2020. What once seemed like a far-off and futuristic date is just around the corner. Even if 2020 doesn’t deliver on the space travel and intelligent robots promised in science fiction, we can be confident that Americans will at least have access to a new payments system that is suited to the modern digital economy.
Not unimportantly, 2020 is the target date that the Federal Reserve’s Faster Payments Task Force has set for faster payments to be available to every U.S. consumer and business. That task force – composed of more than 300 delegates representing financial institutions, corporate treasurers, consumer advocates, financial technology firms, industry associations, academics, and many other groups – convened in 2015 to establish the criteria for a successful faster payments system in the U.S.
To meet this demand, The Clearing House is ready to launch Real-Time Payments (RTP) this quarter, the first new payments system in the U.S. to be developed in over 40 years. When live, RTP will provide financial institutions with the ability to better serve businesses and consumers, and to move payments faster in today’s real-time economy. The Federal Reserve’s Faster Payments Task Force deserves credit for focusing the industry on this extraordinary initiative.
The advent of faster payments promises to transform commerce for both consumers and businesses.
It’s not just the scope of the effort that makes this endeavor historic, although linking more than 10,000 financial institutions in a few years certainly is a monumental task. And it’s not just the speed of payments, which will clear and settle in seconds. Rather, the advent of faster payments promises to transform commerce for both consumers and businesses. Building a new payments system also provides an opportunity to build in capabilities that go beyond merely moving money. This new payments system will allow everyday financial tasks such as paying bills, issuing invoices, making payroll, or settling insurance claims to be easier, faster, safer, and more satisfying. The ability to manage cash flow down to the second will free up working capital for businesses and make life less stressful for consumers on tight budgets.
Faster payments naturally fit and enrich the relationship between regulated financial institutions and their customers. Payments are the most frequent interaction any customer has with his or her financial institution, and a better payment experience will make these interactions more satisfying. The broader range of capabilities beyond payments will provide further opportunities to improve the customer’s experience, such as avoiding fees associated with late payment of bills and reducing disputes about invoice payments, delays in financial transactions, and costly errors and uncertainty. Ultimately, the ability of a financial institution to offer innovative digital payment services through existing deposit accounts will enhance the options that these institutions provide customers for managing their financial lives and make user experiences all the better.
The Clearing House, on behalf of the banking industry, is committed to bringing faster payments to market. RTP has been designed from the ground up to be fast and safe, with extensive value-added functionality built in. When launched in the next few weeks, RTP will be the most-advanced payments system in the world. RTP will meet all of the criteria established by the Faster Payments Task Force for a real-time payments system, and more. For instance:
- The system is real-time in every way, clearing and settling payments in seconds with immediate confirmation and immediate availability of funds.
- Payments on this system are credit transfers, eliminating the risk of unauthorized debits and putting customers in control of their cash flow.
- RTP supports functions such as delivery of bills and invoices and information-rich communication between senders and receivers of payments, providing a secure, efficient platform for innovative financial services.
- The system’s unique settlement model eliminates the possibility of default, meaning payments are final and customers and financial institutions are not at risk.
- RTP is based on modern architecture and standards, making it easy to integrate into online or mobile applications. It’s the perfect complement to API-access and blockchain-based digital contracts.
We are just at the beginning of the faster-payments age in the U.S. RTP is designed to be a platform that supports a wide range of innovative products and services. Just as the pioneers of the Internet could not have predicted Facebook, Google, or Amazon, we can’t pretend to know what new uses real-time payments will enable in the years to come. We are, however, seeing early signs of how faster payments can help businesses and consumers improve everyday financial tasks. For example, billers have expressed interest in not only receiving prompt payment but in using the ability to deliver “reminder” notices through banks’ mobile applications that allow customers to make immediate payment. By encouraging timely payment, billers can improve cash flow and avoid the cost and potential loss of customers that often come with missed payments, late fees, and service interruptions.
As another example of the utility of this system, commercial accounts payable and receivable managers are planning to use the extensive, tightly integrated data delivery capabilities of faster payment formats to streamline back-office processes. Combined with immediate payment confirmation, these improvements promise fewer exceptions and more predictable cash flow.
RTP has been designed from the ground up to be fast and safe, with extensive value-added functionality built in.
Perhaps the most exciting ideas are specialized applications that target narrow, industry-specific needs. Financial institutions and their customers are considering the use of faster payments for route delivery collections by food services suppliers, medical payments to doctors, royalty payments to developers and musicians, compensation for travel disruptions, and payments to ride-share drivers. All of these applications benefit from the speed, certainty, and data-carrying capabilities of faster payments.
The many facets of faster payments are illustrated by essays from various participants in the payment ecosystem in this issue of Banking Perspectives:
- Chuck Ellert of Verizon explains how companies expect faster payments to provide a better experience for their customers while streamlining operations and reducing costs.
- Jim Reuter of First Bank and Christina Tetreault of Consumers Union describe how faster payments could make everyday transactions as intuitive as making a phone call, while alleviating the financial anxiety that many consumers face.
- Tony Brady of BNY Mellon points out the opportunity for banks to provide an array of new services based on faster payments.
- In his essay, Thomas Rea of U.S. Bank outlines the challenges that must be overcome to make faster payments a reality, highlighting the need for industry-wide collaboration and a fundamental change of mindset to meet the 2020 goal.
A Bold but Achievable Goal
If we were just starting today, I would say that delivering a faster payments platform by 2020 was an unrealistic dream. Fortunately, The Clearing House and our member banks have been working on it since 2014, and TCH banks are collectively investing more than $1 billion to bring RTP to market. Other banks and financial technology providers also are investing heavily to get ready for faster payments. Zelle, a groundbreaking payment service that makes it easy to send immediate payments directly to and from bank accounts, already is thriving and has support from the banking industry. In addition to financial institutions, leading technology firms are investing in the infrastructure, software, and services needed to implement faster payments.
Customers are getting ready, too. Major national billers, insurance companies, commercial suppliers, and medical plans are gearing up for faster payments. Forward-thinking small to midsized firms are also talking with their banks about creative ways to improve cash flow, reduce back-office costs, and improve their customers’ experience.
I am confident that the industry is up to the challenge of providing every American with faster payments by 2020. It won’t be easy, and this will take a concerted effort by financial institutions of all types and providers of financial technology. Achieving ubiquity also will require the support of financial regulators as well as the creativity of the providers of payment products and services. Most of all, it will take commitment by financial services providers and the creativity of customers to find innovative ways to use this transformative technology. Ultimately, though, we at The Clearing House are highly optimistic about this system and its ability to deliver a truly modern payments system that meets the needs of 21st century lives.
About the Author:
Jim Aramanda is the President and Chief Executive Officer of The Clearing House Association and Payments Company. He oversees the nation’s oldest bank association and largest private-sector payment system infrastructure for clearing and settling U.S. Dollar payments.
