How real-time payments erased borders for coronavirus-era commerce

With consumers and merchants alike sharing the need to be paid faster, the case for adopting real-time payments globally has quickly advanced during the COVID-19 pandemic.

Banks and technology providers are more clearly seeing the benefits of real-time payments as the pandemic persists. But it's an arena they have been laser focused on for several years now, with a goal of making real-time payments the norm. The pandemic hasn't changed the strategy behind the need for real-time payments; it has just put a brighter spotlight on it.

For more than three years, IBM has used its Watson platform to attract partnerships with payments providers to drive embedded and faster payments across various devices and cloud connections. Now the company is being asked a lot more questions about faster payments.

"Our clients are asking why they can't pay everyone with faster payments," said Doug Cox, general manager and vice president of commercial payments at IBM. "And the one consistent need we see is this aggressive shift, in part because of the pandemic, to real-time payments."

IBM has responded by "transitioning our technology to enable our clients to seamlessly integrate to private clouds as well as leverage other external clouds for scale with real-time payments," Cox said this week at the virtual Mobile Payments Conference. "We are seeing real-time payments growth at rates nearing 50%."

It doesn't hurt any merchant acquirer, or provider or proponent of real-time payments gateways in the U.S., that the technology landscape is getting cluttered with workable and adaptable options.

Zelle and Venmo's popularity illustrate consumer awareness and comfort with faster payments through P2P apps, a payments equation that only a year or two ago didn't seem likely to spread — in part, because providers had not established use cases or strategies to make the payment method a revenue generator. But during the pandemic, these P2P systems became lifesavers for consumers and gig workers following stay-at-home mandates.

The Clearing House launched its Real-Time Payments network nearly three years ago, and earlier this year raised its transactional limit for single payments to $100,000, a move that allowed it to compete with other networks. The Fed's Same-Day ACH faster payment service has a $25,000 single transaction limit.

FedNow, the Federal Reserve's planned real-time payments network, hopes to establish a ubiquitous real-time platform for consumers and businesses alike.

Initially planned with a 2024 time frame, Federal Reserve officials had hinted FedNow could launch earlier if development moved along quicker than expected. But most recently, and in part because of pandemic setbacks and other focuses for the banking system, it seems certain the original launch timetable is back in place.

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"The Clearing House RTP has been in market for three years now, and 60% of the country's banks are connected, and we will have FedNow launching its service in three years, so that will give us two networks in the U.S.," said Peter Gordon, head of enterprise money movement at U.S. Bank. "That is good, because competition is good."

Compared to some other countries, the U.S. seems to move at more of a snail's pace in terms of RTP advancements.

Those involved in U.S. payments understand that the launching and adoption of a real-time payments network takes a long time because "we don't have the political appetite to mandate anything around real-time payments," Gordon said. "Those of us in the industry will be the ones to figure this out and move things forward, and ultimately, that will make for a better solution and more partners being involved. That is the power of the system we have here in the U.S."

How they'll pay in Brazil

Brazil provides an example of how a system promoted and mandated through a central bank can establish near-instant ubiquity.

Brazil's central bank is preparing to launch the Brazil Instant Payments Scheme, or PIX, in November as the single brand for instant payment functions in the country.

In many ways, Brazil's instant payment scheme will be the envy of many faster payments developers and researchers, mainly because the Banco Central do Brasil is making it mandatory for all banks to adopt, and for payment processors to obtain licenses. Right out of the gate, the QR-code-based system will serve more than 500,000 active customer accounts, from checking to savings and prepaid.

But a PIX branded wallet and digital account for payments and wire transfers is targeting the 120 million Brazilians with bank accounts, said Alexandre Pinto, head of development and innovation at Actminds Research, a company providing core banking systems in Brazil and working to enact PIX.

"The system will connect banks and credit unions but also payment facilitators and retailers," Pinto said. "It's a more open network and 24/7 real time, and also much cheaper than the traditional card rails for banks and users."

The other use cases

Aside from potential cost savings for clients when deploying real-time payments, traditional merchant acquirers are seeing an expansion of use cases that appeal to businesses and consumers alike.

"An important new use case is around merchant settlement, with the merchant accepting a card payment and getting the funds moved to the bank on the back end and into their account in real time," said Jordan Reynolds, head of global debit commercial product at Elavon, the acquiring/processing unit of U.S. Bank.

Historically, an acquiring bank would settle payments with merchants through the Automated Clearing House, which could take a few days or more to clear. More recently, the next day or same-day ACH services have come into play as well.

"But the advent of real-time payments gives us the ability to settle with a merchant at any time, seven days a week, and that is where the real power is in real-time payments," Reynolds said.

Another key area for RTP is merchant disbursement to consumers, such as insurance and airline payments, Reynolds added.

Data moves fast

In the background, the ISO 20022 standard common in Europe, the U.K. and Australia has been embraced in the U.S. for real-time payments, making it possible for most networks to essentially speak the same language. ISO 20022 allows thousands of data fields to be attached to the payment as a communication tool that, in and of itself, helps move payments along faster.

Banks in the Swift network are also finding it complements the Global Payments Innovation cross-border payment initiative — which orchestrates legacy banking networks to operate more efficiently and quickly, while also viewing technology advancements as a practice that all banks could embrace in the same manner and, if possible, timeframes. Swift has been using GPI to connect its banks to the domestic rails of faster payments services in Singapore, while also testing Australia's New Payments Platform and the European Central Bank's Target Instant Payments Settlement (TIPS) platform.

Such efforts demonstrate the dramatic role data movement is playing with faster payments.

A fragmented bill-pay world

"We don't talk about it enough, but it is the data underneath the RTP that allows us to get information for the consumer about what they owe, how much they owe, what it is for," U.S. Bank's Gordon said, referring to the power of RTP in bill-payment settings. "When you think about it, you don't get this information real time in the U.S. now; you get a paper bill in your mailbox, that is not real time."

Consumers may also receive a mobile alert on their phones about paying a bill, but "it may not be current," Gordon added. "RTP allows us to create a template that makes the connection from the biller to the consumer, and that is what is going to change."

Troy Hagey, principal at professional services network KPMG Global, noted that nearly half of the bills a consumer receives are for regular payments to utility companies or for cell phones.

"That is a fragmented environment in how to pay those bills, with some going into the billers' websites, so they have to remember all of the credentials they need," Hagey said. "Or they go to the bank bill-pay channel, but only 25% of bills are paid through the bank website, and that is declining as the direct-to-biller model has grown."

Because of that, many companies are looking to RTP in order to drive consumer choice and provide options for allowing payments at any time. "Request for pay is a game-changer in the bill pay environment because you can flow a payment with the data and a real-time confirmation that a bill has been paid," Hagey added.

With so much happening in the payments space, Hagey says it is "a good time to be a payments nerd, because there is a lot of transformation and change happening."

The natural evolution

Ultimately, merchant acquirers will be looking at RTP as a way to help clients manage liquidity in their businesses while also expanding use cases for the RTP network, promoting services like Zelle and advancing RTP at the point of sale.

"I see that as a natural evolution," Elavon's Reynolds said. "But I also see the traditional players like card networks also looking at these things and determining how to compete with RTP."

The major brands will want to structure cards to operate within RTP parameters and tap into the data that is available, while also investing into RTP as a way to offer other services and solutions, Reynolds added.

"Competition will be massive in the years to come," he added. "But I'm really excited about where we are headed."