A recent article in American Banker suggests that U.S. Bank is beginning to charge consumers $6.95 for an instant payment.
First off, kudos to U.S. Bank for offering the service. While not the first bank in the U.S. to offer real-time payments, it is one of the largest banks to do so to date.
However, the steep price for instant payments will limit the feature's appeal and seems to go against the experience garnered from more than 40 real-time payment systems in over 30 countries. Rather than charge consumers too much for a transaction, banks need to think longer term about how to drive volume so other opportunities arise.
To be fair, it's easy to see how the price was determined. The $6.95 isn't far off from what many bill pay sites charge for an expedited bill payment. However, there are two main distinctions. For one, the expedited bill payment fee is often cheaper than the penalties that might have been accrued if the payment is late. For another, there are card fees associated with the bill pay provider accepting the payment since the majority of expedited payments are card only. In other words, a one-size-fits-all fee makes sense for expedited bill payments.
But a $6.95 fee to facilitate a person-to-person payment doesn't make sense.
Very little research is available as to the average size of a P2P transaction but we can make some estimates. Let's assume it's an average dinner check size since many banks use that scenario to illustrate the feature. When I was last in the U.S., I picked up one random expense for dinner: $36 and change. Let's say someone else in my party had picked up the tab, but then I later wanted to reimburse them. To pay them back through an instant P2P service like the one offered by U.S. Bank, it would cost me an extra 20%.
And the cost to U.S. Bank? ClearXchange, the P2P payments network owned by U.S. Bank and other large institutions, does not disclose its fees for participating institutions. But to be an alternative to ACH, it's fair to guess it costs a few cents at most. It can't be, well, $6.95 per transaction.
So, what strategy do I believe the industry should be embracing?
First, everyone needs to take a longer-term view. While recognizing investments have been made and costs need to be recovered, it's important to remember that payments are largely habit-based and it takes an awful lot to change people's habits or even a company's habits. Pricing at $6.95 is unlikely to drive as much volume or revenue as, say, $0.99.
Payment systems are pretty much fixed costs. So as the unit cost plunges, driving volume will ultimately be far more rewarding long term. Indeed, we're still using payment methods that are decades old. Instant payments will be here for at least as long. We don't need a return on investment within six months. We just need to make sure they're done right.
Second, we need to take a holistic view of payments. Most banks don't really know the true profit and loss of a payment, let alone have an enterprise view of what payment method is best for them. A simplistic example of this would be checks. Two thirds of all checks globally are written in the U.S., according to our data. Yet, checks are declining at an ever-increasing rate. In other words, the unit cost is going up on a daily basis.
Banks have generally looked at the revenue, rather than the margin, on payments as this is arguably the first time any payment type has declined. Checks are unlikely to disappear in our working lifetime, which means this is a long-term problem. So banks need to figure out whether they're better switching sooner to instant payments and driving the change. They need to look at the overall costs and benefits, such as avoiding manual data entry mistakes and getting greater volumes of remittance information, from moving from paper to electronic payments.
Third, it's time to move away from payments being a channel and constrained to limited use cases. Real-time payments could almost be considered electronic cash — instant good funds at almost zero cost. They're a toolset that allows banks and corporations to deliver interesting, real-life solutions, from micro-travel insurance to instant loans to on-demand “my-pay-to-date” to avoid payday loans.
Finally, payments are not a competitive advantage. But how well you do them, and what you do with them, is. And you'll only get to demonstrate the value if people use them.
Gareth Lodge is a senior analyst of banking at Celent.
Corrected April 4, 2016 at 2:24PM: This is adapted from an earlier blog that appeared on the Celent website.