As we approach the final quarter of 2020, I find myself contemplating the significant changes in the payments industry. This is a dynamic period for bankers with opportunities for new bank services that can enable greater engagement and retention with customers and increase deposits. I decided to take a tally of recent accomplishments, and hopefully add some clarity to the evolving payments landscape as we consider our business plans for 2021.
One recent trend is the mainstreaming of Person-to-Person (P2P) payments. Early innovators in this space include PayPal, Venmo (owned by PayPal), and Cash App (developed by Square). This category of payments is estimated to be $1 trillion in the U.S. It allows users to send one another money virtually immediately from their devices through a linked bank account, debit/prepaid card or stored value balance. In this space, the game-changer appears to be the expansion of “Zelle” by Early Warning Services to a growing number of U.S. financial institutions.
Zelle is an interesting undertaking, as it’s not actually a new payments network, but a platform using existing infrastructure such as online credit authorizations via Visa and MasterCard plus the ACH network for settlement. In the first six months of 2020, $133 billion was sent via 519 million transactions through the 924 participating financial institutions. Although the service was initially launched to enable financial institutions to compete with FinTech P2P services, it is quickly expanding to allow businesses to complete electronic disbursements to consumers for payouts or reimbursements.
NACHA is engaged in a multiyear effort to establish Same Day ACH (SDA) as a viable faster payments option. As the name implies, a settlement is measured in hours, not minutes, which is now the standard with P2P solutions, and occur throughout the business day. A new third SDA window will be established in March 2021 to enable payments submitted at 2:45 pm MT/1:45 pm PT to result in good funds with the payee at 4:00 pm MT/3:00 pm PT. This solution provides a greater window of availability during the business day. It is expected to expand usage by business users in the Mountain, Western and Pacific regions of the U.S.
Emergency disbursements and faster collection of payments via the ACH seem to hold broad appeal for business users. In 2Q 2020, SDA volume climbed 37% over a year earlier, with 81.6 million payments. The average dollar amount of an SDA payment increased by 33% in the second quarter, compared to the first quarter of 2020, as the allowable SDA transaction size increased to $100,000. As a low-cost payments network with a 50-year reliable track record, we believe businesses will continue to look to the ACH for both consumer and business applications.
The latest addition to the faster payment scene is Real-Time Payments (RTP) from The Clearing House. This may be the most interesting recent development because it’s the first entirely new payments network in the past 40 years and enables payments settlement in mere seconds. This network is built on a platform that uses an international standard for messaging and has the same underpinnings as solutions in the United Kingdom and Singapore. This is a credit-only, “push payment” platform. The Clearing House is owned by 25 of the largest banks in the U.S. and has committed to being operational in the network.
This “big bank” orientation of The Clearing House has made some community institutions hesitant to implement the solution. Independent banks, retailers and credit unions actively lobbied the Federal Reserve to develop a competitive solution, which leads to the announcement of FedNow by the Federal Reserve Board in 2019. An industry update by Governor Lael Brainard in August 2020 confirmed that the Fed is on track to implement their instant payments systems in 2023/2024.
The functionality of RTP and FedNow is expected to be similar in several core ways:
- As the category implies, instant payments are measured in seconds from submitting a payment instruction until good funds are received by the payee/recipient.
- Because settlement is immediate, adequate funds held by the business in a bank account are necessary to initiate the payment.
- Both payments networks allow a “request for payment” capability that is expected to be a game-changer for bill payments by enabling a service provider to notify their client that a payment is due and a simplified response — with the requisite security — to complete the payment.
The challenge with all new payment solutions depends on the basics of supply and demand. We expect both the RTP and FedNow instant payment solutions to be successful in the long-term because of the early implementation of the large banks, which account for a majority of U.S. deposits (supply side). However, we are learning that these solutions’ business adoption is taking time and may require changes in the payables processing stream for established corporations (demand side). We expect business innovation to result in eventual demand and to follow the broad adoption curves realized in other industrial countries globally.
There is no lack of opportunity for banks to expand their suite of payment services to consumers and businesses. The faster payment solutions I outline in this article overlap in many regards. Understanding each of the payments networks’ core capabilities and overlaying those with your clients’ needs and the bank’s goals will result in the most successful implementation. Digital services will only continue to raise the bar for service expectations, and payment delivery speed is no exception.
William Schoch is President and CEO of WesPay, the nation’s oldest and one of the largest associations dedicated to helping members grow and improve their use of electronic payments. He is responsible for developing and implementing strategic initiatives to grow the association and provide maximum value to its 1000 members through information, education, and advisory services. He was appointed to his position at WesPay in 2008.
In 2016, Bill was the incorporator of WesPay Advisors, a wholly owned subsidiary of WesPay, which provides payments consulting in the areas of payments strategy, process improvement and payments regulation. He serves as a director and the secretary of the WesPay Advisors Board.
Bill currently serves on the boards of WesPay, WesPay Advisors as board Secretary, and Nacha. He also serves on the operations committee of the U.S. Faster Payments Council. He recently served on the board of USA Technologies, the Federal Reserve’s Faster Payments Task Force and the steering committee for Nacha’s Payments Innovation Alliance. Bill is a member of the American Society of Association Executives (ASAE) and the California Society of Association Executives (CalSAE). He is a frequent speaker on payments-related topics.