Can real-time payments offset the next bank crisis?

The speed of Silicon Valley Bank's failure —  unfolding over 48 hours — has drawn attention to how quickly a bank can fail in the digital era. But rather than try and slow things down, some experts argue that the solution could be to make money move even faster. 

Whether it was instant communication over social media or the pace at which customers could withdraw money without having to physically go to a branch, speed was certainly a factor. But so was slowness. 

One of the clearest problems that came out of the Silicon Valley Bank meltdown was frozen payments, including payroll disbursements for some workers and transactions tied to e-commerce platforms. While real-time processing cannot ensure there are adequate funds to back a payment, shrinking a processing window from as much as three days to 30 seconds can potentially stave off some of the concerns that led to the closure of SVB, Silvergate Bank and Signature Bank.

When a payment company uses more traditional processing methods such as checks or a wire transfer, counterparty risk can result from the time it takes for funds to move between accounts, according to Tal Kirchenbaum, CEO and co-founder of Ledge, a Tel Aviv-based payments company. Processing for digital payments can take up to three days, with the funds in a pending status until they are settled in the payee's account. There is also time between the deposit of a paper check and when those funds are available.

"With real-time payments, the funds are settled instantaneously, therefore reducing the risk that something happens between the time the funds are sent and settled," Kirchenbaum said. Over the weekend between SVB's failure on Friday and the government's decision to back SVB starting on Monday, March 13, there were companies that had money in transit, resulting in failed payments, Kirchembaum said. 

The Clearing House's RTP network has existed for about five years, and has about 300 members covering nearly two-thirds of the bank accounts in the U.S. The government-backed FedNow network, which is scheduled to go live in July, will connect most of the U.S. banking system to real-time processing. 

"What real-time processing does is it takes the risk out of settlement," said Cheryl Gurz, RTP product manager at The Clearing House. "It's immediate, so there's no worry the payment may unwind. The counterparty has immediate funds."

While Gurz said real-time payment processing does not mitigate the risk that funds may not be available, it does improve timing between available funds and the payment, which can manage liquidity. 

As The Clearing House added banks to the RTP network it has also built a request for pay, or RfP, a related product that pairs real-time invoicing with real-time payment. Banks that support the RTP network are using instant billing to provide overdraft protection for consumers, who can pay bills at a time when they are certain there are adequate funds in their account. 

Banks have more recently extended RfP to corporate clients, which have used the RTP rail to address payment uncertainty that arose during the supply chain volatility in 2021 and early 2022. U.S. Bank, for example, has tied RfP to its treasury portal, enabling payments alongside other business services through an application programming interface.  

RfP and RTP are already being used in states that require immediate payment of outstanding salaries for employees upon leaving a company, according to Gurz. Employers can also make preemptive real-time salary payments in anticipation of a storm or other natural disaster disrupting normal banking operations. 

"You've read where people were worried about payrolls," Gurz said. "If they had used real-time payment it would have settled before the payment went into limbo. There is no delay between the employer and the employee getting their money." 

Fintech

Did VCs and Twitter trolls help take down Silicon Valley Bank?

March 13, 2023 10:31 AM

Industries such as construction can use real-time settlement to pay suppliers faster, potentially reducing reliance on short-term credit, said Paul LaRock, director of Treasury Strategies, a division of Curinos, a financial services consultancy. 

The RTP network has a $1 million limit on real-time payments, a ceiling that it recently lifted from $500,000, which is expected to be FedNow's individual payment limit. The Clearing House said it is considering a limit hike, which may come in 2024. The Fed did not provide comment for this article. 

"There are a lot of different kinds of bills of less than $1 million that you could pay right away if a company suddenly needed to," LaRock said. 

The transaction limits would create parameters around who real-time processing could help, according to Aaron McPherson, a principal at AFM Consulting.

"By definition, the people who would be pulling money out of the bank would need to withdraw more than $250,000, and the cap on RTP transfers is currently $1 million," McPherson said.  "So, it might have helped people between those numbers, but not others."

A digital dollar, or central bank digital currency – which would operate similar to cash in a digital form — could also be helpful, McPherson said. "A digital dollar would have the full faith and credit of the U.S. government," he said, adding that would help ensure the money "is there when you need it."