During the past decade, real-time payment (RTP) networks have been developed worldwide, including within the U.S., India, China, South Africa, Denmark, and Sweden. Real-time payments occur almost instantaneously and work on a separate rail system from traditional digital payments. While the primary use cases so far have been person-to-person (P2P) payments, as RTP develops, new use cases will involve merchants and third-party companies that provide value-added services.
A recent white paper from Equinix, “Real Talk About Real-Time,” discussed how the adoption of a real-time payment infrastructure is changing the payments landscape.
The Current State of RTP Adoption
RTP is still nascent — most payments continue to be made using legacy systems, over traditional card rails. In fact, The Clearing House deployed the first American RTP network in 2017. Big banks have gotten on board with The Clearing House network, but smaller- and medium-sized banks have largely held off for the time being. Wider adoption is expected next year, when the Federal Reserve deploys its own RTP network, FedNow.
When FedNow is deployed, it will likely lead to a flurry of innovation and reorganization of payment systems. “While real-time payment systems are not intended to replace legacy systems such as ACH [automated clearing house] or card networks initially, real-time systems offer a unique opportunity to consolidate payments functionality that is currently dispersed between various interbank and closed-loop systems,” the white paper stated. “Implementing a data-rich, always-on, real-time payment system can provide a foundation for banks and non-bank payment providers alike to improve service to their customers and develop new products.”
Globally, the most common use of real-time payments is peer-to-peer (P2P) payments. In such systems, banks adopt a proxy identifier for the people involved in the transaction, typically a phone number or email address, and complete the transaction via a mobile application. Examples include Swish in Sweden and MobilePay in Denmark. Those applications validate funds and send settlement instructions to a government-run RTP infrastructure.
Reasons Behind Differential Uptake in RTP Infrastructure
As RTP infrastructure becomes more common, uptake of the technology, partly due to the presence — or lack — of developed financial systems already in place, will differ. Countries without developed financial systems took the lead in mobile payments, and some of those same countries are doing the same with real-time payments.
“Many have observed a supposed ‘leapfrog’ effect in markets that lack high-volume systems such as ACH or debit card networks,” the Equinix white paper noted. “In China, retail giants Alibaba and Tencent now dominate the market for mobile payments with their Alipay and WeChat Pay apps. India’s UPI [United Payments Interface] has also seen huge volume growth in a market previously marked by a high degree of cash payments. Compared to these and other success stories (such as the rise of M-Pesa in Kenya), the share of real-time and mobile payments made in the U.S. or in most EU member states is relatively small.”
But the “leapfrog” effect doesn’t account for all the differences in adoption. RTP has had success in markets with digital payment habits, such as Sweden and Denmark, because of the elegant customer-facing apps built on government-run RTP networks. In the U.S., apps will need to create value-added services and connect seamlessly to existing networks in an effort to help wean customers off legacy payment methods. This will likely happen when FedNow is up and running.
Upshot for Banks
For merchants and banks, the payments ecosystem will look very different when RTP is mainstream. Because real-time payments can be transacted any time, more and more transactions will happen outside of business hours, making time zones and business hours less relevant. It will affect banks’ business models and change the players involved in financial transactions.
“Banks will no longer be the sole gatekeepers of payments and financial services. Fintechs and other non-bank payment service providers will leverage real-time payment systems to connect with customers and other service providers. Stakeholders currently outside of the financial services industry will also play a role, including merchants, billers and tech companies.”
Banks need to realize that their main business of sending payments will not be enough to survive in the future. “As real-time payment systems enable the creation of new value-added services, the mere exchange of value will no longer be seen as a product,” noted Equinix. Banks need to reorient their business models more toward a value-added business versus a payments business. Equinix gives some ideas for value-added offerings, including linking payments to loyalty programs, automating invoicing, and interfacing with third-party networks and databases. In any case, banks will need to develop new revenue channels, understanding that payment services will no longer be dominated by a few larger banks.
What This Means for Merchants
Real-time payments will offer significant benefits for merchants, making their businesses cheaper and more convenient. “Real-time systems also offer reduced or eliminated interchange and merchant service fees, meaning that retailers receive more funds each time a customer pays. Smaller retailers in particular may find the combination of instant access to funds and lower service fees a huge boon to their liquidity management processes and overall business,” according to the white paper.
In order to accept real-time payments, merchants will need to update their tech, such as with quick response (QR) codes that will allow consumers to make a purchase. What’s more, merchants also may need to invest in new payment terminals, which can outweigh some of the potential savings from service fees. Still, it will likely be worth it given the savings in service fees from moving away from credit cards.
RTPs can also be a convenient way to pay workers, leading to a shift away from biweekly paychecks. Because these payments are instant, merchants can manage when they choose to disburse the funds rather than sticking with the traditional weekly or biweekly payments that are currently the standard because of legacy systems.
Overall, the next few years will be an exciting time for real-time payments worldwide. Banks should consider refocusing some of their business strategies toward value-added services they can provide on top of the payments services they offer. Merchants will benefit from reduced fees and payment speed, but will need to balance these benefits with the IT investments needed for processing RTPs. It seems likely that, as RTPs gain traction, the payments ecosystem will become more varied and decentralized, in-line with the U.S. economy as a whole.
