Whenever a new payment format comes on the scene, three issues usually present themselves: will it find users, will users achieve the desired scale and will the underlying technology options be compatible. Within the current state of real-time payments, users have checked the boxes. But compatibility (read interoperability) is still in play.
Those were the top-line takeaways from Tuesday's Chicago Federal Reserve Payments Symposium’s “Activating Next Gen Faster Payments” Use Cases panel, which I participated in with several other companies. The panel topics included validation about adoption and the size of the potential user base. Panelists like Tony Cook, Senior Vice President, FirstBank and Sam Shrauger, CEO Airbnb Payments, detailed several use cases that show real-time is still in a healthy developmental stage. But I also came away with a heightened sense of urgency regarding interoperability. Because it is the one of most important factors, in my opinion, in the continued development of real-time payments, let's start there. Without interoperability, use cases stand a good chance of losing their momentum. Without it, achieving the desired scale, and the goal of ubiquity for real-time payments, would be difficult at best.
Interoperability, in the context of a real-time payment, simply means that the payment rails in use will work for the user - regardless of the specific payment application or settlement system. It is the key element in removing friction from the real-time payments process which will remove barriers for adoption. Real-time payment interoperability can also be enhanced using a single alias-based directory or interoperability among the directories themselves – with a common access point.
The wild card is the FedNow real-time payments service, scheduled to go live sometime in 2023. While the ISO2022 standard has been adopted for use by the Fed, additional specific details around other aspects of interoperability have not been publicly provided.
“One observation about interoperability I’ll make is that as we talk to the industries in our pilot participants as well as others, everyone wants it, everyone expects it,” said Dan Baum SVP product for FedNow. “Some would suggest they’re even demanding it. But an observation I’ll make is that the evolution of the debit card networks and the ACH network, again, didn't happen into full ubiquity or interoperability overnight.”
Whether FedNow launches with full functionality and interoperability, as Baum said, remains to be seen. But the question of use cases is hardly vague, as seen this week by the announcement from Verizon, BNY Mellon and Citi. They have collaborated to make Verizon the first company to send request-for-payment messages to consumers who bank with Citi. That means that one of real-time’s most high-profile features will be served to millions of consumers. Instead of being concerned that their monthly recurring payment might be victim to fraudsters or hit when their account is at a low point, RfP will serve as a notice of legitimacy and convenience. This is arguably the biggest use case yet for real-time payments.
I highlighted another use case in this panel that I think has been borne out of reaction to the pandemic-induced economy. It’s becoming extremely important for small merchant businesses to have access to their merchant receipts as soon as possible. Access at the end of an immediate sales cycle, in today's economy, for some small businesses can mean the difference between making that instant payroll that's attracting employees to them, and also being able to buy supplies for the next day.
The Bottomline: As an industry, we need to plan for and structure a real-time payments ecosystem that completely removes friction. Just as consumers send instant payments via Cash app or Venmo, businesses need to see real-time the same way. During the panel, Dan Baum mentioned how we used to look at the back of our debit card to determine the networks my bank participated in, which would then determine the ATM we could go to. But nobody thinks about that anymore. That's where we need to get to with real-time payments.
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