Posted by Christian Hibbard and Alison Arthur on 04 Jan 2021
2021 is expected to be a watershed year for faster payments in the U.S. Not only are customers expecting their goods and services on-demand, but they’re also relying on digital, social distancing-friendly solutions to do so. With use of cash being discouraged, people are looking for alternatives that offer the same speed and finality of payment. Faster payment offerings fill that need. They are designed to significantly expedite the actual movement of funds, with settlement completed anywhere from the same day to a few seconds after the payment is initiated.
“Faster payments” is an umbrella term for different payment systems that various entities have launched in support of quicker on-demand payments. In this blog post, we’ll outline four of the major systems that have evolved in support of faster payments.
Real-Time Payments: RTP® from The Clearing House & FedNow
First, we’ll tackle the newest payment rail: real-time payments. Real-time payments (RTP) is a generic industry term for a payment network or “rail” that allows businesses and consumers to send, clear, and settle payments instantly. Globally there are more than 50 rtp networks, and all differ slightly but have a few typical characteristics. Funds move from the initiating account to the receiving account in a matter of seconds, and they require 24x7x365 systems for both operators and participants. These systems also use the data-rich messaging standard for payments, ISO 20022. This allows for much more detailed information on a payment’s source and purpose, or even why a payment was denied. Real-time payment networks tend to have irrevocable payments, and most are based on a credit push model. Rather than withdrawing directly from your bank account, which is known as a “debit pull”, a creditor would send a request for payment or a request to pay, which can then be accepted or denied by the payer.
In 2017, The Clearing House (TCH) launched its real-time payments system, the first new central payments infrastructure launched in the U.S. in over 40 years. RTP® is also The Clearing House’s registered trademark for its privately-owned real-time payments network. The infrastructure of RTP® is designed with both speed and security in mind, conforming to consumer protection criteria that help prevent fraud and misuse.
FedNow is another real-time payment service which is in development by the Federal Reserve, set to go live by 2024. The Federal Reserve is expecting that the addition of a competing network will drive both to become more efficient while remaining cost-effective for the market. In addition, having two networks allows for redundancy— users have a contingency plan in case one network is offline. On the other hand, some worry that the lack of any clear plan for interoperability casts doubt on these benefits.
The expansion of real-time payment allows the U.S. to catch up to other countries, including the U.K., South Africa, and Brazil, that already have 24/7 RTP systems in place. TCH’s system supports fund transfers, payment requests, and two-way communication between parties. The infrastructure is built to help facilitate financial transactions between businesses and consumers including bill payments, insurance claim payouts, and invoicing. RTP is open to all U.S. financial institutions, and as of 2020 is on its way to becoming an industry mainstay.
Some have delayed their RTP integration, citing lack of client demand and difficulty in upgrading to a 24x7 operating model. Alacriti recently partnered with PYMNTS.com to publish a report on RTP’s demand curve and found that RTP is starting to catch the attention of consumers. It’s not hard to see why. A rideshare driver could be compensated by the end of every ride instead of having to wait for a specified payday during the week. Business owners can receive payment the moment an order is made, and immediately direct that money towards additional working capital needs.
Early Warning Services: Zelle®
Formerly known as clearXchange, Zelle is a faster payments network, owned by Early Warning Services, that allows users to send money to one another by simply using an email address or a phone number that is linked to their accounts. Zelle is accessible from participating banks’ websites, the Zelle app, and other mobile apps.
From the date of its launch, Zelle became one of the biggest faster payments networks with nineteen financial institutions participating. Today, 924 financial institutions are contracted to participate in the Zelle network, with around half online as of 2020. Zelle’s growth allowed it to process over 1 billion total transfers from September 2019 to September 2020. Zelle was built to facilitate person-to-person payments, without the need to physically exchange cash or write a check. The availability of funds is near-immediate, meaning that people receive money faster than ever, the system actually clears and settles the funds leveraging older central rails. Zelle has seen solid growth prioritizing low-value transfers—value limits are set by the individual financial institution, but are generally between $5,000 and $20,000 a month, with smaller daily limits.
The Card Networks: Mastercard Send™ and Visa Direct
Two well-known payment card brands—Mastercard and Visa—are staking their claim in faster payments as well. These well-established brands operate tried and true card networks that have moved money via credit and debit card transactions for over 60 years. They are now leveraging their existing networks reach to join the faster payments revolution.
Traditionally, debit cards have facilitated “pull” transactions, meaning that the merchant accepting the card for payment was “pulling” funds from the underlying customer. Visa Direct and Mastercard Send are now flipping the sequence and using debit card accounts to push funds from businesses or merchants directly to consumer’s accounts. This can facilitate everything from government benefit payouts and insurance claim payments to wages earned by contract workers in the gig economy. Given the ubiquity of Mastercard and Visa cards around the world, it also opens the possibility for fast, frictionless cross-border payments.
Nacha: Same Day ACH
The Automated Clearing House (ACH) Network is one of the largest payment systems in the world and has a 40+ year history of moving money between financial institutions. ACH is the backbone of many financial transactions that people have come to depend upon, from electronic mortgage payments to direct deposit of payroll and payment of government benefits.
Historically, payments made via the ACH network took one to three business days to settle. In 2015, an amendment to the National Automated Clearing House Association’s (Nacha) Operating Rules was announced to speed up the settlement of payments made via the ACH Network. This amendment, known as Same Day ACH, was designed to enable the same-day movement of money for almost any ACH transaction.
The Bottom Line: The payments market is entering a tipping point, as the desire for faster payments has driven significant innovation in payment networks over the past several years. This has resulted in the evolution of established networks (ACH, Mastercard, Visa) and the development of new ones (Zelle, RTP, and FedNow). As faster payments continue to generate new consumer interest and demand, financial institutions and businesses can capitalize on this by partnering with the right Fintech to help execute their digital transformation strategy.
*This is an update on an original post published April 2018
09 Jul 2021 Blog Report: Modernizing Payments Infrastructure in the Era of Real-Time Payments We highlight some of the key points from our Payments Infrastructure Outlook: Real-Time Payments Take the Lead report with Mercator Advisory Group.