Status Check: Real-Time Payments in the US

During the past months, the Federal Reserve’s Faster Payments Task Force has made huge steps towards the implementation of a faster payments / real-time payments system in the US. As a result, the Fed’s RTGS (Real Time Gross Settlement) system is said to be ready to launch in 2020. Immediate loan availability, mobile payments, real-time invoicing and faster government payments to citizens are some of the gains that the new system would provide, both to consumers and businesses.

The benefits are also evident for banks. The Clearing House’s RTPS (Real Time Payments System), an alternative system to the Fed’s RTGS, is already operating in the US with 50% of the country’s 10,000 financial institution using it. Enhanced operational efficiency and the reduction of branch footfall are already lifting revenue among US banks.

Despite these benefits, there remains a number of challenges for merchants and banks alike.

Challenges for merchants 

Lack of awareness and education are among the main factors that are slowing down merchant adoption of faster payments / real-time payments in the US. According to the Fed, “29BN transactions, or 12% of all US payments annually, could benefit from faster authorization, clearing, settlement and/or availability of funds.” From a B2B payments perspective, expense reimbursement and regular payrolls are amongst the areas that could benefit most from the adoption of faster payments / real-time payments.

Challenges for banks

The presence and implementation of two systems could slow down adoption levels of both systems and cause wider operational issues for banks. This is similar to the situation we are witnessing in Europe at the moment where there are two competing regional faster payment schemes in operation, notably SEPA Instant Credit Transfer (a European Payments Council initiative) and TARGET Instant Payments Settlement (a European Central Bank initiative).

According to a recent survey carried out by the Center for Payments among 700 financial institutions in the US, only a third of financial institutions have developed a payments strategy oriented towards optimal resource allocation, with the majority unsure about their readiness for the faster payment’s evolution.

Interoperability and technology integration also need to be considered. For the two systems to effectively co-exist, both RTPS and RTGS would need to have the same or very common architectural components. Ensuring collaboration between the TCH and the Fed is critical in order to drive the implementation of a faster payments / real-time payments in the US. Mechanisms such as the US. Faster Payments Council will be key to ensuring cross-solution risk mitigation and efficient communication.

Investment in technology is another critical factor that can affect the adoption of a faster payments / real-time payments. According to the Center for Payments survey, almost half of US financial institutions feel the current product offering from core technology providers is insufficient to respond to the changes being seen in the payments industry. As a result, banks will need to lead the efforts themselves and update their legacy systems in order to build a flexible infrastructure.

Conclusion and outlook

Although the Fed aims to have its own faster payments / real-time payments solution ready by 2020, for it to succeed, the system will need to have the consensus of all stakeholders involved, including credit unions and smaller banks. Still, testing and onboarding will mean that this process is very unlikely to be finished before next year.

The year ahead offers an interesting perspective, especially regarding bank adoption and product innovation. Once banks have adapted their infrastructure and integrated into the TCH network, they will need to test and launch new products with specific functionalities linked to real-time interbank settlement.

Further down the line, it will be interesting to see how the RTGS and the RTPS will co-exist as they launch new features and evolve their technical infrastructure and interoperability.

But one thing that needs to happen now is for merchants to be educated about the benefits of faster payments / real-time payment settlements, especially when it comes to new features such as real-time interbank payment-by-payment messaging, enhanced reconciliation, increased data harvesting capabilities and the implementation of the new concept of Request for Payment.