Ready or Not, Real-Time Payments Are Coming

After several years of setbacks, the idea of faster payments in the United States finally has genuine momentum.

The Federal Reserve banks plan to release a paper before yearend that lays out a multiyear road map for achieving a virtually real-time system. And as early as this fall, the bank industry group that runs the automated clearinghouse network, Nacha, will seek comment on its proposal to move toward same-day electronic payments.

Still, some observers think that the U.S. isn't moving fast enough, or contemplating big enough changes to a creaky system in which as many as five days may pass before a payment gets completed. Countries on six continents have switched to nearly real-time payments, or are in the process of doing so.

Gareth Lodge, a London-based analyst at Celent, argues that faster payments are picking up steam globally, and that U.S. banks should be planning today for their arrival, despite lingering questions about the scope of the Fed's power to mandate change.

"Although the Fed may not have the regulatory powers to force it to happen, given the sheer scale of its effort relating to this, it would be strange to assume that at least something isn't going to happen," he wrote in a report published last month.

In a recent interview, Lodge spoke about some bankers' fear that real-time payments will cannibalize their existing revenue streams, the Fed's 10-year timeline for improvements and how the Fed might accelerate the adoption of real-time payments in the U.S. What follows is an edited and condensed transcript of the interview.

You point out that there are some 35 real-time payment systems globally. Where would you say we are, globally, in the adoption curve?

We identified, we think, 115 countries that in theory could adopt such a system. I think we'll hit over 50% in the next five to seven years, if not sooner.

What do you think of the Fed's 10-year timeline for a nearly real-time system? Is that aggressive enough?

If the U.S. hasn't got a real-time system in the next 10 years, I think the Fed will feel as if it's failed.

The conversations I'm having fall into two camps. Camp one says, "Yeah, we've got to do something, we know we've got to do something, it's just [a question of] what." The second camp says, "Yeah, we know we've got to do something. We just don't know quite what, nor how to pay for it." And so they want to put it off.

Ten years? It depends on how big and how complex they want to make the project, and how they approach it. Australia is trying to do it start-to-finish within three years. Poland did it within that kind of time frame. Sweden did it in that kind of time frame. However, [those are] slightly smaller markets. And they're also not starting from as far back as the U.S.

One of the myths you sought to dispel with this paper is that faster payments will cannibalize wire transfer revenues.

When you actually go and talk to the wire people in a bank, they don't think they're going to lose revenue. They think it's going to be the cards people. When you go to the cards people, they don't think they're going to lose revenue. They think it's the checks. When you go to checks people, they think it's cash. And so on.

The reality is all the payment types potentially could lose some volume, and probably will lose a small amount. Countries where the banks have embraced it, and have actively managed the real-time payment system alongside other payment systems, have generally benefited. Those [countries that] have taken a defensive mechanism, and [whose real-time systems have] to compete against other payment systems, have typically not done so well.

The U.S. has some proprietary real-time systems today, but nothing that's ubiquitous throughout the banking system, like the ACH network is. How important is ubiquity?

Ultimately, I think it has to be. It has to reach the majority of bank account holders. Otherwise alternative payment methods, such as a check or ACH, are going to have an advantage.

Does it need to be ubiquitous - everybody reachable - on day one? I think that's what you'd ideally shoot for. But in reality, I think if you can get the big banks on board, and then the smaller banks come on board within 18 months, two years, then that is less of an issue.

You point out that Mexico required government payments to be conducted on its real-time system. Could that serve as a model for the Fed in terms of how to get there from here?

I have wondered exactly that.

One of the other things that I look at is e-invoicing — so the whole process of procurement is done electronically. And it's noticeable that there are a couple of big U.S. [government agencies] that have said from some point onwards, they will only deal with organizations using e-invoicing.

It would seem a natural next step, when they're doing the final payment, to stop sending checks, and start using more ACH, or a real-time system. So I think you could start building in some of these things together into an overall program. I'm not sure it's actually going to happen, though. But that is certainly one way that the Fed could drive it.

You quoted someone saying that Nacha could have its "Kodak Moment" — in reference to Kodak quickly becoming obsolete. Nacha has a proposal to move to same-day payments. Do you think that's too incremental an approach?

I have an awful lot of respect for Nacha, and there was no implied criticism for them. They're kind of stuck between a rock and a hard place. I'm sure if they had a magic wand, they would go for a real-time system tomorrow as well. The challenge is how to get there. I think what they're trying to do is put a compromise solution together.