By Cheryl Fitzgarrald
BHMI The United States may lead the world in banking stability, but it needs to catch up in payments innovation. While countries in Europe and Asia have moved forward in the adoption of real-time payment systems, the United States still primarily relies on cards and the ACH.
However, that trend is quickly changing. Growing consumer demand and the rollout of FedNow are expected to drive rapid adoption of real-time payments in the coming years. As a result, many U.S. financial institutions and payment processors are scrambling to catch up and prepare for real-time payments.
Real-time payments are any form of instant payment that can be initiated, cleared and settled in seconds, with 24/7/365 availability. Global consumers made more than $100 billion in real-time payments in 2022. And Grand View Research forecasts that realtime digitization and consumer demand will increase growth of real-time payments by 35.5 percent annually between 2023 and 2030.
Some countries leading the charge in the real-time payments space include India, Brazil, China, Thailand and South Korea. India’s Unified Payments Interface (UPI) supported more than $1.5 trillion and 74 billion transactions in 2022, up from $872 billion in 2021 (see tinyurl.com/bdfscyvf). McKinsey & Co. even reported that real-time payments are growing rapidly in Africa, driven by a surge in digitization during the pandemic.
In many countries, government incentives and mandates are furthering adoption. For example, in December 2019, Japan announced the Cashless Japan initiative to double the number of digital transactions by 2025. Over the past decade, regulators in the European Union have taken several initiatives to force the adoption of new core systems. The European Commission is now floating proposals that would require banks to handle instant transactions and mandate instant versions of credit transfers without extra costs (see tinyurl.com/269httkm).
Demand for real-time payments is starting to surge in the United States, and in a recent survey by the Federal Reserve, four out of five consumers said they are interested in faster options to pay businesses (see tinyurl.com/3c3zjrej).
Since many U.S. banks and payment processors still rely on core payment processing systems built for checks and cards, they must adopt new systems to meet the rapidly growing demand for faster payments. Part of the problem is most U.S. banks are still tied to clearing house and card systems. Businesses have also been slow to adopt new technologies because, until recently, real-time payments have been more costly than ACH payments. In essence, the United States’ robust banking and payments system has left little incentive to put forth the extra effort and cost to adopt real-time payments. However, innovation and consumer demand for faster payments are rapidly changing that equation, forcing U.S. payment processors to evaluate their core systems and processes.
U.S. businesses and financial institutions must now upgrade back-end systems to ensure they can fully support real-time payments. Many of these systems cannot keep pace with real-time payments because they were designed to handle card-based transactions. While processing card-based payments can typically take hours or even days, real-time payments must be processed within seconds and with 24/7 demands.
Some financial institutions and payment processors have tried to keep pace by continually upgrading their legacy systems with patches and updates. Yet this has left them with siloed infrastructures that can't be integrated, lack visibility and leave gaps in the settlement process. Users complete payments on front-end systems, but they are not settled on the back end, opening the door to fraud and risk.
Banks and payment processors will also need processes and protocols to accommodate real-time payment disputes. As everything happens instantly, processors need faster ways to research transactions to handle chargebacks, returns and fraud. When Australia launched its New Payments Platform in 2018, payment service provider Cuscal faced several challenges in transforming its back office to handle real-time payment disputes. It eventually implemented a modern back-office system that accepts real-time investigation requests and enables clients to meet obligations and respond in real time.
Banks will also need new methods for consumer protection and fraud management. Currently, the RTP system by The Clearing House and the FedNow service by the Federal Reserve enable push payments. When the U.K. launched Faster Payments in 2008, Authorized Push Payments became a fraud vector, leading regulators to start scam reimbursement.
Additionally, U.S. institutions will have to work on productization and third-party integration. In Australia, Zepto helps merchants resolve disputes in real time, while Pix in Brazil offers a standard user experience across all apps.
The coming years will usher in a wave of real-time payment adoption in the United States, offering benefits for both consumers and the financial services industry. A modern software suite not only helps payment processors and banks handle today's disputes but also helps them prepare for future payment methods.
Cheryl Fitzgarrald is a senior program director at BHMI, a leading provider of software solutions focused on the back-office processing of electronic payments. The company is best known as the creator of the Concourse Financial Software Suite, a unique integrated collection of back-office products that allow companies to adapt to the rapidly changing world of payments. For more information, please visit www.bhmi.com/concourse_financial_software_suite/.
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