At least 30 countries have either implemented a real-time or near-real-time payments system or are in the midst of implementing or planning one.
In the U.S., the Federal Reserve is leading a multiyear effort to develop a faster payments system, while The Clearing House and the fintech giant FIS announced plans in May to run a nationwide real-time payments system pilot during the first quarter of 2017. Big banks are also trying to stake their claim in offering faster payments. In recent months, Bank of America, U.S. Bank and JPMorgan Chase all signed on to offer real-time peer-to-peer payments via Early Warning's clearXchange network.
As banks in the U.S. start to take the faster-payments plunge, the desire to charge fees for real-time transactions will appeal to institutions seeking to mitigate their cost concerns. FIS has estimated that banks could gain $1.1. billion in fee revenues from real-time cross-border payments, for example.
However, banks that charge high fees for real-time payments will risk being undercut by fintech providers that offer real-time payments for lower fees, or even for free.
Today, banks are taking different fee approaches. U.S. Bank is charging a $6.95 fee for real-time P-to-P payments through clearXchange, and Bank of America isn't charging a fee for them.
However, there's already been a fintech provider offering such a service for free. Venmo – one of the most popular fintech apps used by millennials and owned by PayPal – doesn't charge for real-time P-to-P payments. This mobile app is an early example of a trend that will occur across other types of real-time payments. Sure, charging fees for certain types of faster payments, such as last-minute bill payments, might seem sensible; however, a fintech company could come along and offer the same payment capability for significantly less.
Bottom line: Banks aren't likely to gain high fee revenues from offering real-time payments. Instead, the real payoff for banks will come from protecting customer relationships and revenue streams, cutting operational costs associated with payments systems and silos and potentially gaining valuable real-time insights.
In the near term, banks risk losing existing revenue streams and customer relationships if they don't offer real-time payments. For example, as more countries implement real-time payment systems, a fintech company offering cross-border payments like PayPal's Xoom or TransferWise could offer real-time cross-border payments for a very low fee. This could threaten banks' fee revenues from cross-border payments, and force banks to offer their own real-time, cross-border payments to compete.
Banks could still lose revenues if they have to compete on price with a fintech provider. However, they would at least be able to keep their customer relationships and explore other revenue opportunities with those customers.
Down the road, banks can reap greater benefits from real-time payments. The savings in operational costs from offering real-time payments could be enormous. Real-time payments are an important step on the long journey to a cashless society. By moving more transactions from paper to digital, faster payments could offer major savings in transaction processing. Further, banks also spend a great deal on maintaining separate payments systems for processing ACH, check and other types of transactions. Over time, banks could consolidate many of these separate systems into their real-time payments systems, thus helping to reduce operational costs and redundancies. In the long term, these cost savings will likely outweigh any fee revenue lost due to price competition with fintech companies.
Finally, real-time payments will allow banks to do real-time analysis of transaction data, which could benefit banks and customers. Providing instant advice on how a transaction will influence a customer's finances could turn the mobile device into a financial adviser that customers carry with them everywhere they go.
It's important to emphasize that these benefits are years away from reality. They are also contingent on other factors, such as developing streaming data analytics tools to gain instant insights from real-time transaction data. There's no guarantee that banks will gain these benefits immediately after implementing real-time payments, especially if they don't plan carefully and far in advance.
If banks fail to take these necessary steps, then fintech companies will use the opportunity to become the providers that customers use for real-time payments and financial advice.