- Real-time payments are starting to take off in the US as the coronavirus pandemic pushes consumers and businesses to lean more into digital.
- Currently in the US, more than 130 financial institutions are implementing real-time payments, a five-fold increase since September 2019, according to FIS’ 2020 Flavors of Fast report.
- For businesses, real-time payments can mean big savings in overhead costs.
- Consumers are starting to adopt use cases like peer-to-peer transfers and instant cash outs on payroll.
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The coronavirus pandemic has played a key factor in forcing payments to move online. And as more transactions happen digitally, more focus is given to speed.
Real-time payments have exploded during the pandemic, according to FIS’ 2020 Flavors of Fast report. In markets like Australia, India, and the Philippines, real-time payment volumes more than doubled this year.
India processes the most real-time payments globally. But that’s largely due to the fact that the country doesn’t have a massive legacy payments infrastructure like the US.
In the US, changes to the back-end tech takes time and buy-in from countless parties. But that hasn’t stopped faster payments from catching on. Currently in the US, more than 130 financial institutions are implementing real-time payments, a five-fold increase since September 2019, according to the report.
“There is massive infrastructure in the US in both financial institutions and in corporations,” said Laura Sullivan, a product manager at FIS responsible for ACH, wire, and real-time payments in North America. “All of that existing infrastructure was geared in, and frankly worked fairly well.”
Shifting away from a system that gets the job done is a tall ask in an industry as large as payments.
“All of that investment in monolithic, older technology systems are very hard to replace,” Sullivan said. “Banks were a little reluctant. I think there was certainly some fear of cannibalization of their existing payment streams.”
But FIS, a financial technology giant and one of the key players in the payments space, believes there will always be use cases for different payment streams. Adoption of real-time payments makes sense in certain areas.
In the US, there are three groups leading the way toward real-time payments.
The Clearing House, a funds-transfer and settlement system launched in 2017 and used by the biggest banks in the US, is one. There’s also Zelle, a peer-to-peer service offered by the big banks themselves. And the Federal Reserve is currently developing its FedNow payments infrastructure, slated to launch in 2023 or 2024.
Here are a few of the ways real-time payments are taking off in the US.
For businesses, real-time payments can be a CFO’s dream
Payments have historically been a pain point for businesses large and small. Every business manages their payables and receivables differently, and that often leads to loads of manual work when it comes time to reconcile the books.
What’s more, the delay for a supplier to get paid or the cash held back to meet unpredictable end-of-month expenses means businesses don’t often run as lean as they could.
“With things like bill pay, they are really going to start to see the value of [real-time] payments,” Sullivan said.
Businesses often manage their expenses in monthly cycles. For a particular vendor, companies will hold back cash throughout the month and then lump several, if not hundreds, of invoices together and make one payment at the end of the month.
And while that’s easier for the payer, it can make reconciliation a bit of a nightmare for those receiving payments. It often requires manual intervention to make sure the payment is accurate.
With real-time payments, companies could more easily pay invoices on a regular basis, reducing the friction that comes each month-end.
Small businesses, too, could benefit. Getting paid more regularly for services rendered means a vendor can reinvest that income more efficiently.
“If I can pay [invoices] on a more real-time basis, I’m not losing use of my funds for any longer than I need to,” Sullivan said, “but because I’m paying [invoices] individually, I lose all of that invoice reconciliation overhead, which, in a large corporate, is a significant amount of money.”
Consumers will see benefits of real-time payments through P2P and payroll
Real-time payments infrastructure isn’t a top concern for consumers, but the benefits of instant payments are already being felt in some areas.
Peer-to-peer payments through platforms like Zelle are growing in popularity. Venmo offers users the ability to move money from Venmo to their bank accounts instantly, too (albeit for a 1% fee capped at $10).
Another leading use case is payroll. In the gig economy, platforms like Lyft, Uber, and Instacart offer instant payouts to their workers.
“As we’re seeing in the Uber and Lyft cases, their employees are demanding to be paid real-time, and we expect to see that trend continue even in some more traditional, non-gig economy payroll use cases,” Sullivan said.
And it’s not just the gig economy.
Fintechs like Earnin and DailyPay have gained traction offering employees access to their earned wages between paychecks. And payroll companies like Gusto, as well as Square, now offer earned wage access to their employer customers.
Many of these platforms charge fees for instant transfers, but as real-time payments grow in popularity, free instant transfers could become the norm.
“For the most part, ACH has become a standard for payroll as customers have moved from being paid by check to getting paid by direct deposit,” James Colassano, SVP of real-time payments product development and strategy at The Clearing House said in the report.
“We didn’t think that this was an area in the near term that a lot of organizations and companies would see as a place to start with real-time payments, but we’ve seen a lot of uptick in the short term,” he added.