By Patti Murphy
Instant payments are palpable. The Clearing House launched its real-time, instant payments network, RTP, five years ago. This year the Federal Reserve is set to launch a competing network, FedNow, that will be able to support near instantaneous payments 24/7/365.
TCH and the Fed have long been competitors in the payments space. Both support networks that provide clearing and settlement services for ACH, check and wire transfer payments. Here's the difference: TCH is owned and operated by a consortium of banks; the Fed is a government entity required by law to provide payment services to all federally insured financial institutions, at market prices.
That means when FedNow launches—scheduled to occur between May and July—nearly 11,000 federally insured financial institutions will have access to instant payments capabilities, with transactions settled in real-time against each FI's master account at its local Federal Reserve Bank.
"The benefits of instant payments are increasingly important to consumers and businesses, and the ability to provide this service will be critical for financial institutions to remain competitive," said Ken Montgomery, the Federal Reserve Bank of Boston first vice president who has been overseeing the FedNow program. He added that "financial institutions will be able to use the FedNow service as a springboard to provide innovative solutions to their customers."
Recently, while researching a feature article about the real time payments market for The Green Sheet (see issue 22:12:02), I posed several questions to the Fed. The responses did not come in time to be included in that article, but I thought several warranted sharing.
First, as for timing, FedNow is slated to become available to all FIs by mid-year 2023, "specifically targeting production rollout of the service in the May to July timeframe," the Fed said in an email.
When asked how long it will take for all financial institutions to connect to FedNow, the Fed said, "While the Federal Reserve has not released anticipated adoption volume numbers, the FedNow Service has been developed to meet industry and market demand for instant payments and will be scalable to support growth over time. We have strong adoption targets at launch, and are actively working with financial institutions, service providers and others in the industry to ensure industry readiness and drive volume on the network."
Initially, the Fed expects account-to-account transfers and consumer-to-business bill payments to be the most common use cases for FedNow. That's where RTP is seeing the most activity, notably transfers initiated using Venmo and Zelle, said Rusiru Gunasena, TCH senior vice president.
The Fed did not rule out other types of consumer-to-business applications. It developed a request for payment function that could be used to support instant bill payments. "Because the service is designed to be flexible and support industry innovation, it could lead to additional use cases in the merchant space in the future," the Fed wrote. For example, the U.S. Faster Payments Council, a public-private sector group that has been guiding development of FedNow, created a QR code interface "for faster and instant payment transactions."
Sionic, an Atlanta-based payments company has already done this—developing a mobile payment app that uses QR codes and existing POS devices to support bank-to-bank payments, processed over RTP. It has plans to pilot with U.S. Bank in the first quarter of 2023.
Some worry that real-time payments will cannibalize card payments. Those concerns were heightened by news reports that JPMorgan Chase was all-in on instant payments and scrapping its card business. The bank ranks as the largest merchant acquirer in the United States, processing 31 billion card payments totaling $1.7 trillion in 2021.
A JPMorgan Chase spokesman refuted suggestions the bank's merchant acquiring business was on the block, noting that the bank remains committed to card payments. The planned pay-by-bank service would be offered through the wholesale banking division and marketed as a bill-payment solution for treasury management customers, he stated. Of course, this could eat into debit card payments, as well ACH debit activity.
But here's the thing: JPMorgan Chase is a mega-bank, and as is the case in many large enterprises, projects get mired in bureaucracy. One financial technology executive I spoke with recounted working with Chase to launch an innovative payment solution that never came to fruition because of internal struggles. "JPMorgan Chase is a highly conflicted bank," said the executive, who requested anonymity.
I've seen this play out in the past. Back in the 1980s, executives on the wholesale side of what was then Chase Manhattan Bank developed a debit card program that cleared payments through the ACH instead of the ATM or credit card networks. They convinced what was then Mobile Oil to add the functionality to its branded credit cards. I had one of those Mobile cards, and loved using the debit option; with payments clearing through the ACH I benefited from at least two days of float.
The experiment was short-lived, however. I was told at the time that the retail side of the bank lobbied successfully to 86 the project, fearing it would eat into the bank's fledgling POS debit card program.
According to some reports, JPMorgan Chase's CEO Jamie Dimon told executives on the wholesale and retail sides of the bank to play nice and get the new solution ready. I'm not convinced they can. The disconnect between the wholesale and retail sides of banks is undeniable, especially in large money center banks.
If I've learned one thing in my tenure as payments maven of the fourth estate, it's that old payment methods never die; they just make way for newer models. Instant payments will coexist with credit cards and other entrenched payment methods. Just as it took years for cards to displace cash and check payments, never quite eliminating either, so it will be with instant payments and cards.
Because it is going to take time for instant payments to displace card payments, banks and payments companies need to strategize now about how to use this window of opportunity to strengthen their relationships with merchants. They should begin thinking of ways to use real-time payments to their advantage, for example for merchant payouts, and longer-term new use cases for networks like RTP and FedNow.
Patti Murphy is senior editor at the Green Sheet and self-described payments maven of the fourth estate. She also co-hosts the Merchant Sales Podcast.
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