As the U.S. gradually shifts to faster payments, banks will soon learn what kind of price the market will bear for consumers to send money in real time.
Support for real-time payments means major technology upgrades for most banks. BBVA Compass, for instance, spent $362 million on a new core banking system that can process transactions immediately. Some might argue that such tech overhauls are overdue and necessary. But it is a large outlay of money and bank management and investors will want to see a return on that investment.
Consumers, however, are not used to paying to send money – at least not in the contemporary context of everyday, person-to-person transfers on mobile apps.
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“Venmo transactions cost nothing, unless the user funds them with high-octane credit cards, so most informal person-to-person payments will be hard to charge much for,” said Steve Mott, CEO of BetterBuyDesign, a payment system consulting firm in Stamford, Conn.
The question will become more and more pressing as the Federal Reserve pushes the industry to speed up the clearing and settlement of payments over the next decade or so.
Testing the Waters
A real-time person-to-person payments service launched last week by U.S. Bank and Bank of America with clearXchange will service as a litmus test for whether, and how much, consumers are willing to pay for quick money transfers.
clearXchange is a digital payments network that was bought in October by Early Warning, a bank-owned risk management solutions provider. Customers at both banks are now able to send real-time P2P payments to customers at either bank, using email addresses or phone numbers. Use cases could include quickly splitting a dinner tab with friends, or sending cash as a birthday gift to someone at the last minute.
“We live in a real-time world today, so our consumers are expecting it,” said Gareth Gaston, executive vice president of omnichannel at U.S. Bank. “The general consumer expectation is that we live in a real-time, instant world, so we see that being the norm.”
In this case, the participating banks don’t have to change their settlement processes to offer real-time payments. The sending bank sends a real-time message through the clearXchange network to the receiving bank, which agrees to instantly post the funds. Once the money is in the receiving customer’s account, she can withdraw it from an ATM or spend it on her debit card.
“If I’m at Bank of America and you’re at U.S. Bank, then Bank of America debits my account for the monies I’m sending you, and I’ll see my reduced availability immediately,” said Lou Anne Alexander, senior vice president at Early Warning. “They send the message through our network to U.S. Bank, U.S. Bank will alert you that those monies are being sent and also memo-credit those funds to your account, so that you have instant availability to them.” Behind the scenes, the banks settle up according to their normal schedule, she said.
Real-time settlement may never even be needed, Alexander suggested. “I think a lot of folks are questioning the value of going to real-time settlement, which is a major investment – multiple billions of dollars across the industry,” she said. “A lot of the issues consumers are having today can be solved with funds availability rather than instant settlement.”
To post the real-time payments, the banks have to develop an enrollment process, a front-end application, and the ability to handle fraud, risk, anti-money-laundering compliance and customer service that goes around them. (In the future, Early Warning plans to provide all this as a single solution.)
At U.S. Bank, which is based in Minneapolis and has $422 billion in assets, integrating with the clearXchange network was a “reasonable amount of work,” Gaston said. “Our goal is that this will be the easy solution for the whole industry to implement.”
Through clearXchange, U.S. Bank makes standard payments (which can take a few business days to clear) free, and charges $2.95 for next-day payments and $6.95 for real-time payments. Bank of America, which did not respond to requests for an interview, does not charge for the payments.
To the industry's recent entrants, a $6.95 fee sounds steep.
“For a consumer-to-consumer transaction that might be $60, that's nuts,” said Ben Milne, founder and CEO of Dwolla, a payments startup. “There are enough free tools at this point that people can get a better deal somewhere else. Charging that much on a small-volume consumer transaction is just opening yourself for your customer to look somewhere else.”
As soon as a mass of people start using real-time, person-to-person payments, Milne said, “some free provider is going to pop up, whether that’s a private provider like PayPal or Dwolla, or a bank provider like BBVA or Chase.”
Gaston pointed out that U.S. Bank has invested heavily in the infrastructure to create real-time person-to-person payments and is first to market. If the market won’t accept $6.95 for real-time transactions, the bank will adjust its pricing, he said.
“It’s always difficult to price a product when you’re first to market,” he said. “We’ll continue to watch the market as it matures and we’ll make different decisions if different decisions need to be made. We listen to consumer feedback every day. We work for our investors as well.”
The Case for Fees
One case in which consumers might be willing to pay for real-time payments is when they’re in a tight spot.
“If there is a genuine need for getting funds to someone absolutely right there and then, then maybe $6.95 is worth it,” said Nick Holland, an independent consultant. “For most other consumer requirements for money transfer, same day or even next day is probably OK.”
Another use case is business payments, which tend to be larger and where fees are less objectionable.
“Small-business payments are formal and important, so they might see some value in it to pay a fee,” Mott said. “A lot of smaller businesses don't use low-cost [automated clearing house payments] yet, but that might change with faster payments.”
Even Milne, whose company has a partnership with the U.S. arm of the Spanish banking giant BBVA, acknowledges that financial institutions need to cover their costs.
“I’ve spent a lot of time talking to financial institutions about, if they integrate a real-time solution, how do they make their money back?” he said. “One of the things I’ve found resonates really well is talking to them about businesses which, if they need cash faster, there’s some cost for them to get that faster. What is the cost of that credit for a few days to that business?”
Gaston didn’t rule out a business version of the clearXchange product at U.S. Bank.
“I think P2P payments is the first mechanism for real-time payments, and I think there are many applications for them, such as small disbursements from businesses to consumers. You can imagine all the other mechanisms you could use it for once you’ve got a mechanism in place – faster check clearing for example.”
U.S. Bank and Bank of America are moving the ball forward in faster payments and, as Gaston noted, providing the kind of Internet-grade service consumers increasingly expect. And where they are charging fees, they are explicitly stated up front and consumers have a choice – faster access will cost more. This seems a more reasonable and clear way to charge for services than, say, overdraft fees, which tend to creep up on customers unexpectedly.
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