Beyond Speed: the Long Term Impact of Immediate Payments in the U.S.

by Ian Rubin 0

Two years ago, faster payments had not reached the radar of many banking executives based in the United States. Today, immediate payments (and what to do about them) is a topic of discussion at every bank I visit.

Despite the activity and excitement surrounding the development of a real-time scheme, it’s important to consider the longer-term implications of a large scale, national, faster payments network.

While immediacy of payments is a critical component, it is perhaps even more important that faster payments will become an enabler of far-reaching, big-impact transformations. Speed is valuable, but it is not the end game; the longer-term value from immediate payments goes well beyond speed.

Once new immediate payments rails are available, there is a limitless variety of products and services that the banking and merchant industries might be able to offer. To paraphrase the famous quote, “We are only limited by our imaginations.”

Once faster payments are available to the market, we will witness innovations that we have yet to imagine. Many of these innovations will have ripple effects on both retail and commercial banking, as well as potentially significant implications on society itself.

Consider some of the possibilities:

Currently in the UK, more than 50% of faster payments transactions are conducted outside of banking hours. If that holds true in United States, would it change expectations about the weekend availability of services? What if, for example, house closings could be conducted on weekends? How might that impact the weekend demand for lawyers, cleaning services and moving companies?

If faster payments enable account-to-account transfers in real-time, what long-term impact will that have on correspondent banking services? Do faster payments, with their direct access, immediacy, and low-cost profile, threaten traditional correspondent banking services?

The U.S. real-time rails are expected to support the ISO 20022 messaging standard. With the ability to capture richer transaction data such as invoice details or time and date stamps, ISO 20022 therefore has the potential to impact a large number of payment-based strategies. Access to this rich payment data can position retail and commercial banks as providers of important value-added services.

It’s no secret that many business and technology banking executives have initial skepticism around the business case for immediate payments.

Concerns over revenue and product cannibalization, the need for increased risk and fraud prevention, and the investment required to enable real-time connectivity across dozens of systems have bankers questioning the faster payments value proposition.

As bankers contemplate the technological requirements necessary to prepare batch-based systems for real-time processing, they are also evaluating the opportunity to re-imagine the banking and payments businesses for the 21st century. This requires an environment that is SOA-based to enable rapid software development, incorporates contemporary messaging standards like ISO 20022, and is ‘services-enabled’ to more easily integrate with other systems.

Investment in realizing this environment will provide a platform for innovation that can enable the bank to re-shape its traditional business models.

Where should a financial institution begin? By accepting, then embracing, the opportunities that preparing for faster payments will bring. By thinking long-term and ‘big-picture’, banks can lay the foundation of their innovation strategy for the next twenty years.

But one thing is certain today: the impact of immediate payments goes well beyond speed.

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