With the Clearing House’s RTP network and the Federal Reserve’s FedNow, the demand for instant payments continues to grow from consumers and small businesses. How can businesses best accelerate this process?
Debbie Smart, Senior Product Marketer at Q2, and Keith Gray, Vice President of Strategic Partnerships at the Clearing House, sat down with Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, for a PaymentsJournal podcast and explored the landscape for instant payments. Although the path can be different for different institutions, it’s clear that customers have come to expect real-time payments. Late adopters beware.
Payroll: A Critical Use Case
From the beginning, account-to-account payments have been driving many of the real-time use cases. The growth of providers like Zelle and Chuck has fueled the expansion of business-to-consumer payments.
One application that has been frequently overlooked is payroll, including daily payroll and earned wage access. These functions are already key users of the RTP network—and they’re growing every day.
“Who would have thought that six years ago when we launched this that a lot of people would prefer getting paid every day for what they do?” Smart said. “Now all of the rideshare companies and the companies like Grubhub are using RTP to push money out to their contractors.”
Exploring Business-to-Business Payments
On the commercial side, especially with business-to-business (B2B) payments, the most significant value is in the data. The rich messaging on the new payment rails doesn’t exist in the older payment rails. Commercial customers are increasingly excited about the possibilities as they learn more about this.
Another important usage involves paper checks. A third of all B2B payments are still made with a check. But 78% of the time, when a business pays another business via ACH, the identity information or remittance information doesn’t go along with the transaction. It goes in an email or via U.S. mail, which makes it time-consuming for these businesses to complete reconciliation. Part of the excitement around the power of instant payments lies with the ability to have that remittance information from the start.
It’s not just the immediacy of the payment. Timing is critical in a B2B transaction as well. “If I owe a supplier a million bucks tonight at midnight,” Gray said. “I can keep that in my account till 11:59 and 45 seconds, and then I’ll shoot it out. I’ll get a confirmation back and everything will be closed and settled literally within seconds. That perfect timing and visibility of an immediate payment is a key part of the value proposition of an instant payment.”
Other use cases are being explored, if not offered already, in payments that traditionally have been limited to business hours. “In the auto industry, most consumers tend to shop for cars after work or on weekends, when the banks were closed,” Tavilla said. “With real-time payments, the 24/7/365 enables more convenience and better business processes.”
Start With Receive Only
Starting real-time payments with receive only makes sense for several reasons. It allows a business to get connected to networks and get the plumbing in place, so to speak, for using the new rails.
“The biggest benefit is what they can bring to their accountholders by receiving instant payments,” Smart said. “I’ll give you an example. We’ve got a customer, a $9 billion credit union, who started with receive only in January of 2021. The first month, they had 3,400 incoming transactions. By December 2023, that number was almost 38,000. They didn’t promote it, or even announce that it was available—they just enabled it. What’s even more interesting to me is the fact that the day they went live, the first payment hit within 60 minutes.”
Smart pointed to Grubhub as an entity where real-time payments grew from demand by the users of the app. When a Grubhub driver opens the Grubhub app, a message says: “Would you like to be paid immediately? If your bank doesn’t support it, click here for a list of banks that do so.”
Eventual Move to Two-Way
Financial institutions should plan to eventually support send and receive capabilities. That enables FIs to take advantage of all the capabilities that RTP and FedNow have to offer. For example, you must be able to receive and send in order to receive requests for payments. If you can’t send, you wouldn’t be able to push payments out, given that RTP and FedNow transactions are push only or credit push payments.
“An analogy I often like is that if you have a phone and can only receive calls, you can’t really take advantage of the technology,” Tavilla said. “It’s just a one-way system. Whereas if you have a two-way system, there are many more possibilities and value that you can take advantage of with the network.”
Joining Multiple Networks
FIs have always had multiple payment networks to choose from, across all payroll and payment types. Since FedNow launched, there has been a lot of concern in the industry about how to deal with these choices.
“My point is that we’re used to it and we’ll figure it out,” Gray said. “In the meantime, what we’re seeing is that most of the banks that are joining FedNow are also on RTP, or are getting on RTP. That’s also true of all of the technology providers that I deal with, both the big guys and the smaller guys.”
Over the long term, it’s possible that the networks will become interoperable, as they are on other payment rails. But the fact that the connectivity partners all support being able to connect to both networks makes it easier for financial institutions.
The bottom line for most FIs is this: What am I doing for my accountholders to enable them to move money the way they want to be able to move money?
“When financial institutions are considering implementing real-time payments, look at your own customer base and their financial needs and pain points,” Tavilla said. “Think about how real-time payments can complement the existing payment methods that your financial institution currently supports. Think about how you can help solve your customers’ problems and improve the customer experience.”
Download the Q2’s Instant Payments white paper, “What to Know and Where to Start“