By Russ Banham
Treasury & Risk
Prepare for payments transformation. In November 2017, The Clearing House (TCH) and 25 partnering banks launched the first new core payments structure in the United States in more than 40 years. The new system permits real-time payment clearing, marking a major change for treasury operations that have been using the one- to two-day Automated Clearing House (ACH).
Qualifying payments are domestic, interbank electronic transactions. Their payment messages are transferred, and funds are available to the payee, in real time —literally within seconds—on a 24×7 basis. The new system, dubbed RTP for “real time payments,” was designed and built through the collaborative efforts of TCH and its partnering financial institutions. RTP meets the objectives of the Federal Reserve Faster Payments Task Force, which has been tasked by the Fed to identify and assess alternative approaches for implementing safe, ubiquitous, and faster payment capabilities in the United States.
The new system follows late on the heels of the Faster Payments Scheme Limited (FPSL) launched by the United Kingdom in 2008. FPSL moves mobile, Internet, telephone, and standing-order payments quickly and securely, in nearly real time, 24 hours a day. Seventeen banks and building societies are participants in FPSL, with more than 400 financial institutions now offering the service to over 52 million account holders.
Why has the U.S. lagged behind the U.K. by a full decade in developing RTP? “The clearing cycle prior to FPSL in the U.K. was three days, giving them significant impetus to improve the status quo,” says Steve Ledford, senior vice president of product and strategy at TCH. “In the U.S., we already had ACH and next-day payments. There was less of a gap to make up.”
Another factor slowing implementation in the United States was the sheer volume of financial institutions dotting the American landscape—more than 100,000 entities in all. TCH and its partnering banks needed extra time to design a payments model that could scale to address all these institutions’ different capabilities. As Ledford puts it, “We needed to find a model that worked for everyone.”
Worth the Wait
Similar to wire transfers and ACH, RTP is another component of the core industry payments infrastructure, with the potential to support diverse use cases. In a business-to-business context, RTP is a credit “push” system. Payments are pushed from the bank account of the business making the payment to the bank account of the company receiving it. In between, RTP supports the financial institution’s customer-facing systems for services like bill payment, cash management, peer-to-peer (P2P) payments, and emergency disbursements. Messages such as requests for payment, payment confirmations, requests for additional information, and remittance detail are used to create frictionless customer-facing interactions.
TCH is working with a wide array of industry stakeholders, including community banks, credit unions, and financial institution service providers, to drive adoption of the long-sought real -time payments system. “The reality is that we’ve been talking about payments transformation for the past 25 years,” says Alberto Casas, managing director and North American head of payments and receivables at Citi, one of TCH’s partnering institutions and one of six banks currently processing payments through RTP. The others are JPMorgan Chase, BNY Mellon, SunTrust, U.S. Bancorp, and PNC Financial Services Group.
“However, we wanted a model that didn’t just promise immediacy and faster payments,” Casas adds. “We also wanted to create ‘smarter’ payments—a standardized data set that allowed for clean interactions between parties to send and accept inbound or outbound payments. Today, payments and payment information don’t always travel together perfectly, with the receiver often misunderstanding the purpose of the payment, culminating in costly and frustrating interactions.”
An example is a wire transfer that lacks details indicating the purpose of the payment. Without the right payment guidance, the recipient company may not connect the payment to the right receivable. RTP obviates this possibility by supporting the transfer of critical information about a payment along with the transfer of funds, to efficiently deal with back-office reconciliation issues.
This unique capability was designed and developed using technology from Vocalink, the software vender that built the U.K.’s faster payments system and which is now owned by Mastercard. TCH wrote the code for RTP and is the system operator.
Heightened payment security was another factor weighed carefully in the development of RTP. The new payments system is the first to be built and launched in the United States since the advent of the Internet. Over this period, incremental changes have occurred in payments, beginning with the gradual reduction in the use of cash and checks, and continuing forward with the digitization of payments and standardized messaging.
“Previous fast payments systems were based on older-generation technology and payments standards,” Ledford says. “An advantage for us being later to the game is that we could learn from and piggyback off of the previous systems’ upgrades. We’ve developed a system using secure, digitally capable Web-based protocols. So we’re not just fast, we’re also safe.”
Treasurers who leverage the RTP system may help their companies achieve competitive differentiation in their markets.
“With RTP, the payments system can actually become a customer engagement tool,” says Casas. “An insurance company, for example, can provide instant claims payments to a company devastated by a natural disaster.”
Now that the United States and several other nations have introduced independent systems for faster payments, other countries around the world are expected to follow suit, resulting in significant changes in how businesses and consumers send and receive payments globally.
“Today’s payments systems are the building blocks upon which future payments innovation will be built,” says Casas. “Nevertheless, we’re not predicting that all payments will move to a real-time payment channel overnight. RTP is an additional option for payers and receivers to support unique use cases.”
He provided the example of a consumer who has not paid his or her electricity bill on time. “RTP will allow for a request for payment to go from the utility to the consumer’s bank,” Casas says. “When the bank receives the request, it can instantly forward a detailed message through RTP to the consumer that the payment is now overdue. There are multiple benefits, including the avoidance of late fees and/or service disruptions while simultaneously helping to build trust and customer loyalty.”
The business owner sees that if the bill isn’t paid immediately, the electricity will be turned off. “If the person chooses the ‘click to pay’ option, the money is moved from the bank to the utility in real time to avert a shutdown in power—and possibly even a late payment fee,” he says.
Treasurers’ Next Steps
Treasurers interested in adopting RTP need to first determine its value in the context of their current business operations. Moving to RTP might require new payment technology, particularly if the company’s current system releases batch payments periodically to address specific deadlines.
“Business customers need to contemplate API [application programming interface] connectivity with their banks to release transactions in real time, as opposed to batch,” Casas advises.
Treasurers may also need to change the way they manage liquidity and working capital, creating models in their accounts that move money from point A to point B, he adds. Furthermore, with an RTP system, security needs to be embedded in the company’s operational processes at the item level as opposed to the batch level.
Citi is working closely with its commercial accounts to prepare them for these changes. Ledford says the other five TCH member banks are also assisting their business customers with the transformations required.
Response to RTP has been highly positive thus far. “We’re already hearing from the treasurers now using RTP that the big difference for them has been immediate confirmation of a payment,” Ledford says. “They’re telling us they cannot overstate how important that has been— the certainty it gives them in simplifying processes like reconciliations.”
Treasurers are also touting the speed of the new payments system in assisting their just-in-time supply and demand obligations. An example is a midsize or smaller company buying from a supplier with which they don’t have a credit relationship. “The company needs the product to ship soon but is concerned over payment,” says Ledford. “What might have taken weeks to resolve in the past takes a couple hours and less, due to the new system’s certainty [of payment] and speed.”
Down the line, more and more financial institutions and their customers will be engaging in real-time payments. “We’ll see material adoption [of RTP] in 2019, when more banks are online with more features and functionalities, such as requests for payments and extended messaging,” says Casas. “By 2020, we’ll see a high number of banks on the system and payment volume ramping up in a significant way. Beyond that, it will eventually become the material payments method and the primary alternative to existing systems.”
These developments will be felt worldwide. In anticipation, Citi has developed a comprehensive toolkit that addresses its connectivity to all payment methods and channels globally. Casas explains, “We’re focused on building globally inter-operable capabilities to provide a common experience through a central real-time payment gateway. We see this as a significant differentiator.”