Real-time payment rails in the United States have surged in popularity in recent years. According to The Clearing House, the RTP® network saw a 7% increase in real-time payments volume in Q2 2024. Despite this growth, however, many banks and other financial institutions (FIs) have been reluctant to integrate real-time rails into their existing payments stacks. These FIs cited concerns about cost, the complexity of upgrading outdated systems and potential fraud as reasons for this hesitation.
To move forward, banks will need to address these concerns, find ways to mitigate them, and challenge the misconceptions that hinder the adoption of real-time rails. For some FIs, this may simply involve educating stakeholders. For others, forming partnerships with third-party technology providers will be critical to overcoming these hurdles.
Cost and Fraud Concerns Delay Real-Time Payment Implementation
Upgrading to real-time rails is no easy feat, especially when banks face steep costs to overhaul their legacy payment systems. Additionally, many FIs worry that these newer systems are more susceptible to fraud.
FIs’ fraud fears hinder real-time payments adoption.
34%
of banks believe their core systems are ill-equipped to handle real-time payments.
Many FIs lack the expertise to handle fraud in real-time payments, and this fear has led some to eschew real-time rails entirely. In fact, 36% of FIs admit they do not know how to handle refund requests from victims of authorized transaction fraud. Unlike in legacy systems, where transactions can often be reversed, real-time payment rails make it difficult to recover funds once they have been transferred.
However, experts note that push payments, which are the only type of payment on instant payments rails, are inherently more secure because they must be authorized and initiated by the account holder. Other payments, such as an automated clearing house (ACH) debit/pull payment, can be withdrawn from an account by someone other than the account holder. Experts also suggest that FIs focus on preventing fraud before it happens rather than dealing with the aftermath. Artificial intelligence (AI) tools can play a vital role in bolstering security by using pattern recognition to detect irregularities in payment data that could indicate attempted fraud.
Banks are concerned about the costs and complexities of upgrading core infrastructures for instant payments.
Many banks have relied on their existing technology stacks for decades and are apprehensive about the cost and effort required to integrate instant payments. A recent study found that 34% of banks believe their existing systems — some of which date back as far as the 1970s — cannot accommodate the increased volume and speed of transactions that real-time rails demand. Another 34% feel that their systems could not handle the 24/7 payments availability that real-time rails require. These legacy systems often need regular maintenance performed during off-hours, and banks worry about losing customers if a 24/7 system needs to be shut down for such maintenance.
Third-Party Partnerships Accelerate Real-Time Payments Integration
FIs concerned about the cost and complexity of implementing real-time payment rails could benefit by partnering with third-party payment providers that can handle the difficult legwork.
Banks are looking beyond their existing payments engines to implement real-time capabilities.
A recent study found that 44% of banks plan to build real-time rails outside their current payments technology stacks, with small banks finding this approach particularly favorable. Just 21% of banks with more than 50,000 employees plan to partner with third parties, while 48% of banks with fewer employees said the same. This discrepancy stems from two factors: Larger banks have the in-house resources and expertise to implement these payments independently, and they often have more entrenched relations with existing vendors. In contrast, smaller banks lack this in-house capability, although they are often more agile and can more easily leverage the expertise of a third party.
Frost Bank recently partnered with Finzly to implement real-time payment rails.
The FI-FinTech partnership aims to facilitate both RTP network and FedNow® Service payments, with these capabilities seamlessly integrating with Frost Bank’s existing systems via a single application programming interface (API). According to a news release, this integration greatly simplifies payment management and distribution while allowing the bank to easily scale its payments systems.
“By partnering with Finzly to deliver FedNow and RTP instant payment solutions, we can provide our customers with more options beyond traditional payment methods,” said Aaron Wiatrek, senior vice president at Frost Bank. Indeed, the Frost Bank-Finzly collaboration highlights how third-party payment providers can help smaller FIs overcome the challenges of integrating real-time payment systems.
FIs Underestimate Consumer Interest in Real-Time Payments
An additional stumbling block for greater real-time payments adoption is a false assumption by FIs that customers are not particularly interested in utilizing this technology. In fact, the biggest factor suppressing customer demand is that the banks themselves are not offering real-time payment solutions.
Most corporate customers want access to real-time payments.
A recent study found that more than two-thirds of FIs do not provide access to the RTP network or FedNow Service. This is despite almost 64% of corporate bankers saying their corporate customers have significant or overwhelming demand for these services. Another 53% of respondents added that this demand came from both corporate and retail customers.
Banking leaders, however, worry that implementing real-time payments could ultimately harm their business. Nearly one-third believe it could cannibalize other revenue streams. This concern appears largely unfounded, however, as customers will likely shift to the real-time option offered at their current bank, rather than switch institutions. Conversely, the absence of such options could drive customers to competitors who do offer them.
Banks must create demand for real-time payments themselves.
A joint study by Finzly and the U.S. Faster Payments Council reveals that while roughly 90% of FIs believe there is customer demand for instant payment options, just 65% believe customers would actually adopt these methods if implemented. In essence, banks find themselves in a dilemma: They do not want to implement instant payments without strong demand, yet customers do not express strong demand for instant payments if they are not readily available. It is therefore incumbent upon banks to implement these payments and turn customers’ soft preferences into clear demand.
Overcoming Obstacles to Real-Time Payments Adoption
FIs face three primary hurdles to the widespread adoption of real-time payments:
- Perceived risk of fraud due to the instantaneous nature of transactions
- Substantial cost of overhauling legacy systems to support real-time payments technology
- Perceived lack of demand for these services
To overcome these obstacles, FIs can take several strategic approaches.
First, they must develop comprehensive fraud detection and prevention measures that are seamlessly integrated into the payment processing. Second, they must adopt a more holistic perspective on the value of real-time payments by considering the potential for new revenue streams and improved customer experiences. They should also partner with third-party financial services to offload much of the cost and effort required to implement real-time services.
Finally, FIs should prioritize customer engagement, demonstrating the practical benefits of such payments through specific use cases. Some examples include improved cash flow management for businesses and instant bill payments for consumers. Customers will likely embrace real-time payments if these options are available to them and they understand the benefits of such technology. By addressing these challenges head-on and highlighting the tangible benefits, FIs can drive adoption and position themselves at the forefront of the evolving payments landscape.
