While the Federal Reserve's real-time payments system won't debut for at least four years from now, the recently announced move offers a green light of sorts for continued competition and innovation in the space.
The Fed, which announced in August 2019 a plan to create a system dubbed 'FedNow,' due out in 2023 or 2024, means that essentially a competing network owned by large banks won't be the sole provider of real-time settlement. That itself was hard to even imagine, given the high level of skepticism by smaller financial institutions and the increasing use of the blockchain in international payments.
The future of FedNow
FedNow is a touchy subject in the industry. That's because The Clearing House, a consortium of 25 national and regional banks, already has a privately built network (dubbed 'RTP') that acts as an 'always on' clearing and interbank settlement platform. The system debuted in late 2017 and now reaches more than half the demand deposit accounts nationwide. TCH has claimed that its own system can serve as a solution for all banks.
Small financial institutions would beg to differ. That's in part because they argue if one provider were to dominate real-time payments, it could not only hike fees, it could also pick and choose which vendors to work with, just like any monopoly does.
With competing real-time payments options, opponents argue, there will be more opportunity for providers to come up with solutions to plug into whichever real-time payments approach a financial institution uses. So the Fed's announcement legitimizes the existing solutions of providers that help banks and credit unions make faster payments, notes Steve Mott, principal of BetterBuyDesign, a consultancy.
"It rationalizes the business models on the back end," Mott says. "They just have to find some financial institutions who will offer their services and their products on the front end."
More choice, in real time
The Fed's participation in the real-time payments realm means customers will have the choice of which platform they want to employ, just as they do with faster payments now, says Jay McShirley, founder and chief executive officer of linked2pay. "You'll have multiple options among the payment methods you use," he says. "What FedNow means is that the technology is going to be supported long term."
In essence, that's what's been going on with faster payments for a few years now. Fintech has worked to come up with partial solutions for faster payments, where money is pushed across networks and settled later via ACH or the card networks. It's a Balkanized system, but fintech has stepped in to help make sending payments a little faster than the traditional batch settlement, which can take two business days.
Fintech innovation has allowed for the emergence of person-to-person services such as PayPal and Zelle, and push payments with services such as Visa Direct and MasterCard Send. Same-Day ACH is another means. Blockchain providers are also providing real-time settlement across borders: Ripple's Ripplenet, for example, links network users worldwide for real-time settlement of international transactions, with PNC becoming the first U.S. bank to sign on for the service earlier this year.
Even without real-time settlement, in many instances, payments are instant in the eyes of the recipient, thanks to fintech stepping in to put up the money until settlement. For example, linked2pay sells software tools for independent sales organizations, including Same-Day ACH, real-time payments and merchant onboarding. linked2pay has worked with PayFi, another payments provider, to push payments to customers while taking on the risk. It underwrites credit-worthy merchants with monthly revenues of $70,000 to $120,000, such as dentists and restaurants. The fee for quick payment: 0.02% of the transaction amount.
Data: the Holy Grail
In a sense, for all the talk about real-time payments, the speed of the transaction probably won't be the most valuable part of the service, notes Sarah Grotta, director of debit and alternative products advisory service at Mercator Advisory Group. "What is really important in real-time payments is the data," she says.
For vendors, the race to real-time could be a bonanza, because all of the complexity will demand third-party assistance. For remittance, companies will need to reconstruct whole new accounting systems to be able to absorb all of the new data coming in with payments. "That's going to take a while," Grotta says. "It's no small undertaking."
Along the way, real-time settlement will call for innovation, and healthy competition will eventually make real-time payments a normal part of the financial system. But like any other innovation in payments, it just takes time.