Payments

09:01 AM
Nasreen Quibria, CGI
Nasreen Quibria, CGI
Commentary
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The Real-Time Payments Revolution

Where does the U.S. market stand in this picture?

Email, twitter, text messages, app alerts – In this digital age the confluence of connected devices has given rise to instant communication and with it, the expectation for near immediate access. The growing appetite for rapid transactions is now permeating banking services. Consumers seek to make high-speed payments from anywhere, at anytime. To address this increasing market demand, real-time payment initiatives are emerging across the globe in a revolutionary way.

Nasreen Quibria, CGI
Nasreen Quibria, CGI

Real-time payments is also known as faster payments, immediate payments, or same day payments. Real-time settlements are typically characterized by a credit transfer initiated from a customer’s bank account to another bank. The credit is then posted within seconds after participants’ payment instructions are validated, and a confirmation is sent back to the originating bank.

The most successful expedited payments system is U.K.’s Faster Payments Service (FPS) launched in 2008. Today there is nearly 100 percent domestic reach. Other countries are now emulating the UK model including Poland in 2012, Sweden in 2013, and Singapore’s G3 scheme that is in development. Australia is also embarking on a program to implement a similar a system by 2016. India, Hong Kong are following suit, among others.

While around the globe variations of real-time schemes are gaining momentum, the U.S. landscape is a patchwork of efforts. In 2010 the Federal Reserve Banks launched its same day ACH service to lukewarm results. The opt-in nature, along with its limitation to six ACH categories, proved to be a hindrance, with anemic enrollment by a handful of small and medium-sized banks. Concurrently, the largest players (Bank of America, Wells Fargo, and JP Morgan Chase), which have significant amount of ACH transactions with each other, established a private exchange between them. Similar alternative initiatives that leverage the debit network to speed up transactions have emerged from nonbanks providers as FIS, Fiserv, PayPal, and Square. However, such efforts have not achieved network effects of participation by all endpoints.

In spite of the clear need for a ubiquitous faster payments system in the U.S., in August of 2012, NACHA failed to pass its Expedited Processing and Settlement (EPS) program to change the network rules. This would have expanded same day ACH transactions to the private network operator, The Clearing House, and broadened the ACH categories offered by the Federal Reserve service.

Notably, in September of 2013 the Federal Reserve Banks issued a consultation paper on payment system improvement focused on real-time payments. The Fed followed by launching a consultative study to develop and provide an assessment of alternatives to improve the speed of the U.S. payment system. In more encouraging news, this month NACHA announced plans to revive its faster payments plans based on feedback from banks, credit unions, and users of the payments system. The intentions are clear – implementation of real-time payments in the U.S. is inevitable.

[See Also: How Banks Should Respond to the New Players in Payments]

Real-time payments will be a game changer. With accelerated payments, banks have an opportunity to offer a wide array of payment options to grow volumes, revenue, and their client base. The higher velocity of capital positions banks to support new services in mobile and emerging person-to-person payments. The unbanked and underbanked populations, most of whom who don’t have bank accounts, but own cell phones, expedited payments have the potential to foster financial inclusion through mobile transactions. Rapid payments can also offer premium capabilities to banks such as last minute payroll services, disaster payments, cash concentration, tax payments and many others. In concert, rapid transactions initiatives can enhance the revenue lever, while reducing costs by mitigating fraud, collections, and charge-offs to achieve real profit improvement.

In this shifting global landscape U.S. financial institutions need to be ready to embrace the coming trend. Not implementing faster payments in the U.S. will result in an opportunity loss to improve payment services and efficiency, reduced choices for customers and businesses, and a loss of participation in a growing sector of payments as they seek alternative channels to meet demand. In the absence of a ubiquitous real-time payments system, the U.S. financial market risks falling behind the rest of the world.

Nasreen Quibria is an executive consultant with CGI

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jschlesinger
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jschlesinger,
User Rank: Apprentice
3/31/2014 | 12:58:49 PM
re: The Real-Time Payments Revolution
The UK (and the US) had same day payments long before faster payments.

In the UK we had CHAPS and in the US they had Fedwire and CHIPS. These are both 'high value' payment systems. The average CHIPS transaction is just under $4million. They are relatively expensive to us, have limited hours of working and use a Real Time Gross Settlement (RTGS) for intra-day payments.

Faster payments in the UK replaced a 3 day settlement system for low value payments called BACS. Faster payments now uses the RTGS (run by the Bank of England) for same day (usually within 15 seconds) settlement of low value payments, there is an upper limit of -10k.

The revolution is that consumers can transfer money, pay bills and so on without losing their money in the banking system for three days and at commodity cost.

The SEPA system that is due to come fully into action on 1 August 2014 will provide next day settlement for payments in Europe. It will no longer be allowed to 'value date' payments - that is, receive them on one day but apply them to the account at a later date.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
3/31/2014 | 1:37:37 AM
re: The Real-Time Payments Revolution
This was one of the most talked about issues at BAI Payments earlier this month. The Federal Reserve had several representatives at the conference talking about this initiative. Whether they can get buy-in from all of the payments players here remains to be seen.
Ivy Schmerken
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Ivy Schmerken,
User Rank: Author
3/30/2014 | 1:20:57 PM
re: The Real-Time Payments Revolution
With the emergence of "person-to-person" payments happening, the need for real-time payments - or fast payments- in the U.S. is something to consider. I was not aware that the U.S. is behind many countries -the U.K., Poland, Sweden and soon Singapore. We also still have T+1 (trade day plus one) for settlement of stock trades which builds risk into the system.
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