As the U.S. moves toward broad adoption of real-time payments (RTP) later this year with the deployment of FedNow, it can learn a lot from the UK’s implementation of real-time payments.
A recent webinar featuring Miriam Sheril, Head of Product at Form3’s U.S. division, Connie Blacklock, EMEA Head of Real Time Payments at J.P. Morgan, and Steve Murphy, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, shed light on what banks should consider when it comes to real-time payments, the vast differences on what the space looks like in the U.S. compared with other regions, and what the payments industry can expect in 2023.
Differences Between U.S. and U.K. Payments Ecosystems
The U.S. and U.K have some important differences between their financial systems, which U.S. banks need to keep in mind. In the U.K.’s faster payments system, for example, payments appear to move in real time, but settlement between banks actually happens only a few times per day. That’s different than the U.S., where on real -time payment networks, settlement happens immediately.
The U.K is also looser about who it allows to tap into its real-time payments system, allowing using bank intermediaries to access the network. “In the UK, you can be a financial institution that doesn’t have a banking license, but you can actually still participate in the scheme,” Sheril explained. In contrast, “The US has some pretty strict rules confirming that there are no intermediaries allowed. If you’re a bank, you need to directly participate in RTP or FedNow.”
Allowing non-banks access to the real-time network can lead to innovation. “It really opened up the market for UK Faster Payments when the Bank of England changed the [participation] rules in 2017,” Blacklock said. “It really helped open doors in the market.” It is unknown whether this may happen in the future in the U.S.
Move to Real-Time Payments Involves Resilience and Availability
As banks start planning for the rollout of real-time payments in the U.S., they should not focus solely on the technical aspects. According to Blacklock, banks should focus not just on getting the payments right but also on transaction reporting and operational considerations.
“It’s easy to think about reporting as an afterthought because you’re so focused on the payment processing, but reporting is what gets you your data,” said Blacklock. “And it’s what clients need to make their businesses run. Definitely put reporting as a top agenda in terms of your planning.”
Another key focus should be on resiliency and stability. Because real-time payments occur instantaneously, a blip in the system can wreak havoc. With a real-time payments system, the lack of time lag reduces the room for error. In a few seconds, millions of transactions can drop or fail, and it is impossible to manually replay all the transactions. Thus, whatever can be automated in error recovery should be.
It’s also important that U.S. banks align their teams for this upcoming transition to real-time payments. This includes making sure that everyone involved is familiar with how real-time payments work, what the cloud is, and how application programming interfaces (APIs) work.
Banks will need to focus on staffing for a 24/7 payments ecosystem and look ahead for any particular challenges that may arise. Sheril listed some specific concerns she heard from banking executives, including:
- “My operations team don’t work 24/7, how will we adjust?”
- “With reconcilement, how will those reports work? Because now I have a 24/7, no-end-of-day process, and what does that even look like?”
Murphy agreed that the people aspect of implementing real-time payments will be more significant than the technological aspect. “A while back, we interviewed about six or seven of the largest banks who had implemented RTP in some way, shape, or form,” he said. “And what they said was that the operational piece was much more challenging. The technology piece was a challenge, but on a scale of one to ten, it was probably more like a five or six.”
Blacklock also underscored the importance of planning for exponential growth in RTP. “Don’t be naive and think that your volumes are going to stay low, because again, fingers crossed for everyone who is choosing to go into RTP, you’re going to see high volumes and you’ve got to have your systems ready to do that,” she said.
RTP and Fraud
In many ways, fraudsters are benefiting from real-time payments, as they leave no time for customers or banks to second-guess them. The only way to solve for this will be via machine learning solutions, which will be developed as the RTP rollout proceeds.
“I was recently at an industry event, and what I heard was that, at least on the B2B [business-to-business] side, there really hasn’t been a large uptick in fraud yet,” said Murphy. “But fraud in general is bubbling and increasing. TCH [The Clearing House] does not provide layered services [addressing fraud] to the banks. They just provide the network and they are expecting the banks to develop their own systems of behavioral modifications and algorithms over time. FedNow is probably expecting to provide a couple of fundamental layered services for the banks. But mostly the reliance is going to be upon the banks themselves to build up their antifraud capabilities.”
What to Expect in 2023
Of the thousands of banks in the U.S., only a few hundred are currently on the TCH RTP network. More banks are expected to hop on the RTP bandwagon with the launch of FedNow. This will take time, though. “I don’t think 2023 is the year of huge volumes of faster payments in the U.S.,” said Sheril. “2023 to me is more banks signing up, starting their work, planning their budgets to get there. As more banks get on board there will be more use cases, driving a virtuous cycle of improvement.”
In contrast to the United States, the adoption of real-time payments is set to increase dramatically in the UK and the EU. “Last year, the volumes of real-time payments in the market increased 23% from 2020 to 2021 [in the UK],” Blacklock said. Furthermore, the UK is designing a new real-time payments architecture scheme, with a new platform and clearing system using the ISO 20022 messaging standard.
According to Murphy, next year will also feature innovation that has been a long time coming: cross-border real-time payments. “There is an initiative underway between TCH, EBA CLEARING, and SWIFT called IXB,” said Murphy. “They’re expecting to commercialize cross-border payments in 2023. And I would guess the first use case will involve Euro-US dollar conversions. But I would imagine that the UK is going to be one of the next markets that they’ll add next.”
In the United States, banks should get started now by planning their technology and human resources for the deployment of real-time payments. This involves gearing up for a 24/7 payments ecosystem, involving changes in staffing, reporting, and training. It will also involve getting everyone on board about the tech involved, including the RTP network itself, as well as cloud storage and APIs. Banks should also prepare for cross-border real-time payments, which will likely be operational next year. Those will connect with a real-time payments network in Europe and likely with a newly overhauled system in the UK.