Instant Payments: Sit Back at Your Own Risk

July marks the first anniversary of the launch of FedNow, the Federal Reserve’s entry into the U.S. instant payments ecosystem. Depending on one’s perspective, the past year has been either action-packed or a slow, steady climb. The Fed reports that it has enabled 734 financial institutions to participate in its network, either directly or through an array of industry partners.

By comparison, The Clearing House’s instant-payments offering, RTP, went live in November 2017. Over the past six-plus years, RTP has processed over 500 million transactions and continues to grow more than 40% annually, with daily volumes approaching one million payments. Although RTP trails FedNow in terms of total financial institutions — The Clearing House reports over 600 active financial institutions — its traction with the nation’s largest banks provides a sizable aggregate volume advantage.

Despite combined participation nearing 1,000 financial institutions and daily instant-payment volume exceeding that of wire transfers at leading banks, adoption is still in its early stages. Currently, 90% of financial institutions have yet to act, and several early adopters remain in receive-only mode, limiting the benefits of a two-sided network.

It may be tempting for banks to sit back and take a wait-and-see approach; however, such inaction could prove a costly mistake.

There are strong indications that instant payments will reshape the U.S. payments ecosystem in the near future. The Clearing House touts that RTP reaches 65% of U.S. demand deposit accounts and geographical concentrations lead to some originators seeing success rates above 80%. Combined with FedNow’s focus on enabling the long tail of community banks and credit unions, and processors addressing network interoperability concerns, the point of near ubiquity needed for instant payments to scale is rapidly approaching.

Waiting on the sidelines threatens banks’ consumer and commercial relationships by leaving room for enabled competitors to satisfy their clients’ instant-payment needs. Last December, Navy Federal Credit Union received $2.7 million of instant-payment volume on its first live day. This works out to just under $1 billion of deposits over a year. Where were these deposits going before instant payments went live? More importantly, where are the potential deposits going for banks waiting on the sidelines today?

Looking beyond the potential to drive deposits, instant payments can also be a source of commercial bank income for originating banks. A lack of originators in the market enables banks to develop origination capabilities and gain footholds in new commercial client relationships, opening opportunities across the entire business relationship, such as with lending and broader treasury management. Banks and credit unions offering instant-payment origination for their business can build a strongly defensible position.

On the consumer side, the prospect of the Treasury Department leveraging FedNow to speed up disbursements is a potential catalyst for mainstream adoption. Two or three years ago, nobody would have predicted that digital wallet unloads, same-day payroll and gig economy payments would be the use cases driving instant-payment growth among consumers, and very few saw those use cases going from proof-of-concept to industry table stakes in less than 18 months. With new instant-payment use cases being developed daily and rolled out rapidly, there is no window for fast following.

There are several areas where financial institutions can use instant payments to introduce new products or improve existing ones. Early adopters use instant payments to offer immediate, around-the-clock loan funding, driving differentiation with their dealer loan products. Others leverage real-time reconciliation and detailed transaction data to provide new integrated payables and receivables management solutions.

The appeal of instant payments is here to stay. The business case to originate and receive instant payments exists already, driven by the generation of deposits, fee income, customer acquisition and retention and the enhancement of existing services such as loan disbursements. Financial institutions sitting on the sidelines are missing an opportunity to support their customers and potentially risking those relationships. Taking a wait-and-see approach is no longer a prudent path forward.