The Clearing House’s (TCH) Real-Time Payments (RTP®) initiative is set to dramatically alter the execution of payments in the U.S. This change won’t happen overnight; however, as many firms have invested heavily in their legacy platforms, and replacing them will take no small effort. The transformation will no doubt be an evolutionary, rather than revolutionary, process.
RTP’s success will depend initially on the size of the network. Six of The Clearing House’s owner-banks are now processing RTP; if the majority of TCH’s 25 banks goes into production soon, RTP will have reached a sizable portion of deposit accounts in the US. TCH is working with not only financial institutions, but also service-providers like FIS to support and enable RTP capabilities.
Given the Federal Reserve’s typically hands-off approach to payment system innovation, as well as traditional financial institutions’ tendency to follow government- or association-issued guidance, fintechs are most likely to take first advantage of the opportunities afforded by real-time payments. P2P providers in particular will want to save transaction costs by leveraging this new network rather than using debit and credit card rails. Aggressive fintechs may also take advantage of the new network; a Venmo or Square, for instance, could reduce their costs considerably by using the RTP infrastructure.
The Clearing House Challenges
The initial investment in the supporting infrastructure needed to use the network, though, could prove daunting. Solution providers and/or financial institutions themselves will have to build functionality and capabilities such as re-trying transactions, audit-logging, reporting, warehousing future-dated transactions and much more.
Having been a chief financial officer (CFO) myself, I know firsthand that the ability to have the remittance advice returned—which RTP enables—should prove invaluable. How this messaging capability will be integrated into enterprise resource planning (ERP) systems, though, is still unclear. THC’s RTP system uses the international ISO 20022 standard format for its messaging, but building this capability into ERP systems will take time and money. Automated Clearing House (ACH) has had an XML format available for some time, but it has not been widely adopted.
Many in the industry also have concerns about the 24×7 payment operations that RTP requires—for both commercial users and financial institutions. Others worry that RTP will encroach on banks’ revenues from other payment types, especially wire transfers. For now, the initial $25,000 cap on RTP transaction amounts should prevent wire cannibalization, but over time this limit will be raised. Once RTP becomes internationally available, these revenues could take an even bigger hit.
The return on RTP investment, though, could be considerable. RTP’s messaging capability in particular presents financial institutions with opportunities to monetize RTP by offering value-added services to customers. Commercial customers can execute B2B and B2C payments with remittance information instantly, at any time, while cashflow-sensitive small business customers may leap at the chance to make low-cost, same-day payments with RTP.
With RTP, banks can offer payments at various price structures based on a customer’s requirements for the payment. If the customer wants payment finality and messaging data/remittance information with the payment, they may choose RTP. If they want a lower-cost option that’s still fast, they may choose same-day ACH. Other mechanisms have their advantages, too.
If they build and execute on the right use cases for RTP, financial institutions will reap the revenues. But first they have to replace their payments platforms, and that is no small feat— especially in what is traditionally a slow-moving industry.