Instant payments systems have gained traction in countries that had cash-based payments infrastructures. While services like FedNow and the RTP network have launched in the U.S., instant payments haven’t taken hold due to the firmly established financial system.
In a recent PaymentsJournal podcast, Abeer Bhatia, CEO of Personal Lending & Head of Enterprise Payments at Wells Fargo, and Elisa Tavilla, Director of Debit Advisory Services at Javelin Strategy & Research, discussed the past, present, and future of instant payments.
An Infinite List of Trends
The payments space has undergone massive shifts in the past few years, driven by a few central undercurrents.
“There’s almost an infinite list of trends happening, but two stand out most,” Bhatia said. “One is the increase in instant payments and the attention it’s received since the launch of FedNow and RTP. The second is the expanded availability of data that companies have within the new formats.”
Instant payments services allow for much richer data to be transmitted between sender and recipient. It’s facilitated by the ISO 20022 messaging standard, which acts as a universal payment language. So far, countries outside of the U.S. have been swifter to adopt the new model.
“There are unique aspects about markets like Brazilian and Indian which caused instant payments to take off there,” Bhatia said. “The main reason is it’s needed. It’s a compelling alternative to cash payments, and it allows them to conduct both P2P and customer-to-business (C2B) payments.”
Barriers to U.S. Ubiquity
In India and Brazil, the government has effectively mandated the use of instant payment rails, making growth fundamentally faster. The U.S. isn’t likely to get a government mandate anytime soon, but that’s not the only factor slowing instant payments adoption.
“The U.S. is highly card centric,” Tavilla said. “Cards are convenient to use and accepted virtually everywhere. There are also over 9,000 institutions in America and two real-time settlement systems. Getting all the financial institutions on board and connected to the networks will take time.”
“P2P has been a primary instant payment use case in markets like Brazil and India,” she said. “P2P has been adopted in the U.S. but, behind the scenes, it’s not really an instant payment. The settlement is asynchronous, but it appears instant to the customer, so there’s no urgency to transition to something else.”
Future Speculation
There’s been increasing speculation on the future of instant payments, but there are more practical matters at hand first.
“A financial institution might be able to send money immediately, but there’s a separate question,” Bhatia said. “Can the recipient accept money immediately? Oftentimes, that’s not the case. It will require systems that are currently geared towards batch processing to be redesigned to handle real-time payments.”
Once the infrastructure for instant payments is established, much of the initial adoption might be in industries outside of traditional C2B payments.
“It could be in earned wage access for the gig economy or in payouts in the gaming industry, but those are the types of areas where instant payments will take root in the U.S.,” Tavilla said. “Real-time payments aren’t going to substitute for the existing rails that work.”
Once U.S. consumers begin to understand the capabilities of the rails, real-time payments will take off. The newly launched FedNow will play a significant role in that growth.
“I’m excited to see the network has over 700 financial institutions participating now,” Tavilla said. “It’s still growing, but it’s also iterating more robust features and functionality. That drives more use cases which creates greater value and increases transaction volume. It will be interesting to see how the U.S. Treasury leverages FedNow, given the success of government mandates in other countries.”
Instant and Irrevocable
New fraud vectors are likely to emerge, presenting a critical challenge for the real-time payments industry, especially given the irrevocable nature of instant payments. It’s paramount for organizations to remain vigilant in identifying fraudulent transactions and preemptively stopping them. Preventing fraud is far preferable to remedying it after the fact. Both FedNow and RTP have implemented multiple controls to combat fraud.
At the network level, both rails have implemented transaction limits, negative lists, and other fraud mitigation tools. The comprehensive data provided by instant payments rails also serves as a deterrent to fraud. Effective security management is essential to instill trust in the networks amid the transition to real-time payments.
Establishing that trust will involve educating consumers about fraud risks and the irreversible nature of instant payments.
“One feature customers value is payment confirmation,” Tavilla said. “Payments are posted in real time with full transparency, which can also mitigate fees or late charges. The customer starts to feel more confident. And the payment details are there so the merchant or payee can easily match the transaction with the payer.”
A security aspect that is still lacking from instant payments is purchase protection. It’s one of the reasons U.S. consumers have been reluctant to switch from credit cards.
“Another reason is consumers love their rewards cards,” Tavilla said. “Until real-time payments can offer comparable incentives and the customer protection piece, the value won’t be obvious enough for consumers to change their payment behaviors.”
Digital Wallets
Globally, commerce is rapidly shifting towards e-commerce, with card-not-present transactions experiencing much faster growth compared to card-present transactions.
“It’s much easier to use a digital wallet than to type in the card number, address, email, etc.,” Bhatia said. “Digital wallets are a mainstay of online commerce, so maybe the better question is whether one or two wallets will dominate, or if multiple wallets will spring up.”
Digital wallets offer consumers a more convenient checkout experience, which will further drive their adoption.
Tavilla emphasizes that mobile wallets are a permanent fixture, thanks to their one-click checkout simplicity. Financial institutions should prioritize offering customers various payment options to enhance their experience and boost transaction volume. While payments are the primary use case for digital wallets, their potential extends far beyond that.
“It will be interesting to see if the U.S. adopts the super-app concept like Asia,” Bhatia said. “Culturally, Americans prefer to keep their financial operations more compartmentalized. Digital ID cards, however, that’s something that could be adopted sooner rather than later.”
A Powerful Nexus
Instant payments may be catching on slower than expected, but they will play an integral part in the coming payments landscape.
“Speed is one of the top trends,” Tavilla said. “Aside from FedNow and RTP, same-day ACH is growing rapidly. The use cases for real-time payments will only increase in the U.S.”
“Systems and processes will need to be retooled to support instant payments before people truly see the benefits,” Bhatia added. “That will take time. And we’ve just begun to explore the concepts of identity and data. There’s going to be a nexus of payments, identity and data that’s going to be very powerful.”