Sep 1st 2021

Financial PerspectivesCFOs and Treasurers

In the US, Progress on Real-Time Payments Accelerates

Sep 1st 2021

Dozens of apps today offer real-time payments between bank accounts or digital wallets—if you’re a consumer.

But the same functionality for large B2B payments has lagged in the US. Indeed, old-fashioned paper checks, wire transfers, and Automated Clearing House (ACH) transfers remain the rails by which most corporate payments move.

That is rapidly changing. Thanks to efforts by the financial services industry, fintech startups, and even federal regulators, a new generation of rapid payments capabilities for corporates is being readied. And though most of the focus in recent years has been on domestic transactions here in the US, an age of global, real-time B2B payments is dawning, too.

While the US did not have a true real-time payments system as recently as several years ago, multiple solutions are now in development. And experts expect international frameworks to emerge over the next few years.

The methods in the US to transfer funds among banks, include:

Payment Method What is it? How Fast?
Checks Paper document At least one business day
ACH Automated Clearing House electronic payment network At least one business day
Same Day ACH Expedited ACH transfer available for an additional fee End of same business day
Debit/Credit Card Network owned by card associations Less than an hour (using card network)
Wire Transfers Bank-initiated transfer using a fee-based network, such as SWIFT or Fedwire Between a few minutes and several business days
Zelle Real-Time Payments through Zelle, digital payment network owned by banks Within minutes (using card network)
TCH RTP Real-Time Payments through The Clearing House Immediate
GPI Global Payments Innovation Initiative, operated by SWIFT (Society for Worldwide Interbank Financial Telecommunications) Less than a day

Europe Leads the Way in Real-Time Payments

For now, the US remains behind in real-time payment capabilities compared to other markets, especially Europe. There, regulators have pushed through a series of mandates, starting with the first Payment Services Directive more than a decade ago. Recently, European Union directives have led to a number of new systems for instant credit transfers and payment settlements.

That sort of regulatory pressure has been absent in the US, where payments are more market-driven. For its part, Bank of the West in 2019 joined The Clearing House (TCH) Real-Time Payment (RTP) network, which offers access to financial institutions representing nearly three-quarters of US demand deposit accounts.

As real-time payments become more ubiquitous in the US—and if regulatory mandates occur, as they have in Europe—corporates will see more value in signing up for such systems. But for most US companies right now, cross-border payments remain viable only using checks, wire transfers, and transactions over the SWIFT network.

As real-time payments become more ubiquitous in the US—and if regulatory mandates occur, as they have in Europe—corporations will see more value in signing up for such systems.

A Domestic Real-Time Payments Network Is Coming in 2023

This mostly hands-off approach does not mean that the need for real-time payments has gone unnoticed by US regulators. After years of study, the Federal Reserve announced in August 2019 that it was directing its member banks to build a new program called FedNow to support rapid payments in the US. The initial timeline called for a 2024 launch, but the Fed has made rapid progress toward its goal and now expects to launch a year earlier, in 2023.

So far, the impact of FedNow on the payments industry appears neutral. On the one hand, it highlights the importance of real-time payments in the industry. And it’s seen as a boon for smaller banks, many of which are not part of The Clearing House network (which is owned by 25 large banks).

On the other hand, a Fed program could result in further delays, as banks wait to see which solution might dominate. Some might remain on the fence to see how the market plays out.

Moving Corporates Off Paper Is Harder Than It Might Seem

Regardless of which business model or network succeeds, though, the biggest hurdle at this point is convincing corporate clients of the need for a new system.

The issue is primarily information, not speed. With the use of checks, corporate clients can make payments with limited information about the recipient, and acceptance is universal. Perhaps most importantly, checks provide a reliable trail of paper information for both issuer and recipient.

Today, customers who make electronic payments must send related transaction information separately, either through email, a separate channel, or an ACH addendum. Reconciling the payment with the transaction data is then left to the receiving party.

Additional Real-time Payments Solutions Are Emerging

One solution comes with the Global Payments Innovation Initiative (GPI) from the SWIFT network that processes cross-border transactions worldwide. Cross-border transfers over SWIFT’s GPI, which adds a layer of information to make the transaction traceable and transparent, totaled $77 trillion in 2019, nearly doubling the 2018 total. GPI has been integrated with domestic RTPs, enabling frictionless international transactions in minutes, if not seconds.

Other, more complex transactions could benefit from the use of distributed ledger technology, or blockchain. But for now, this may not be a viable solution for most cross-border payments. Because blockchain is a closed-loop system that can carry information, which goes well beyond a simple funds transfer, it might be more applicable to trade finance, title company validation, or other broader transactions.

For now, banks can continue to focus on advancing their capabilities with the available domestic solutions, such as Zelle, RTP, and ACH. Looking forward, the priority will be on finding solutions that go beyond speed to address the broader spectrum of corporate needs.

That’s what a win-win future will eventually look like: transparent, traceable, efficient transactions that improve the payments process for both bank and customer.

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