In 2017, an interbank payment system providing near-instantaneous settlements debuted. Why has it yet to catch fire?
By Russ Banham
What’s holding up real-time payments? In 2017, the veil was lifted off an interbank payment system providing near-instantaneous settlements instead of next-day automated clearinghouse (ACH) transactions. The real-time payments (RTP) network worked and was ready for adoption by banks, businesses, and consumers.
Four years later, the RTP Network can point to several success stories, but nowhere near the adoption rates hoped for when it debuted. About 130 banks are on the network, up from a handful in 2018. Combined, they can reach 60% of demand deposit checking and savings accounts. That’s a far cry from the 4,430 commercial banks, 640 savings institutions, and 5,160 credit unions in the United States.
The Clearing House (TCH), a banking association and payments organization, developed and operates the RTP Network. In May, the CEOs of 23 leading financial institutions that own TCH signed a letter committing to present and pay bills through the network. The CEOs of two of the three major payments technology providers in the U.S., Jack Henry & Associates, and Fiserv, also signed the letter. The other major provider, Fidelity National Information Services, passed on the opportunity.
Promising news, but don’t uncork the champagne yet. Despite the benefits of real-time payments, most of the action involves individual payers and smaller amounts. In other words, not the large B2B corporate transactions of interest to CFOs.
One reason for the reluctance is the need to customize enterprise resources planning (ERP) systems to accommodate real-time payments, an impediment the RTP Network is working to overcome.
Another challenge is skepticism over the value of a system that speeds up payments by only a single day. As CFO Steven Horowitz of managed home health care provider CareCentrix puts it, “If you’re already getting the mail at 2 p.m., getting it at 8 a.m. is not much of an improvement.”
To be fair, speed is just one of RTP’s perks. Others include 24/7/365 access (banks are always online to process transfers); instant confirmation; and settlement finality — a sending bank can’t revoke or recall a payment. Additional benefits include the ability to send a “request for payment” and receive payment data along with the payment, verifying that an amount has been sent and received.
These benefits are significant, but the system needs to iron out a few kinks. “We’re still early in this story — probably chapter two in a six-chapter book,” says Zachary Aron, a principal and global payments leader at Deloitte Consulting. “We’ve passed the point where it’s been proven the system works and does what it promises. It’s just that building out the infrastructure is taking longer than [they thought it would].”
Real-Time Meets Reality
Real-time payments involve three parties — a receiving bank, a sending bank, and a pre-funded Federal Reserve Bank account. Within the RTP Network, a credit transfer payment message is initiated by the sending institution. Once received, payment is finalized in close to real-time.
In the first-ever U.S. real-time payment in November 2017, BNY Mellon successfully transferred $3.50 from an account to another account at U.S. Bank. One year later, four other banks — Citibank, JPMorgan Chase, PNC Financial Services Group, and SunTrust — could execute inter-bank payments within three seconds. At the time, the payment limit was $10,000.
Today, there are 130 banks able to execute real-time payments at a $100,000 limit. Is 130 banks a minuscule number, given the thousands of banks across the nation? “It’s not 100%, but it is still pretty important,” says Russ Waterhouse, TCH executive vice president of product development and strategy.
Asked how many businesses send to and receive payments from other businesses on the network, Waterhouse says, “That B2B data doesn’t exist, but my sense is that 60% is a good proxy, if not higher, since some of the largest banks with corporate banking operations are live on the network. We’ve made huge inroads.”
Waterhouse provided introductions to two companies that have used the RTP Network. Both companies served on TCH’s advisory board and participated in use cases. Neither is sending or receiving real-time payments on a live basis.
“We did transactions in a test mode,” says Michael Riggin, vice president of banking and chief risk officer at Global Holdings, a provider of consumer debt settlement strategies and technology. “It worked as expected, but we have not yet implemented it. The challenge is bank adoption.”
Global Holding has 600,000 consumers and 1,000 creditors using its tech platform. “Although our three banks are RTP-enabled, we’d be unable to reach all our customers because their banks aren’t RTP-enabled to receive a request for payment,” he explains. “We’re getting there, but we’re not there yet.”
Michigan State University (MSU) participated in a use case for emergency loans to students. The university’s federal credit union provided the funds through the RTP Network.
“It was a great solution, as long as the bank the student used was an RTP participant,” said Jeff Rayis, MSU director of treasury and financial management. “The market is waiting for more acceptance.”
Acceptance is forthcoming, Waterhouse maintains. He cited the importance of the decision of Jack Henry & Associates and Fiserv to back the network. “Through these two channels, we can access around 2,000 financial institutions and about 70% of DDAs,” he said. “Banks that want to join the network now have a technical path to do that.” Both tech providers will be live on the network sometime this year.
Will They Come?
Across the Atlantic, the RTP building blocks are already in place. “The [United Kingdom] and Europe are well ahead of the U.S. in moving from checks to ACH to RTP,” says Andy Lilley, vice president of accounts receivable automation at BlackLine.
Lilley’s career includes 13 years at Bottomline Technologies, the U.K.’s largest payment processing technology provider.
“I remember having conversations with CFOs and heads of treasury about real-time payments, and they always asked, `Why would we want to pay people earlier?’” says Lilley. “The key driver, we explained, was not speed but working capital management. You’re not paying earlier; in fact, you’re gaining the opportunity to make the payment decision as late as you need to make it — literally down to the last minute.”
In effect, a CFO can buy time, determining when it is most suitable from a cash-flow standpoint to pay a supplier or other customer — early, on time, or later.
“During the pandemic, CFOs couldn’t depend on cash coming into the business,” Lilley says. “Consequently, the question was, “How far down the road can I put off the [accounts payable]?’ The longer you have to make this decision, the better chance of not overextending the organization’s lines of credit. You also buy more time to work out payments with your customers. That’s valuable for a CFO’s intelligent decisioning around working capital.”
To overcome U.S. resistance, TCH is collaborating with ERP vendors to enable the network’s real-time payments through the use of application program interfaces (APIs), which allow two applications to communicate with each other.
The APIs offer a cost-effective path for CFOs to consider real-time payments in a B2B context. Convincing the thousands of other commercial banks, credit unions, and savings institutions to become RTP Network members, however, remains an uphill climb.
Asked what’s holding up the financial institutions, MSU’s Rayis pointed to the network’s 24/7/365 payment flows. “Many banks have become used to the ACH Network’s Monday to Friday windows; they’re not configured to post and track transactions in near-real-time all the time,” he says. “They will come on board eventually for competitive reasons. As I said to our credit union, `If you don’t do this, you will lose clients.’”
Even if all the banks in the world went real-time, Horowitz, the CFO at CareCentrix, remains dubious about the opportunities inherent in a system that limits payments to $100,000.
“I can see the opportunity for smaller midsize companies and those in the [business-to-consumer] space where payments are much less, but for companies that do bigger transactions, they’d still have to go through a different mechanism,” Horowitz says.
His point may become moot in the first quarter of 2022 when the RTP Network will review a proposal to raise the limit to $1 million. If it gets the green light and more banks join the network, another barrier will be gone.
“We’ve seen three times the number of real-time payments in the last year than we saw in the preceding three years,” says Deloitte’s Aron. “I don’t know if Moore’s Law is at play, but I can see momentum building. In five years, this will be par for the course.”
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.