Financial institutions are “feeling the need, the need for speed.” With the 30th anniversary of the movie “Top Gun” in 2016, this well-known quote also applies to the current global race for constant availability of real-time payments.
Opt-in participation for real-time payment delivery is the next phase of the faster-payments movement. This phase is being driven by initiatives from The Clearing House, such as secure tokenization of payment requests and enablement of real-time payments functionality, and its partnership with VocaLink for the deployment of a real-time payments platform.
Even the Federal Reserve Bank is anticipating the need to join the movement: On October 3, 2018, the Federal Reserve Board invited public comment on actions they could take to support faster payments in the U.S. The potential actions, which would facilitate real-time interbank settlement of faster payments, build on collaborative work with the payment industry through the Federal Reserve System’s Strategies for Improving the U.S. Payment System (SIPS) initiative.
Presenting the use cases
As the market migrates to real time, business cases for faster payments include:
A small business that needs to remit payment urgently in order to secure goods;
A credit union dispersing funds to a car dealership on behalf of a member;
An insurance company immediately remitting funds for a claim to the policy holder;
Money movement between consumers or to micro-businesses; and
A government agency paying emergency funds to those impacted by natural disasters.
Fortunately, all these use cases demonstrate benefits for businesses and consumers.
Impacting smaller financial institutions
Once real-time payments are enabled within the U.S., the projected volume (as of 2016) is expected to reach 3-4 billion transactions annually with up to 35 percent of these transactions generated by smaller financial institutions (i.e. credit unions and community banks).
Standard business cases for credit unions from the same-day payments perspective involve expedited bill payments, enhanced timing for the delivery of payroll, and expedited funding for new accounts or loans.
As mandatory Same Day ACH is now in place and “the need for speed” continues to drive the faster payments movement forward, credit unions are evaluating the operational (core processor testing/certification efforts) and financial impacts (product design and pricing considerations) of expedited payment delivery. For example:
What will be the unique product packaging characteristics and transactional pricing considerations credit unions will review for offering expedited payment delivery?
Examples include standard delivery of a payment included, Same Day ACH for consumers at a slight premium, and real-time (if the CU opts in) at a higher premium.
Further, will the credit union embed a series of minimum balance considerations or other factors to potentially offset those fees?
What service will credit unions focus on initially to position real-time payments (i.e. person-to-person, or P2P)? In addition, how will enabling faster payments technology help credit unions compete with the fintech community and secure a primary financial institution relationship with members?
How are credit unions preparing for the potential transition of interchange/debit card-based transactions (that represent 24 percent or more of their net interest income) to a future payment platform that will leverage fee-based, real-time, good funds payment processes?
In other words, what pricing strategies are credit unions beginning to evaluate for the eventual migration away from debit card payments and interchange revenue?
What will credit unions’ liquidity and settlement demands be as payment speed increases, and the evolution to a 24/7 environment for payment processing takes place?
Obviously, liquidity needs are a key part of credit unions’ operations, and immediate access to liquidity becomes increasingly important as payment speeds evolve.
What is the impact to the suite of mobile “experiences” credit unions need to enable to accommodate faster and real-time payment functionality?
For example, a key theme during the NACHA Payments 2016 event was the concept of evaluating customer experiences under the assumption that the transaction revenue was zero. What are the unique experiences credit unions will deploy, and how will data monetization become the component they will use to feed the cross-selling aspect/deepening of relationships?
As the race for faster payments continues around the world, evaluating these operational and financial considerations of accelerated payment delivery are crucial for credit unions to make sure they’re not left behind. Perhaps once thought of as just a trend, faster payments are clearly here to stay. Now is the time for your financial institution to make sure you’re prepared for your members’ ongoing, and growing, need for speed.