The race for faster payments is here

Since the launch of the Federal Reserve’s Strategies for Improving the U.S. Payment System whitepaper in January 2015, the term “faster” has frequently been linked to payments plans. In fact, in the years following the report’s release, the emphasis on faster payments has given way to a full-scale industry evolution.

Today, “faster” has become a blanket term for transactions that move more rapidly than traditional payments. For example, Same Day ACH, approved in May 2015, became one of the original faster payment options, establishing a new choice for same-day clearing and settlement via ACH. Building on that momentum, solutions like ExcheQ, Mastercard Send, Visa Direct, Zelle and others came online, creating functionality that uses existing infrastructure to support expedited payments. When they launched, these faster payment options layered on consumer- and business-facing applications to allow users to send and receive payments more quickly over ACH and card networks.

And then, in November 2017, The Clearing House launched its real-time payments network, RTP, the first new payments system in more than 40 years. Discussions about “real-time payments” quickly became synonymous with RTP, creating a new definition in the faster payments glossary. So, when the Federal Reserve announced its plans for FedNow in August 2020, the Fed took care to use the term “instant payments” to distinguish it from RTP.

Now the landscape reads like a laundry list of different faster payments options, and word choice matters. While there is no hard-and-fast definition in the U.S., faster payments generally include products ranging from Zelle to Same Day ACH and beyond. The use of the phrase “real-time payments” signals a connection with the RTP network, and the term “instant payments” connotes the FedNow service.

A growing demand

Nomenclature aside, expectations for faster payments continue to climb. For example, heightened by the pandemic, businesses now expect to have immediate funds receipt in support of cash flow. In fact, research from the Federal Reserve indicates that nine in 10 businesses anticipate being able to initiate and receive faster payments by 2023, and many are ready to do so today. The Fed’s study also revealed that nearly two-thirds of businesses would consider switching banks if faster payments services were not available at their current one. According to the research, leading faster payments use cases for businesses include payroll (See “Real-time payroll gets real” sidebar below), supplier payments and recurring bill payment.

“We’ve seen a huge impact in the payments landscape as a result of the pandemic,” says Connie Theien, senior vice president of industry relations and faster payments strategy leader at the Federal Reserve System. “Both consumers and businesses have been forced to look at payments services that are remote, contactless and faster. As much as we might like to see a light at the end of the tunnel, with some of our society opening up and businesses returning to in-person activities, a lot of these behaviors are for the long run.”

Consumers, too, deem faster payments a priority. Increases in person-to-person (P2P) services have shifted the landscape, so much so that 89% of people now report using P2P and more than half say they will continue using digital payments after the pandemic, according to a May 2021 survey by Zelle. Services like Zelle that provide instant access to money have transformed immediate payment capabilities from the exception to the norm.

“It’s not so much that your customers say, ‘I want this or that,’” says Steve Ledford, senior vice president of products and strategy at The Clearing House in New York City. “They’re expecting [faster payments]. They expect you to be able to move things immediately.”

Providers are also identifying opportunities for leveraging faster payments rails for existing services. For example, as of February 2021, Zelle transactions can be cleared and settled over the RTP network. While only a couple of banks have introduced this service to date, it opens the door for faster settlement between banks and creates a new type of RTP network volume. And other solution providers are considering similar approaches.

“We plan on hooking up ExcheQ to FedNow,” says Michael Bilski, CEO of $905 million-asset North American Banking Company in Roseville, Minn., of the community bank’s proprietary P2P service. “We think every bank will have to have its own interface or app to connect, whether it’s FedNow or RTP.”

Are providers ready?

As community banks consider their connections to these faster payments services, core providers and fintechs play a significant role. When it comes to RTP, several major service providers have already jumped on board, offering the service to their bank clients. They also have plans for FedNow. In fact, the Federal Reserve reports that third-party providers constitute about a third of the participants in the FedNow Pilot (see “Inside the FedNow pilot program” sidebar).

“We are seeing a lot of new services come to market that are available to support community banks in implementing [FedNow],” Theien says. “There are organizations that have designed overlay services that interact with cores through APIs [application programming interfaces] that may make it easier or faster to implement.”

For example, Finzly, a Charlotte, N.C.-based fintech that provides payments services to banks, has inked a partnership with ICBA Bancard to offer instant payments to its customers. Through what the company calls a core-agnostic “payments hub,” community banks can connect to existing payments rails, including ACH, wires, RTP and, when it goes live, FedNow.

“We have been in the industry for close to 10 years now and have worked with a lot of cores,” says Suja Ramakrishnan, director of marketing at Finzly. “It has been a very progressive journey into payments. Try and take [faster payments] as an opportunity, because it is a whole modernization effort.”

Other solution providers see faster payments as a way to support community banks in their product journeys. From new bill pay opportunities with advanced messaging and request for payment functionality to a commitment to serving minority communities, core providers are introducing offerings targeted at key use cases and the growing needs of community bank customers.

Though much groundwork has been laid, details, particularly as they relate to FedNow and interoperability with other payment schemes, continue to be opaque. That lack of certainty may cause some community banks to hold back on executing real-time, instant or other forms of faster payments. But experts advise against a “wait and see” mentality as pressure continues to mount around these faster solutions.

“You want to look at your customer behavior today,” says Rusiru Gunasena, managing director of the JHA PayCenter at Jack Henry & Associates, which is based in Monett, Mo. “Customers want to get paid. They want their money in real time. When they want to send money to their kids or want to pay for something, they send it through Venmo.”

To address this urgency and expedite time to market, providers have simplified the community bank engagement process. In fact, The Clearing House reports that RTP receive-only functionality can be made immediately available through its express onboarding with the major core providers. In addition, both The Clearing House and the Federal Reserve have implementation guides and materials aimed at easing execution.