Prime time for faster payments is approaching
Over the last few years, there’s been a constant buzz in the U.S. over faster payments, but consumers, merchants, and corporations have yet to see any impact; even most payment service providers, and other payments industry participants have been largely unaffected. So, what has been going on? and what type of impact may my financial institution expect?
At the beginning of 2015, the Federal Reserve launched a comprehensive strategy to rally the industry to develop solutions to improve the U.S. payment systems. With this objective, the Fed formed the Faster Payments Task Force (FPTF) integrated by more than 300 industry stakeholders and representatives from organizations across the payment ecosystem to identify and assess alternative approaches for implementing safe and ubiquitous faster payments capabilities in the United States.
After two years of work, the FPTF published in January of 2017 the first part of their final report “The U.S. Path to Faster Payments” which describes the background and process of the task force’s work and its motivation for pursuing faster payments solutions in the context of the current payments landscape. The second part of the report is due to be released by the end of the summer and will include the assessment of faster payments capabilities of all the proposals received, an analysis of the remaining challenges and opportunities, and recommendations for successful implementation of faster payments.
In contrast to other markets where the adoption of faster payment has been mandated by the regulator to up to a few dozen financial institutions, the US is relying on independent private sector initiatives to develop faster payments solutions that will interconnect almost 10,000 financial institutions, 28 MM businesses and 250MM consumers from the largest economy in the world. The development of faster payments in the U.S. is no small feat, and is expected to be more complex than in any other market.
We anticipate the publication of the final report from the FPTF and the commercial launch of the first set of faster payment services by The Clearing House (TCH) and Early Warning Services (EWS) will capture significant media attention during the second half of 2017, and thus become a catalyst for more financial institutions, FinTechs, and businesses to realize they need to prepare for faster payments.
TCH, owned by some of the 25 largest banks in the US, has been testing their Real-Time Payment (RTP) solution for a few months now. A small number of these banks are expected to launch their initial RTP services later this year, with the rest of them doing so by the end of 2018. However, RTP is open to all financial institutions and the journey to connect thousands of medium and small financial institutions and create a ubiquitous platform is still long.
EWS, who’s also bank owned, is building a network of banks that support Zelle, its faster payments service previously known as ClearXchange. The service went live on June 12, and similarly to TCH, EWS is partnering with multiple implementation partners to provide connectivity to all financial institutions and create a ubiquitous platform.
In response, the card networks have aggressive plans for deploying their own version of faster payments: their push payment services Visa Direct and MasterCard MoneySend.
In addition to TCH, EWS and the card networks; large and small financial institution and their solution providers, as well as a growing number of FinTech startups like Ripple and Dwolla have been busy developing the next generation of payment services.
Will faster payments affect my organization?
In addition to speed, the new generation of payments services offer a robust set of new capabilities that will make them easier to use, easier to integrate with other tools, and more secure and efficient. Some may describe faster payments as the most significant upgrade to the technology and capabilities of the US payments infrastructure since the ACH network was launched in 1974, more than 40 years ago.
Faster payments are here to stay and as their adoption progresses, they will capture transactions primarily from the ACH and wire networks, in addition, they will also capture some transactions from cards and cash. In other words, if you are a financial institution, are part of the payments solutions ecosystem or are a large user of payment services, you will be affected and need a “faster payments” plan.
As a first step, you probably want to develop a deeper understanding of the ongoing trends, and the strengths and weaknesses of the different faster payments solutions available in the marketplace. Then, you will need to develop internal awareness and educate key stakeholders. Depending on the size of your organization, chances are that you may want to form a small multi-disciplinary team who can also help you assess your clients’ faster payment needs, the implications to your existing payment products suite and related customer experiences, and to your systems, operating rules, and processes.
Later, your organization will need to integrate faster payments solutions into your overall payments strategy and develop a specific plan which may include new products, new partnerships, new investments and potentially reviewed revenues and costs. The business and strategic case for faster payments will likely need to be reviewed, prioritized and approved by your leadership team and board before the implementation can begin.
The level of complexity of evolving from batch-based processes that operate during business hours five days a week to a 24×7 real-time payments processing is not trivial. Although the point of departure and impact of faster payments to individual organizations will be quite different, it’s not hard to imagine it will take at least 24-36 months before most FIs are able to offer faster payment services. To add one more challenge, many of the technology vendors and faster payments implementation partners may soon be solidly booked for the coming years, delaying the implementation for those FIs who don’t take action on the early days.
Is your financial institution running late for Faster Payments?
So, let’s go back and explore my original question: Is your financial institution running late for faster payments? As mentioned before, it’s expected that a few of the larger banks will have their initial set of faster payment services by the end of this year. Assuming you have not yet started, can your financial institution really afford to be two, three or more years late to the game.
In all fairness, faster payments services will not yet be ubiquitous and adoption rates will be low by the end of this year. Still, the frequently leveraged strategy of waiting to see what happens before committing to any action may not the best approach in this case, given it may take two, three or more years for any financial institution to get ready.