Retailers are often considered to be key beneficiaries of faster payments, but they may be among the last to reap its benefits in the U.S.
The latest advancements in real-time payments are focused on banks' use cases. The Federal Reserve is advancing its real-time settlement service through testing with banks, and
These tests emphasize a focus on P2P or B2B payments, which are essentially interactions between a customer and a bank.
Countries such as
"Real-time payments are not here yet for merchants, but that focus is changing," Drechny said. "Merchants have always envisioned faster payments as a more direct access [to funds] that could be more secure and efficient for them with a push-payment aspect."
In the U.S.,
The Fed recently clarified its timetable for
While its initial focus might be on B2B payments and further developing cross-border capabilities, FedNow is also likely to become a means for speeding the delivery of stimulus check payments to consumers. This government-to-consumer scenario could set the stage for faster consumer-to-business payments.
"The Fed would have the banking credentials and connections to the bank, and they could create a QR code that becomes capable for merchants to scan and accept," Drechny said. "Then you just really have to build the instant settlement aspect for the merchants at that point in order to enable it."
The card network road map
Card networks have made investments and paid a lot of attention to B2B commercial payments because there is a significant desire among companies to move money and data at the same time — a key benefit of real-time rails.
Real-time payments are essentially "the latest and greatest version" of the account-to-account process, said James Anderson, executive vice president of global commercial and B2B solutions at Mastercard.
When looking at the consumer space, card networks generally leaned toward the use cases of paying bills or making other recurring payments. These are more straightforward use cases than those for online or in-store commerce, but they also establish a necessary foundation.
"Consumers used to write checks for all of that, but now have moved to online banking or directly to the biller's website," Anderson said. "So there is a place for real-time payments to be added in those cases."
Real-time payments at the regular retail point of sale would benefit a different set of circumstances, such as consumers using credit cards to manage rewards and cash flow. The history of credit cards and the re-emergence of the buy now/pay later concept demonstrates that consumers like methods that don't immediately drain significant funds from their accounts.
"A lot of individuals in the payments space say the big thing for real time is merchant payments, and the main reason for real-time to exist," said Sarah Grotta, director of debit card advisory for Boston-based Mercator Advisory Group. "But there are some stumbling blocks before we get there."
The industry can take a cue from the COVID-19 pandemic in seeing how consumers will change their habits when they have to, and it has already seen some real-time processes at work with decoupled and private-label debit networks, Grotta noted.
"When you think about the Target Red debit card or what happened in the fuel pump space with the Cumberland Farms app, you are paying at the pump and the transaction hits your checking account and moves without going through the card network," she said.
Those scenarios could come into play in the future in linking with a real-time payments network, as opposed to going through the Automated Clearing House, Grotta said.
The infrastructure for what would essentially be a decoupled debit system on steroids is already set up and operating. It also brings loyalty programs and other incentives into the process.
For the card networks, the attention can't be solely on the technology that makes real-time rails operate and how to plug into those and make them sing in a retail setting. It takes some initial steps first, and those would be improving customer experience with new technology to the point where it would be easier to convert to real-time and get consumer adoption at the same time.
Mastercard's Vocalink Faster Payments network in the U.K. is an example of a real-time engine, and the card brand also operates
There are more opportunities to enable real-time payments for consumers, and this will drive the technology's use for merchants as well, according to Mastercard's Anderson.
"We at the card networks have been pretty good at advancing consumers' gravitation toward cards by embedding cards digitally into Apple Pay or Google Pay and others, or working with a company like PayPal," Anderson said. "And we have embedded a lot of security into that, including the rights to chargebacks, which consumers like."
But the nature of the point of sale is changing as well. If diners are comfortable scanning a QR code to be able to view a menu because of COVID, it likely won't be long before consumers are just as comfortable making a faster payment in the same manner, Anderson added.
Banks and tech come first
The growing collaboration between banks and tech companies can be seen in developments such as Visa's AI-based faster payment services and last year's launch of the
Merchants are absent from that equation.
"Merchants will be a very important part of real time payments, but the on-ramp to that freeway will not be constructed nor facilitated by banks," said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.
"The banks are not motivated to do it, because their systems are still batch payments and real-time is a fundamental processing change," Crone said. "They also have an existing infrastructure that compensates them well for the connections they already have through Visa, Mastercard and even to a certain extent, with same-day ACH."
This creates situations like
However, even if CVS wanted the availability of funds for every transaction, its systems — like those of many merchants — could not handle such a process because they are set up for batch payments through the banks, acquirers and payment gateways they work with, Crone noted.
Batch payments are essentially a remnant of initial legacy systems developed more than 50 years ago when the payments industry was one of the first to computerize its operations. They were developed to operate smoothly with accounting systems that could only handle a certain number of payments at a time.
"The fintechs will have to lead the way on real-time payments for merchants," Crone said. "If they wanted to, a Square or other provider could factor in real-time payments because they have the consumer data and know the transaction history through using real-time AI."
Taking control
Merchants may not be the driving force behind real-time payments, but they don't want to be completely absent from the discussion, the MAG's Drechny said. "It's really becoming a matter of better control for the retailer."
Retailers would benefit from real-time payments in scenarios that wouldn't necessarily affect P2P or B2B payments.
For example, a major retailer facing the Monday after Thanksgiving weekend could be waiting on settlements "in the billions of dollars," said Drechny, who previously worked as an executive for Walmart. "All of that systematic risk is sitting out there and the retailer is hoping that the big deposits show up on Monday, and those would probably have to be cut up in segments because their system is not set to accept all of that at once."
A problem like that could be avoided if a retailer had at least some of the consumer payments come in and settle in real-time during the course of each day, Drechny added.
The push for real-time payments in B2B and cross-border sectors is important for the U.S. payments industry, but having the B2B capabilities is likely not a top priority for many retail merchants.
"Merchants can negotiate when they have to pay vendors, but they can't do that regarding when they get paid by customers," Drechny said. "Real-time payments for merchants would get rid of all of that" uncertainty.
Consumer demand
In the past, the argument could be made that consumers were too entrenched in older payment habits to consider a real-time alternative.
The evolution of Venmo and Zelle P2P services — and consumers' desire to engage in more contactless transactions at the point of sale during the pandemic — created a new opportunity for faster payments, said Jodie Kelley, CEO of the Electronic Transactions Association, a trade association that helps companies involved in electronic transaction processing stay abreast of industry trends.
For example, Zelle's transaction volume during 2020 reflected an increase in consumer
With that sort of momentum, Zelle reported a 2020 year-end total of $307 billion sent through 1.2 billion transactions.
PayPal reported Venmo customer accounts were up 32% in 2020, ending just shy of 70 million active accounts. The company expects Venmo revenue to reach $900 million in 2021.
These account-to-account transactions are growing and provide examples of merchants gaining the benefit of faster payments. It fuels speculation about what could occur on a large scale. However, current P2P systems are small at every level — in the number of consumers and merchants using them and the value of the transactions.
Still, consumer habits are changing and that's a key factor moving forward.
"One interesting thing is the way the pandemic has changed the industry and how people engage," Kelley said. "It has pushed people to try things they might not have otherwise tried, including thinking more about contactless payments."
With mobile and digital engagement growing, many technology providers are trying to make payments to retailers mirror what is happening in the B2B services field, where faster payments are more prevalent.
"The kinds of solutions some of our ETA member companies are providing to retail merchants, where a single solution will help you manage your inventory and your payments, these are some of the same things that are happening in the B2B space," Kelley said.
The payments industry is already innovative, but once it gets into a new innovation cycle similar to what the pandemic brought on, "it just zips ahead" to meet the demands of the day, Kelley added.
But at what cost?
Merchants have long battled with payment networks over costs such as
"When I was working on the Federal Reserve's faster payments initiative, it was interesting to hear the issuer concerns in the marketplace around the fees they would pay in order for networks to be enabled," Drechny said. "Fees were ever increasing and that was a concern. They feared paying more for something on the network side than what they were receiving in interchange, so to them it was something that had to be looked at."
But with the pandemic creating more card-not-present, and thus more expensive, transactions for merchants, the opposite may be true; real-time payments may become the cheaper option overall, even if the pricing doesn't undercut card-present transactions.
Many merchants don't know what they can afford and how mandates or regulations would affect their bottom lines.
"They don't have the capabilities to develop a lot of this technology on their own, so they are trying to figure out a way to stay relevant with customers with new technology, without having to do it themselves," Drechny said.
The solution to that problem is becoming more apparent as payments technology reaches new heights.
"They have to work with the fintechs on this," Drechny said.
