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Why the Value of Real-Time Payments is Not in the Fees Charged

Real Time in the US

I recently hosted a webinar with payments experts to delve into ACI’s Prime Time for Real-Time research and uncover what the rise in global transactions means for the U.S. market. I was joined by Steve Ledford, product executive for the RTP Network of The Clearing House, Reed Luhtanen, executive director of the U.S. Faster Payments Council, and Peter Hazou, director of solutions for Financial Services at Microsoft. We investigated the unique factors that have so far hindered ubiquitous adoption of real-time payments in the U.S., as well as those that highlight the market’s position to capitalize on the global rise of real-time, and deliver value to financial institutions, merchants, corporates and consumers.

Bridget Hall: One of the most asked questions on our webinar was around the fee structure for real-time payments. Why are U.S. financial institutions still asking how to charge for real-time transactions?

Reed Luhtanen: It’s understandable that financial institutions are interested in the fee income associated with payments. For many of them, the income they currently receive from various payment types is a material part of the institution’s overall P&L. But the ability to grow your business by obtaining mindshare from customers, participating in rich data flows, and offering an optimal customer experience are all compelling reasons to engage and adopt instant payments.

Steve Ledford: Some non-fee benefits include increased competitiveness, attracting and retaining deposits, and a platform for deploying value-added services based on extended data and messages.

Peter Hazou: The inflection point in the payments industry pivots around value and customer centricity. But the fee charged no longer represents the value of the transaction to either the payor or the processor. Data insights and contextual services around finality, irrevocability, reconciliation and other value-added services are the new competitive lens; not payment widget processing for a fee.

BH: If not for the processing fee, where should the U.S. market be focused when building its business case for real-time?

PH: The business case for real-time payments centers around what financial institutions are trying to achieve with their investment, not the P&L around fees versus costs. Financial services have permanently raised the bar on customer expectations from providers. It is why non-bank competitors are focusing, successfully, on the data provided by payment flows and real-time payment messaging standards, and not on the fees (for which there is usually no charge). The value proposition around payments has evolved irreversibly; banks need to evolve their approach to the payments business beyond the narrow silo of product P&L.

SL: Future products and services will be built on real-time payments infrastructure. Failure to implement now will leave a financial institution trailing behind both its bank and non-bank competitors.

RL: I agree with the above. There are highly innovative companies working to provide real-time payments solutions outside the traditional banking system. Developing and leaning into an instant payments strategy can position financial institutions to deliver the experiences customers want in the channel where they want them: their mobile banking apps.

BH: Knowing the data around the payment flow is valuable; how do you see digital overlay services for real-time payments manifesting in the U.S.?

SL: Overlay services are a way to extend the underlying value of real-time payments by adding use-case specific functionality. Overlays can also provide access to multiple faster payments networks to provide a single payment service that combines the unique features of each network.

PH: Payments are changing, and client needs and expectations are changing in parallel. Part of meeting this challenge lies in evolving bank business models around the services they provide to customers and the value-added services they have traditionally brought into new lines of business.

BH: Which use cases do you think will be most impactful in driving adoption of real-time payments in the U.S.?

PH: There are many new use cases not yet developed around edge devices and services like QR codes and the internet of things (IoT) where real-time payments will be the norm. You cannot run a modern real-time data-centric economy based on overnight batch processing. Banks are in the process of updating their core systems, specifically to futureproof themselves for the economy to come. COVID-19 is proving this - who knows what 5G will bring?

RL: I think there is a lot of potential for bill payments to have a huge impact on the adoption and usage of real-time payments in the U.S. Every person and every business in the economy receives and pays bills. There is a tremendous opportunity to make that process more efficient, more transparent, and more reliable for end users. The certainty of instant payments, alongside the data flows enabled through modern messaging infrastructures, can establish a truly universal use case for faster payments that benefits all stakeholders.

 

Want to watch the entire webinar for further insights? Now available on demand.