Closer to real-time for real-time payments


What holds up real-time payments? In 2017, the veil was lifted on an interbank payment system offering near instant settlements instead of automated clearing house (ACH) transactions the next day. The Real-Time Payments Network (RTP) was working and ready for adoption by banks, businesses and consumers.

Four years later, the RTP network can report several successes, but far from the adoption rates hoped for when it started. About 130 banks are on the network, up from a handful in 2018. Together, they can account for 60% of checking and demand savings accounts. That’s a far cry from the 4,430 commercial banks, 640 savings institutions and 5,160 credit unions in the United States.

The clearing house (TCH), a banking association and payment organization, has developed and operates the RTP network. In May, the CEOs of 23 major financial institutions that own TCH signed a letter committing to present and pay invoices via the network. The CEOs of two of the three major payment technology providers in the United States, Jack Henry & Associates and Fiserv, also signed the letter. The other big provider, Fidelity National Information Services, missed the opportunity.

Promising news, but don’t uncork the champagne yet. Despite the benefits of real-time payments, most actions involve individual payers and smaller amounts. In other words, not the big B2B business transactions that CFOs are interested in.

Hands up

One of the reasons for the reluctance is the need to customize enterprise resource planning (ERP) systems to support real-time payments, a hurdle the RTP network is struggling to overcome.

Another challenge is skepticism about the value of a system that speeds up single-day payments. As CFO Steven Horowitz of home health care provider CareCentrix says, “If you already get the mail at 2pm, getting it at 8am isn’t a big improvement.

To be fair, speed is only one of the benefits of RTP. Others include 24/7/365 access (banks are always online to process transfers); Instant confirmation; and the purpose of the settlement – an issuing bank cannot revoke or recall a payment. Additional benefits include the ability to send a “payment request” and receive payment data along with the payment, verifying that an amount has been sent and received.

To be fair, speed is only one of the benefits of RTP. Others include 24/7/365 access (banks are always online to process transfers); Instant confirmation; and the purpose of the settlement – an issuing bank cannot revoke or recall a payment.

These advantages are important, but the system needs to iron out a few problems. “We’re still only at the beginning of this story – probably chapter two of a six-chapter book,” says Zachary Aron, director and global leader in payments at Deloitte Consulting. “We are past the point where the system has been proven to work and deliver on its promises. It’s just that building the infrastructure takes longer than [they thought it would]. “

Real time meets reality

Real-time payments involve three parties: a receiving bank, an issuing bank, and a pre-funded Federal Reserve Bank account. Within the RTP network, a transfer payment message is initiated by the sending establishment. Once received, payment is finalized almost in real time.

In the very first real-time payment in the US in November 2017, BNY Mellon successfully transferred $ 3.50 from one account to another US Bank account. A year later, four more banks – Citibank, JPMorgan Chase, PNC Financial Services Group and SunTrust – could execute interbank payments in three seconds. At the time, the payment limit was $ 10,000.

Russ Waterhouse, TCH

Today, there are 130 banks capable of executing real-time payments up to a limit of $ 100,000. Is 130 banks a tiny number, given the thousands of banks across the country? “It’s not 100%, but it’s still pretty significant,” says Russ Waterhouse, executive vice president of product development and strategy at TCH.

Asked about the number of companies that send and receive payments from other companies on the network, Waterhouse responds, “This B2B data doesn’t exist, but I feel like 60% is a good indicator, if not more. , since some of the largest banks with corporate banking are live on the network. We have made tremendous progress.

Waterhouse presented two companies that used the RTP network. Both companies have served on TCH’s advisory board and participated in use cases. Sending or receiving payments in real time is also not live.

“We did transactions in test mode,” says Michael Riggin, vice president of banking services and chief risk officer at Global Holdings, a provider of consumer debt settlement strategies and technologies. “It worked as expected, but we haven’t implemented it yet. The challenge is adoption by banks.

Global Holding has 600,000 consumers and 1,000 creditors using its technology platform. “Although our three banks are RTP compatible, we would be unable to reach all of our customers because their banks are not RTP compatible to receive a payment request,” he explains. “We’re getting there, but we’re not there yet.

Michigan State University (MSU) participated in an emergency student loan use case. The university’s federal credit union provided the funds through the RTP network.

“It was a great solution, as long as the bank the student used was an RTP participant,” said Jeff Rayis, director of treasury and financial management at MSU. “The market is waiting for more acceptance.”

Acceptance is imminent, argues Waterhouse. He cited the importance of Jack Henry & Associates and Fiserv’s decision to support the network. “Through these two channels, we can access around 2,000 financial institutions and around 70% of DDAs,” he said. “Banks wishing to join the network now have a technical path to do so. Both technology providers will be live on the network this year.

Will they come?

Across the Atlantic, the building blocks of the RTP are already in place. “The [United Kingdom] and Europe are way ahead of the US in moving from checks to ACH to RTP, ”said Andy Lilley, vice president of accounts receivable automation at BlackLine.

“The key driver, we explained, was not speed but management of working capital. You don’t pay sooner; in fact, you have the flexibility to make the payment decision as late as necessary, literally until the last minute. – Andy Lilley, Vice President of Accounts Receivable Automation, BlackLine

Lilley’s career spans 13 years with Bottomline Technologies, the UK’s largest provider of payment processing technology.

“I remember having conversations with CFOs and treasury people about real-time payments, and they always asked, ‘Why would we want to pay people earlier?’ », Explains Lilley. “The key driver, we explained, was not speed but management of working capital. You don’t pay sooner; in fact, you have the flexibility to make the payment decision as late as necessary, literally until the last minute.

Andy Lilley, BlackLine

This is because a CFO can save time, determining when it is most appropriate from a cash flow perspective to pay a vendor or other customer – early, on time, or later.

“During the pandemic, CFOs couldn’t depend on the money coming into the business,” Lilley said. “Therefore, the question was:” How far can I delay the [accounts payable]? ‘ The more time you have to make this decision, the better the chances of not extending the organization’s lines of credit. You also save more time to settle payments with your customers. It’s invaluable for a CFO’s smart decisions about working capital.

To overcome resistance from the United States, TCH is working with ERP vendors to enable real-time network payments through the use of Application Program Interfaces (APIs), which allow two applications to communicate. between them.

APIs offer CFOs a cost-effective way to envision real-time payments in a B2B context. However, convincing the thousands of other commercial banks, credit unions and savings institutions to become members of the RTP network remains a difficult climb.

When asked what is blocking financial institutions, MSU’s Rayis pointed to the network’s 24/7/365 payment flows. “Many banks have become accustomed to ACH network windows Monday through Friday; they’re not set up to publish and track transactions in near real time all the time, ”he says. “They will end up getting on board for competitive reasons. As I said to our credit union, “If you don’t do this, you will lose customers. “

Even though all the banks in the world have switched to real time, Horowitz, the CFO of CareCentrix, remains skeptical about the opportunities inherent in a system that limits payments to $ 100,000.

“I see an opportunity for small to mid-sized businesses and those in the [business-to-consumer] a space where payments are much less, but for companies that do larger transactions, they would always have to go through a different mechanism, ”says Horowitz.

His argument could become moot in the first quarter of 2022 when the RTP network examines a proposal to increase the limit to $ 1 million. If it gets the green light and more banks join the network, another hurdle will disappear.

“We’ve seen three times as many real-time payments in the last year than in the previous three years,” says Aron of Deloitte. “I don’t know if Moore’s Law is on the line, but I can see the momentum building. In five years, it will be normal. “

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

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