Pillars of digital banking: Real-time payments stir innovation

From speaking to the market and our analysts, we’ve selected three of the core components that are shaping the future of digital banking. The first of these is real-time payments

Financial institutions, businesses and consumers have welcomed real-time payments (RTPs) for the obvious reason that they bring much faster settlement.

That initial attraction is still a huge appeal. With FedNow set to launch in 2023 the US Federal Reserve is keeping a close eye on interest.

“Businesses are calling for consumer-to-business and business-to-business payments that facilitate quicker access to funds, the ability to post payments immediately and automatically, and timely notification of payments,” said Shonda Clay, the Federal Reserve’s chief of customer and industry engagement, on the announcement of a survey the regulator published recently on business demand for faster and instant payments.

Among the survey’s findings, nearly 75% of micro businesses and 60% or more of all other businesses cite managing cash flow and working capital among their top concerns in the current business climate. Many are now focused on offering additional digital  payment options, ensuring payment timeliness and growing sales and revenue.

That’s the tip of the iceberg, with instant access and confirmation of payment providing the impetus for a number of innovations in the digital banking landscape. Progressive banks and financial institutions have found new and novel products and services made possible only by utilising RTPs.

“We thought we knew how folks would end up using the RTP Network. And we were wrong,” says Steve Ledford, Senior Vice President, Product and Strategy at The Clearing House. Launched in 2017, the network currently reaches 60% of US demand deposit accounts.

“Innovative players who are much closer to their customers and businesses are finding ways of meeting their needs and solving problems that we as network operators never would have figured out,” he says.

Moving funds in and out of a digital wallet and from account to account instantly have played a big hand in the transformation of banking over the past few years, but the complementary products and services continue to grow as more.

One growth area is earned wage access. More institutions have offered early salary payment – including Chime, Monzo, and more recently, Revolut, providing access to funds before a user’s payday. On-demand earned wage has also led to the rise of a new category of third party providers. One such provider, DailyPay, is working with The Clearing House and PNC Bank to make early wage payments instant, without disrupting the employer’s salary cycle.  

Pay pals: Monzo and Revolut offer early wage access, made possible thanks to the growth of RTPs. Source: Digital Banking Hub

As with money going into the consumer’s account, instant payments have been similarly applied with those going out, in the form of request to pay (as it is known in the UK, in Europe as request 2 pay and in the US as request for payment). Billers, merchants, corporates, and other businesses are looking to the service, in which payees are prompted to pay bills and complete other transactions. RTPs become useful here as the payee can respond to the prompt by settling up immediately, allowing organizations to provide more flexible payment terms. In some cases, the payee doesn’t have to go through the motion of going to the biller’s website, with the prompt link taking them straight to the payment in-app or within the desktop banking service.

Pay call: Chime’s request for payment solution. Source: Digital Banking Hub

Chase launched a request for payment service in July, making it available through both app and website. Sources suggest JP Morgan is one of more than twenty large financials that are committed to rolling out similar provisions in the future.

The standout performer in consumer finance this year (and subject of the third part in this series, as well as the follow-up webinar), buy now pay later (BNPL) has also benefited from the emergence of RTPs. A downside to traditional BNPL is that it puts pressure on merchants and BNPL providers who don’t receive full payment until after the goods or services are delivered. RTPs alleviate some of that pressure, cutting out extra processing and settlement time.

Holding up instant

The Clearing House’s Real Time Payments Network and the Federal Reserve’s FedNow may seem to be in competition with one another, and indeed a number of banks are taking a “wait and see” approach to which provider they are going with. However, it is likely that banks will need to support both networks as each adds new features, in order to fully provide RTP experiences to customers. 

As of the time of writing, 150 institutions are signed up to the RTP Network in the US. These institutions are capable of much deeper penetration into their client base through the digital provision of RTPs and the potential complimentary products and services they bring. Smaller, less digital-reactive players – generally community banks and credit unions – face an increasingly uphill battle.

To adopt a new payment type, financial institutions need to do a minimum of two things: construct a viable business case and ensure their existing technology infrastructures can facilitate the new requirements. Both can be tough to overcome: RTP fee models can be ambiguous and volumes unpredictable, with implementation costs difficult to calculate as many of these providers rely on legacy on-premise technology. One solution is cloud-based payments as a service (PaaS), which can reduce upfront costs and allow the organization to increase volume faster if demand requires it.

Digital banking and RTPs are deeply connected, with the evolution of the former driving the need for the latter. As digitalization continues to shape financial services, RTP will play its part in opening up more possibilities.

Michael McCaw
Digital Content Editor
michael.mccaw@curinos.com
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