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John Gaffney: Greetings, and welcome to the Payments Podcast. Caution is usually a sound strategy in the banking industry. Now that the worst of the pandemic is, hopefully, behind us, it's a sure bet that financial leaders have learned valuable lessons from their ability to fast-track projects, like emergency loans and contactless payments, over the past two years. But mixing that urgency with a healthy dose of caution is a preferred approach, I'm sure, and raises the issue of how much caution is necessary.
My name is John Gaffney. I'll be the host for this episode of the Payments Podcast, and the topic will centre around the balance of caution and opportunity in the context of real-time payments.
We simply couldn't have a better guest. Jessica Cheney is Vice President and Head of Product Management for Digital Banking Solutions at Bottomline and has over 25 years of cash-management experience with banks and software providers, including senior leadership roles at US Bank.
Perhaps most relevant for this conversation, she has served on the US Federal Reserve's Faster Payments Task Force, the NACHA Innovation Alliance, and the US Faster Payments Council. So, welcome, Jessica.
Jessica Cheney: Thanks, John. I'm happy to be here and have the chance to talk about one of my favourite topics.
John Gaffney: Yes, I know it is. I can't wait, either, but first we have to get to a little bit about the format of this episode, because I need to get some numbers out there before we can start. As Jessica is a keen observer of, and participant in, the development of real-time payments, as well as the FedNow Faster Payments platform, she and others have noticed a concerning development that shows US banks are a bit slow to pull the trigger here. So, we're going to present Jessica with seven reasons banks have identified as obstacles to real-time adoption. She'll address them, but first some numbers.
So, how do we know the US isn't moving as fast as it could, or as fast as other countries? Let's look at some data from The Clearing House, which is the current volume leader in real-time payments and made up of the banking and payments companies, as a consortium.
Its third-quarter report shows that real-time transactions showed total 45 billion, for an estimated value of $19.7bn. Now, that's a 10% bump from Q2, but it comes after a slight dip between Q4 2021 and Q1 2022. The United States is on track for 1.8 billion real-time transactions in 2022.
Now, compare that to some other countries and you can see the reason for this perceived overabundance of caution. India made 14.8, no, 48.6 billion – yes, 48.6 billion real-time payments in 2021. I almost tripped on the number, Jessica. Followed next by China at 18 billion, according to the Centre for Economics and Business Research, so, Jessica, on a general level, are we being too cautious in the United States? If we are, why should we approach it more aggressively?
Jessica Cheney: There have been reasons for banks to approach this more conservatively in the past, John. The TCH RTP network was brand-new. The Fed offering was not fully and clearly defined, and consumer demand was strong in other instant payment alternatives, but banks and companies were unsure if demand would continue.
That's no longer the case. It has been five years since the launch of the TCH RTP network, and FedNow is only months away from production. In Q2 of this year, TCH processed 41.2 million transactions: in excess of $18bn. The growth of solutions like Venmo and Zelle, for consumer and C2B instant payments, has continued at an incredible pace. Zelle reported in September that they had processed in excess of 5 billion transactions in the 5 years of their existence.
The growth isn't just in P2P. One argument for slow adoption by commercial banks has been the notion that businesses don't require real-time payments. The facts might be starting to question that. Zelle reported an 87% increase, quarter over quarter, in their digital disbursement business – that's their B2B-based or B2BC-based business – and nearly 8 million payments from their small business solution in the last quarter.
Zelle is now also processing transactions via the TCH RTP network. So, the pandemic was really a game changer for the acceptance and use of real-time payments, especially for businesses – small businesses specifically. During the pandemic, they turned to instant payment options not only to pay each other and their employees, but also as a way to accept consumer payments as an alternative to cash.
The infrastructure is now in place and, at least for TCH, has been proven. Demand is there and growing. There really is no longer a need to be cautious and conservative. If banks continue to do so, they risk being left behind by their competition.
This is no longer just a big-bank proposition. The reality, actually, is that it never was, as many of the small banking technology providers have already integrated with TCH. However, that aside, the Fed is a trusted partner of most of the regional and small – smaller – banks. Now that the Fed is about to launch FedNow, there's no reason not to move forward with implementing instant payments.
John Gaffney: Yet some banks continue to wait for critical mass. A recent payments report, on the other side of this coin, showed 53% of US businesses said, ‘Cashflow management improves with real-time payments,’ for example, and 33% reported improved transparency in their payment process. So, why do you think banks are being cautious here?
Jessica Cheney: As I mentioned earlier in my comments, there is evidence of growing demand for real-time. Almost every payment publication headline you read echoes that, right? There are new use cases that are being implemented every day: bill payments, rebates, insurance claims and settlements, merchant settlement, real estate closing, automobile financing. And the one that the pandemic really pushed into being: earned wage access, or instant payroll.
John Gaffney: Right.
Jessica Cheney: Right, but the point you've raised about liquidity benefits of instant payments is one that I don't think is fully understood. If it were, demand would only increase that much faster. Using an instant payment, a company can hold onto their cash longer and only make payments at the required minute, to take advantage of advantageous trade terms, or in order to ensure shipment of goods, or to ensure continued service.
Real-time payments are, first and foremost, a liquidity tool that should be understood and utilised more. On top of that tool, a payer also receives confirmation of payment as an added benefit.
Demand on the B2B or B2C side of the house is actually hindered by the lack of adoption of some parties. The biggest challenge to whole-scale adoption of real-time payment by some large entities is reach. They are limited by how many employees, or vendors, or customers they can use real-time payments with. This is a bit of a self-fulfilling prophecy. The demand is strong now, but, with even more accessible recipients, the demand will also increase.
John Gaffney: Interesting. Now, pricing has also been mentioned, but it looks like it's even up from what the Fed has announced. They recently put out its fee schedule, which includes some fee holidays and some other pricing roughly equivalent to other platforms. Do you think banks are expecting something different from the Fed, in terms of pricing?
Jessica Cheney: Not necessarily. I think the obstacle you were referring to was, sort of, the unknown of pricing: was this going to be better or worse than what TCH was offering? How did it compare to ACH and wire pricing? I think that the Fed announcement in early November clarified all of that.
What I found interesting was that the Fed has gone so far as offering price incentives for those adopting FedNow in 2023. Now, it's just another reason to stop waiting on the side-lines and get moving with your real-time payments projects now.
John Gaffney: Interesting. We've talked about interoperability in the past. Rather than ask you the same question, I'm going to ask you to comment on what somebody else said. This is from the Modern Treasury website: ‘The challenge around RTP and FedNow interoperability is that, while the communication language that each system uses is the same, the setup for sending and receiving payments via either system is slightly different.’ Do you see that as an important issue?
Jessica Cheney: John, I think the setup in receiving a payment piece of this is somewhat of a one-time headache. I think the bigger interoperability challenge is going to be the actual exchange of a payment or a request for payment, with senders’ and receivers’ banks participating in opposite platforms.
That exchange is really the more complicated part. Having the message sets be the same is an essential first step, but the next hurdle to overcome is the actual routing and exchange across networks. That accomplishment will certainly help address the reach problem that I was mentioning earlier.
John Gaffney: Okay, interesting. Then let's go to fraud, which I know is a bug bear of yours. Despite the data available via ISO 20022, there's still this perception – I heard it on a webinar the other day – that the irrevocable nature of real-time payments leads to permanent fraud. What is it going to take the put this myth to bed?
Jessica Cheney: I love the fact that you asked me this question. I think it's going to take three things: one, widespread communication of the data that is proving to say that this is not the case. Secondly, this has, kind of, been my stump speech, right? Continued common-sense security practices being enforced, and the myths around the speed of the payment requiring security best practice shortcuts being debunked. That's the primary thing, but thirdly I'd also say time.
As the volume of real-time transactions increase over time, and the data continues to show that these are no more fraudulent than any other type of payment, when the common-sense security practices are followed, the noise about this issue will finally quiet down.
John Gaffney: You know, in prepping for this interview, I looked at what a lot of banks are doing in terms of how they position real-time payments, what the messaging looks like. We mentioned use cases earlier. Some banks have said, “It's good, it's fast, it's great,” right?
Other banks have been a little more detailed, a little more forward-thinking, like JPMorgan Chase was talking about detailed scenarios, like, if your business has low inventory, does that open more possibilities? But do you think banks should be on the lookout for new use cases, and maybe even have a team ready to go, to take advantage of them?
Jessica Cheney: I’d turn that a little bit, John. I think banks need to actively be looking for innovation, innovative new use cases, and add-on services that they can create around instant payments. There are a lot of creative ways to take advantage of what real-time payments have to offer, and its ancillary offerings.
No-one has really talked about how they can take advantage of and capitalise on things such as the added communication vehicle, the confirmation of payment. There are a lot of things that real-time payments offer that banks should not be waiting for someone else to figure out how to use. They are in touch with their customers. They know this market. They just need to stop putting up a barrier and start thinking about how it could actually be used, instead of somebody telling them how it could be used.
Chris Ward at Truist, I think, has a great summary of what's driving Truist to come up with new, real-time use cases and ancillary services. He has three ‘I’s:
John Gaffney: Let's go to B2B payments, which I know it's a burgeoning area here. I'm going to go to your alma mater at US Bank. They recently put out a report that said, ‘Reducing,’ quote, ‘Pending anxiety and de-risking money movement’ – I love those phrases – ‘RTP is quickly gaining traction as businesses prioritise speed and convenience when sending and receiving money.’
Then it goes on to say that, with the maximum transaction limit raised from 100,000 to 1,000,000, that more opportunities will open up for businesses to take advantage of RTP. How important was that transaction limit raise, Jessica?
Jessica Cheney: For some specific use cases, John, it was essential, right? It now allows RTP to become more of a true, lower-cost wire alternative for such things as mortgage closings, commercial loan funding, large vendor or trade-related payments, large retail merchant settlement, for example, but in general it really just takes away another perceived barrier of adoption. It just takes that away again.
It allows RTP to be an alternative to wire. It now matches the limitations on same-day ACH, which just recently increased its limit to $1m, as well. So, that limit change was something that was essential for the larger dollar use cases to actually come to fruition.
John Gaffney: Okay, interesting. So, final question: I saw a quote – I'm going to leave the person and the bank out – that pretty much said, ‘We're going to wait and see.’ You said earlier that you risk being left behind competitively if you don't aggressively get after a real-time strategy, but is there any wisdom in waiting for it to launch?
Jessica Cheney: I don't think so at this point, John. We're beyond that wait-and-see period of time. There's really no benefit, at this point, of waiting for it to launch, for FedNow to launch. The real-time or instant payment projects take several months to implement at a bank, right?
John Gaffney: Right.
Jessica Cheney: All of the uncertainty about this offering – specifically FedNow – is now known. We know what the message sets are. We know what the production or live dates are going to be. We know pricing. We know who their technology partners are. If you don't know who the Fed’s technology partners are, on the Fed website it has a service provider showcase that highlights them.
We know that demand for real-time or instant payments is here and growing, so, putting all those things together, I really don't see what we should wait for. Like I mentioned earlier, the longer you wait, the less you will be seen as a progressive payments innovator, and the more you'll be seen as a technology laggard and beaten to the punch by your more aggressive competitors.
John Gaffney: Alright, the business case for real-time payments laid out there. Jessica, thank you so much for joining us and lending your experience and expertise here.
Jessica Cheney: Anytime, John. I appreciate your time.
John Gaffney: Okay, so that's a wrap for the Payments Podcast. Actually, the title we're working with is, ‘Real-time payments have arrived. Now what are we waiting for?’ If you want to find out, you're going to have to listen to the podcast, wherever you get your podcast. Thanks for joining us.
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