What Will It Take To Hit The Instant Payments Tipping Point?

Instant payments is an innovation that doesn’t require much explanation. Getting immediate access to money is an obviously better solution than waiting for the check to arrive in the mail, or constantly refreshing a mobile banking app to see if transferred funds have been cleared for use.

And, as Karen Webster noted in a recent conversation on digital disbursements with Ingo Money’s Drew Edwards, while it may not be conventional wisdom that consumers and SMBs want instant payments, it is well on its way to shifting from “nice to have” to “must-have.”

“We’re seeing over and over that this is what customers want, and it’s where market leaders are heading,” Edwards told Webster. “We’re not talking about whether we’re going to hit this tipping point in the future – we’re talking about when, and we’re talking about in the next couple of years.”

Getting to that tipping point is complicated, Edwards noted, and there are some big obstacles to overcome, even though market pressures are setting the pace at which companies must move to offer instant pay as an option. And, in many cases, the FinTechs are serving as the pace car.

He and Webster drilled into three segments where the need for instant payments is acute, and the obstacles that must be cleared to rearchitect payment workflows.

Restaurants: Instant Pay Means Rethinking Payroll and Payouts

Tips are an expected part of the compensation package for waitstaff, who expect to walk out with them at the end of their shift.

In the old days, Edwards noted, when customers were more likely to pay in cash, waiters spent a fair amount of time playing banker, collecting tips and divvying them up among supporting staff. In the digital age, the vast majority of payments and tips are on cards, and cashing out tips at the end of the shift is a complex process for restaurant owners.

For starters, restaurant operators have to make sure tax is paid on tips, which means everything must run through their payroll software. And that means restaurateurs are manually keying data into the payroll platform.

“Operators obviously don’t have cash – they may not even see the funds from that day’s sales for a few days,” Edwards said. “That means they have to get cash, keep it in a vault, then go through all kinds of manual processes to get the tip data entered into their bookkeeping program. And then, after all that, they are still putting money in an envelope and handing it to their workers.”

Trading the cash and the envelope for an instant push payment is attainable, he noted – enabled by companies like Ingo.

But that’s just a symptom of the problem, which is the entire fiction-filled, highly manual workflow around collecting and distributing tips. Simply talking about turning tips into instant digital disbursements often isn’t enough to persuade restaurant owners to invest.

The key is telling restaurant operators that the entire workflow can be fixed, and that those manual processes can be dropped in favor of integrated automation. If owners can push a single button and have tips automatically recorded into their bookkeeping software, perhaps they can make it home an hour or two early.

As Edwards noted, that is a reason to get on board.

Instant Merchant Settlement: Faking It Until They Make It

While PayFacs like Square and PayPal have been the inspiration for a lot of change in merchant services, Edwards said, it is in instant payments that their influence is reshaping the industry itself.

What those firms have in common, he noted, is end-to-end visibility across the entire payments flow. They are the architects of their own integrated authorization, transaction, settlement and point of sale payments. Enabling “beautiful payment experiences” – where a merchant can hit a button and get paid immediately, or even opt to get paid for every sale – is seamless and possible, without Square or PayPal taking on risk.

The problem, Edwards said, lies in the rest of the industry, where the standard is a marriage of batch-based Tier One processors with a few layers of systems that are pieced together to create merchant acquiring processes across payment types and channels.

“Until that restaurant or merchant hits a button at the end of the night to batch out their daily sales, that day’s transactions are invisible,” he pointed out. “The [legacy players] can’t see the transactions, and so they can’t give over the funds because they don’t know what the merchant has done that day.”

To keep up with growing merchant demand, these players are “faking it till they make it,” Edwards said.

“Using AI and machine learning, they can predict the average sales a merchant will clear per day, and push that through for instant access at the end of the day. The true-up happens on the back end.”

In other words, it appears to the merchant that they are getting instant payments – well, more like same-day access to funds – even though the actual settlement is happening more slowly.

But that is most likely a stop gap, noted Edwards, pointing at how the “super ISOs” are restructuring their offerings to build their own systems that are more vertically integrated and part of the whole payments flow, like Square.

“The Tier One processors are threatened by that whole change,” he said.

Insurance: Instant Pay’s Big Tipper?

If he’d been asked to bet on which industry would have moved faster on instant push payments, Edwards probably would have never chosen insurance over banking, with the logic that the only thing in the world that moves slower than banking is insurance.

Now, however, he’s not so sure he’d make that bet. Although he thinks the changes that will reshape banking are already in motion, insurance is moving even more quickly into the fold.

“Payouts is their business. That whole notion of paying out is so core to the industry; they are all moving lightning-fast,” he said.

Insurance is a wild and complex world, he noted – unlike other use cases, where the payments are a known and predictable event, insurance payouts are by definition irregular. Consumers pay in regularly, but the payouts can happen once a year, twice in a lifetime or never.

The contribution Ingo has made here – and the rapid headway they’ve seen in this industry in particular – is in building a payout experience that mirrors the commerce experience. As the customer gets to the end of the claims process, just as they would pick a card to pay with, they choose a card or bank account to which their money will be sent.

“I think the insurance companies are going to get there first, something I never would have said a year ago,” noted Edwards.

There are still hurdles to overcome, because insurance processes are complex. There are often hand-offs along the way, and the payments will always be irregular. But it is a change that is clearly coming fast.

Today, Edwards said, those instant payments are popping up – in gig work, in B2B payments, in P2P payments and in marketplaces. An entire mechanism has been built to divert payments away from check printers and toward allowing digital choice for customers. They can have a check if they want one – but, increasingly, no one does.

Consumers expect it, and the question isn’t about whether it is going to happen. The tipping point has already been tipped: “Everyone knows this is going to happen. The question now is whose rails and how to do it,” he noted.

In some ways, added Edwards, the change is akin to the evolution of the internet. In early days, he said, the phase one question was about access: What ISP would you sign on with to get online? Today, several decades down the road, that question doesn’t make sense to anyone – getting on the internet is no longer a concern or even a thought.

Today, instant payments is in its own phase one, but that is coming to a close, Edwards noted.

“The first step was connectivity to instant payments. Now, we are evolving to the real-time economy, and what we can build off that,” he said. “Five years from now, nobody will be talking about how the money moves instantly – they’ll be talking about the new use cases that are around because the money moves instantly.”