The Clearing House On The Race for Real-Time Payments In The US

Real time is getting ever closer to prime time.

But it might not be the Federal Reserve’s doing.

You’d be forgiven for thinking that faster payments might be the purview of the U.S. Federal Reserve, where details (a roadmap, really) of FedNow, the proposed instant payment system, were released earlier this month. But with a 2023-24 timeframe to implementation, the Fed’s efforts will take a while to cross the Rubicon from concept to reality. Waiting for the Fed — and its promise of interoperability, which requires participation from the private sector — is akin to playing the (very) long game.

In the meantime, as Russ Waterhouse, executive vice president of product development and strategy at The Clearing House (TCH), told Karen Webster, there are plenty of initiatives and use cases being embraced right here and right now to move the needle on speeding payments toward real-time ubiquity, away from paper checks and even from ACH payments that take one to three days — or more — to settle and post. These efforts include TCH’s efforts to connect financial institutions’ (FIs’) core banking systems to the company’s Real-Time Payments (RTP) network, along with what card networks and FinTechs are doing to enable real-time push payments to receiver bank accounts.

Part of the tailwind comes from the fact that consumers are becoming more aware that there’s a better mousetrap out there.

Waterhouse said that the recent, and various, challenges of getting Economic Impact Payments (EIP) into the hands of those who need it most spotlight the need for seamless, real-time delivery of and access to funds. As has been widely reported, millions of Americans had to wait weeks and months for paper checks to arrive. In other cases, stimulus payments were commingled with tax refunds, and were subject to garnishment.

As Waterhouse said: “The good news is … at least for the banks and from the consumers’ perspective, the next round, once we get clarity around what that is, should be a lot better than the first.”

Learning from past mistakes will be important, he said, considering that there were roughly 120 million ACH, 36 million checks and about 4 million debit cards issued in the first funding round.

Indeed, in a webinar focused on FedNow, Federal Reserve Governor Lael Brainard acknowledged the stimulus payments, and the lack of liquidity experienced by some recipients, as proof positive that delivering fast payments is becoming ever more critical.

New Trends Emerging

Waterhouse said that in terms of TCH’s own initiatives in getting banks on board the ongoing effort to make RTP ubiquitous across the entirety of the U.S. financial services ecosystem, traction may have thus far been slower than originally thought. Achieving ubiquity across the 12,000 or so FIs in the U.S. is actually a two-step process: connecting the core banking systems of these FIs to the TCH network, and then getting the banks to make it a part of their service offering.

But change is afoot as a growing number of stakeholders in the financial services arena are embracing and offering real-time payments. In the midst of the pandemic, Waterhouse said of TCH’s own RTP network, “we’re seeing significant signs of a very different trend.”

Against that backdrop, while the first year and a half of TCH’s RTP push saw uptake by larger member banks — something that Waterhouse said may have fed a misperception of the TCH focus to connect just “the big guys” — TCH always knew the key to ubiquity was getting “the longer tail” on board and has worked hard from the outset to achieve that goal.

One of the stumbling blocks has been getting the attention span of the large core banking service providers that serve those small FIs. Waterhouse said that the mega mergers between FIS and Worldpay and Fiserv and First Data hasn’t diminished the importance of enabling RTP on behalf of the banks that are a part of those processor platforms; it pushed those projects a bit farther down the priority level.

Jack Henry … And Aiming For Ubiquity

“The silver lining for us has been Jack Henry,” Waterhouse told Webster.

Jack Henry & Associates (JHA), which provides payment processing services to banks and other FIs, said late last month that five banks joined the RTP network on the same day, connecting through JHA PayCenter, offering real-time payments and access to money to those account holders.

JHA has estimated that it plans to onboard 20 to 25 FIs each month to the RTP network — and Waterhouse estimated that as many as 100 FIs are teed up to go live between now and the end of the year.

In addition, he continued, FIS has brought its first bank onto the platform, and shortly 400 banks will have access to RTP. With the combined exposure through JHA, FIS, Corporate One Credit Union and others, Waterhouse estimated that RTP will reach 70 percent of the financial services market before the end of the year.

“That doesn’t mean that we can send a message and send a payment to 70 percent of the market,” he said, “but in terms of the technical ability and the network to use RTP, it’s there, and now it just requires a bank to make a decision to activate it.”

Expanding The Use Cases

Waterhouse said that getting banks to sign on is about showing them the relevant use cases that will drive revenue and even new customer acquisition. Although credit unions (CUs) now recognize the importance of payments as part of their solution set, for many community banks and CUs, payments has not always been their main business — at least not when compared to loans or mortgages.

“What’s going to change that are some new use cases,” Waterhouse predicted.

He pointed to Paychex (which provides HR solutions) as an example, where, in June, the firm said it had sent $4.6 million in real-time payments for payroll in just two weeks after making that feature available. Waterhouse said an inevitable shift away from ACH reflects the benefits of RTP: Employers can know instantly with, say, Friday payroll, if there have been glitches and address them before even the employee spots the issue.

“The [employer’s ability] to remediate the problem,” he said, “is vastly different and improved.”

That also dovetails with banks that offer real-time payroll the desire to capture direct deposits and cement customer loyalty.

To get a sense of how sticky that loyalty can be, Waterhouse noted that Grubhub, which he said is a large user of RTP, has actually been steering its drivers toward banks that offer the real-time service — and away from FIs that don’t (and thus take advantage of daily payout options). Silicon Valley, marked by, say PayPal or Uber, have long been realizing the value inherent in making disbursements via RTP.

For small- to medium-sized businesses (SMBs) eying RTP, Waterhouse said there’s a looming impetus in the form of instant credit card settlement. That can be a boon to smaller merchants who want (and need) better cash flow visibility. Certainly the current economic environment has trained a spotlight on the ways speedier payments can help, well, everybody.

A joint report by PYMNTS and Visa underscores the cash flow crunch: Roughly half of SMBs report frequent cash flow challenges — and as many as nine in 10 merchants said they would be very or extremely interested in real-time settlement capabilities.

Financial service providers should sit up and take notice: Four out of 10 surveyed Main Street SMBs said they would be interested in switching to point-of-sale (POS) providers or acquirers offering that capability.

What’s Next

Looking ahead, Waterhouse said that by the end of the year, RTP may see as many as 300 or 400 non-TCH member banks offering real-time payments functionality and the results of a proof of concept for bill payments that Waterhouse said could drive “explosive” growth. This pilot program uses routed requests for payment using a Zelle social alias or traditional account information to make bill payments sent, settled, posted and confirmed in real time.

Waterhouse said that as these new use cases continue to gain use, there will be more and more that appear that they haven’t even thought of but innovative FinTechs and FIs will.

“It’s going to become extremely compelling and competitively disconcerting for banks that don’t have access to RTP,” he said.