Posted by Alison Arthur on 12 Jun 2019
Modern commerce can be described in one word – immediate. Customers expect on-demand transactions whether they’re hailing rides, consuming media, or paying bills. Technology has elevated business to consumer (B2C) interactions with the help of apps, mobile payments, and ecommerce software that streamline even the simplest transactions.
Now that consumers can pay for goods, services, and experiences with the touch of a finger, expectations are rising for immediate payments in other aspects of commerce. For example, businesses moving money to other businesses more quickly and efficiently. Insurance companies paying their customers’ insurance claims on-the-spot to lessen disruption to their lives. Employers paying contract employees and freelancers more expediently than issuing paper checks. And cross-border payments of all types being conducted in simpler, more streamlined transactions.
Faster payments are evolving quickly to bring new speed, connectivity, and efficiency to money movement around the world. This blog provides an overview of faster payments, what’s currently underway in the US, and global systems that have been developed in support of faster payments. It also provides use cases of real-life applications for faster payments in business to business (B2B), B2C, and consumer to business (C2B) transactions.
Faster Payments Defined
So, what are faster payments? Faster payments is a catch-all term for advancements in the payments ecosystem that are designed to help move money between entities faster than the traditional settlement times of the past. Faster payments are also built to leverage safety and security features that can help businesses and consumers better manage the risk that surrounds payment transactions.
Faster Payments in the US
How are faster payments taking shape in the US? Let’s take a closer look at how payment rails are being developed and adapted in support of faster payments.
When is the last time a new payments infrastructure was launched in the US? In 2017, The Clearing House (TCH) launched its real-time payments (RTP) system, the first new core US payments infrastructure in over 40 years. As a net-new payment network (or “rail”), RTP enables businesses and consumers to send, clear, and settle payments instantly. In addition to speedier transactions, RTP also conforms to consumer protection criteria designed to prevent fraud and increase safety.
The RTP network is currently on a path to reach nearly 50% of US accounts and is expected to have near-ubiquity by the year 2020. The network is built to streamline financial transactions between businesses and consumers by supporting fund transfers, payment requests, and two-way communication between parties.
Automated Clearing House (ACH) transactions are the backbone of money movement in America. The network has been in place for over 40 years and facilitates everything from employee payroll direct deposit to mortgage payments. In 2015, Nacha (the governing body of ACH) announced improvements to ACH in support of Same Day ACH. These improvements were intended to accelerate the traditional settlement time of one to two business days to same-day settlement.
In 2018, Nacha announced further improvements to Same Day ACH that accelerate the availability of funds, increase the dollar limit of transactions to $100,000, and extend the submission window an extra two hours per business day. These improvements are expected to take effect by 2020. ACH’s established ubiquity among financial institutions and businesses makes it a natural place to facilitate faster payments via Same Day ACH. In Q1 2019, more than 52 million Same Day ACH transactions were recorded and this number is only expected to keep growing.
In 2017, Early Warning Services launched Zelle to streamline person-to-person (P2P) payments among account holders at US banks. The solution allows money to be moved by providing an email address or a phone number, thereby avoiding the need to provide sensitive banking, personal, or payment information. Users can pay one another via Zelle through their banking websites, the stand-alone Zelle app, and/or other mobile apps.
Zelle leverages relationships with major national banks, credit unions, and regional/community banks to extend its reach to millions of US customers. Transactions are completed within minutes, eliminating the need to write personal checks or use cash. In Q1 2019, 147 million transactions were recorded on Zelle totaling $39 billion. Given this uptake and the huge reach of Zelle’s infrastructure, one can only imagine that its usage and adoption will continue to grow over time.
Faster Payments Around the World
The US faces unique challenges in adopting faster payments due to legacy systems and a fragmented marketplace. However, many countries around the world have established infrastructures in place. Japan was at the forefront of faster payments, launching its Zengin System in 1973. Dozens of countries followed suit in the coming decades, with China’s Internet Banking Payment System (IBPS) and India’s Immediate Payment Service (IMPS) both rolling out in 2010. More recently, Australia’s New Payments Platform (NPP) went live in 2018. All told, there are approximately 40 faster payments systems worldwide with more to come in the next several years.
Faster Payments for B2B, B2C, and C2B Transactions
Given that backdrop, what are the real-life applications of faster payments for businesses and consumers? Here are three examples where faster payments can expedite commerce.
Use Case #1: B2B Payments
Businesses depend on suppliers to keep operations running smoothly. And suppliers require on-time payments to keep their goods flowing to businesses. Faster payments can be used in these B2B situations to make immediate payments that reduce the need for invoices, bills, paper checks, and lag times. A supplier can even use RTP messages to make a Request for Payment, a non-obligatory payment “ask” in lieu of a bill or an invoice.
Use Case #2: B2C Payments
Insurance claim payouts are a prime example where faster payments can create an immediate impact on consumers’ lives and strengthen their relationships with insurance providers. In the event of a natural disaster, policyholders may require immediate payouts to help secure basic human needs like food and shelter. Insurance companies can expedite these emergency payouts using faster payments methods, cutting down the time required for policyholders to receive their funds.
Use Case #3: C2B Payments
There are situations when consumers need to make immediate bill payments to, quite literally, keep the lights on. Using utilities as an example, a customer who is delinquent on their account might be at risk of losing basic services. Faster payments can allow them to make an immediate bill payment on their account and have the funds transferred near-instantaneously.
The Bottom Line: Faster payments are becoming a reality both domestically and globally. As the US catches up to major infrastructures around the world, the use cases for faster payments are sure to expand. The positive impact of faster payments could be a game changer for businesses and consumers alike, with the potential to streamline commerce like never before.
10 Feb 2021 Blog Picking Up Speed: FedNowSM Service to Launch in 2023 The Federal Reserve announced they are on track for a 2023 launch of their FedNowSM Service. We discuss what this means for faster payments in this blog.