S. will need to overcome.
Interoperability drives ubiquity, reduces fragmentation
Although the real-time payments ecosystem in the U.S. is expanding, it needs to do so in an interconnected, interoperable manner. We often see ecosystems emerge as a single system as a result of top-down mandates, such as the Unified Payments Interface (UPI) in India. However, this is not the only way to achieve ubiquity. A single system might be perceived as ‘closed’ to some parties when it is not owned or operated by the central bank. Whether it is true or not, many regulators have made moves to combat this perception and ensure the accessibility of real-time systems through sponsored models or direct access.
UK Faster Payments (UKFP) evolved via indirect access/sponsorships for fintechs and smaller banks into a direct access model with central bank accounts for all parties. In Europe, the need for a centrally-operated pan-Euro real-time system has been met by the European Central Bank (ECB) via the launch of TIPS, complementing the existence of the Euro Banking Association’s (EBA) RT1 service. It’s complementary because payment initiators can leverage a variety of local clearing and settlement providers, or direct access, to send their transaction via one operator – but ultimately settle the payment for their recipient on either system to maximize the number of reachable parties. This industry-leading interoperability is interesting when we reflect on the U.S. market.
The TCH’s existing RTP system has not yet achieved complete ubiquity. However, the U.S. payments market has a strong track record of delivering innovation through competition rather than regulation. Depending on the way the newly announced FedNow system will operate, it could actually reduce fragmentation and further promote ubiquity within the ecosystem. Both parties have acknowledged the possibility of an interoperable service, although the technical complexities have yet to be addressed. Interoperable systems will be necessary to overcome the risk of fragmentation.
Legacy systems impact interoperability
While potential interoperability between multiple U.S. real-time systems is an important topic, the more pressing driver for some financial institutions is the interoperability within their own environments (particularly around core banking), their customers and global markets. Legacy systems don’t require modern messaging standards, such as ISO 20022. These new standards are rich in data, which enable high value services for customers centered on transparency. Enabling existing core banking systems to directly integrate with new real-time payments solutions is potentially risky, due to the mission-critical nature of core banking functionality. Banks are looking at ways to insulate the core from these changes, while adopting real-time native solutions that can bridge the gap and add value. A true real-time bank is enabled for all message types and can accept file formats and inputs from customers (particularly large corporates) in existing formats, while leveraging transformation and orchestration to enrich payment messages.
Additionally, banks and processors should play a more critical role than simply passing messages with transactions. The ability to capitalize on richer data requires real-time enablement of the entire business. For banks with a large cross-border or correspondent banking business, the arrival of Universal Confirmations and SWIFT gpi also necessitates real-time, rich data messaging capabilities. Essentially, even if banks already have immediate payments in place, there is still work to be done to keep pace with the global evolution of real-time. This is very much evidenced by the UKFP’s plan to refresh the system and move to ISO 20022.
It’s fair to say that it’s not all about ISO. India’s UPI does not run on ISO 20022, but it does have a standard, interoperable API which enables access to the payment rails. This has been crucial in creating the Indian real-time payments ecosystem, which is undeniably one of the most advanced in the world. Despite being slightly behind the global real-time curve, the U.S. is ensuring fast-follower status by building its real-time systems on the latest standards. TCH RTP already has several of its APIs published, which is a good first step. But to catch up with India, the market will need a clearer focus on open APIs, and how partners can connect their new services to the payment rails.
By setting up their core systems to operate smoothly with the different real-time systems, financial institutions will no doubt benefit in the long run, as will their customers.
Business propositions must be front of mind
One of the biggest challenges for real-time payments adoption globally, even in relatively advanced markets, has been the lack of clarity on business propositions at the time that systems are designed and launched. Ultimately, consumers won’t pay for new payment rails, just like they don’t expect to explicitly pay for any other ‘everyday’ payment method. Banks need to look beyond peer-to-peer payments to create ROI in their real-time investment.
The business propositions in the retail space lie in creating alternative acquiring models for real-time payments, and digital overlay services to drive volumes for these new models. Digital overlay services will be equally important in the corporate space as a way to create ROI for real-time payments. These overlay services enable integration with accounting and ERP systems to facilitate improved cash management, and eventually robotic process automation. Corporate customers are less concerned about the payment type; they are looking for greater flexibility in the routing of payments to align with their Service Level Agreements. There is an expectation of demand for real-time disbursements instead of batch, which will help corporates deliver the best possible experience to their customers and retain their liquidity position, all without having to alter their existing integrations to their banking provider.
Around the world, one of the most talked about overlay services is Request for Pay (RfP), sometimes called Request for Payment or Request to Pay. This creates the opportunity for all ecosystem participants to connect to this core functionality through orchestration and develop individual customer propositions that layer into the transaction. RTP is not a data transformation problem; it requires deep technology changes to handle the orchestration and non-functional requirements that the future of all payments will demand. Central infrastructures that launch with this kind of open functionality from day one are setting up their markets for real-time payments success, including very low transaction latency and very high volume throughout. TCH RTP, like many newer real-time systems, has Request to Pay functionality in its core system. The Federal Reserve has announced the FedNow system will also consider RfP functionality. RfP has a multitude of high-value use cases, including real-time billing and driving loyalty, to create value in their real-time business proposition investments.
There’s no doubt that what the U.S. needs now is an industry-wide drive toward real-time payments. From a bank’s perspective, the major uplift is in the first move to real-time and the modernization of its infrastructure. Once this real-time enablement of the bank is complete, it reduces the complexity of adding new gateways and system connectivity, whether that is to meet a new system in a current market, or to support expansion into new markets. FedNow has reinvigorated the conversation around real-time payments adoption, and global experience tells us that having system choice can provide benefits in terms of driving adoption and transaction volumes. That will undoubtedly be a win for all parties.
How to Respond to the Convergence of Real-Time Payments and Open Banking
Developing a future-proof strategy for real-time + open payments
The convergence of real-time payments and open banking is introducing new complexity as well as new opportunities into the payments ecosystem. Understanding the implications of this change and how it will affect the competitive landscape will prove essential to gaining an advantage in this dynamic market. We developed this whitepaper as a key resource to help outline an overarching strategy for navigating these changes successfully:
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