With the Rise of Faster Payments, FIs Need to Get Better at Money Movement

It's been just over five years since the American financial system joined the real-time payment (RTP) revolution that started in Europe. Mega banks in particular have processed increasingly large volumes of instant payments for personal and business accounts since the Clearing House launched its RTP® in late 2017. With the promise of a second national provider, the Federal Reserve's FedNow Service, coming online this year, faster payments are poised to get another boost. Many account holders now expect to have this option at their fingertips, making it imperative for banks and credit unions of all sizes to add real-time payment products to their menus.

New use cases for consumers and businesses continue to emerge as the industry's real-time payments segment reaches maturity, creating additional revenue opportunities for financial institutions (FIs) that embrace the movement.

In fact, U.S. instant transaction volume is on track for a compound annual growth rate of 37% through 2026, when it is projected to hit 8.9 billion transactions, up from 1.8 billion in 2021, according to ACI's 2022 Prime Time for Real-Time Global Payments Report.

On the consumer side…

Account-to-account transfers are driving real-time payment demand. Instead of using ACH and waiting two business days for a transfer to an external account to go through (or even for an end-of-day batch payment under same-day ACH), account holders now expect to push money out instantly.

How pressing is the need to offer such options? One in five consumers say they have already abandoned a financial transaction or account opening process because it took too long to complete, according to an American Banker survey sponsored by Alacriti.

In one use case example, a consumer is able to complete an auto loan while shopping on the lot over a weekend or holiday even when their FI is closed. Title companies issuing real-time payment requests to replace wires in real-estate closings is another emerging use case with the added benefit of reducing "man-in-the-middle" wire fraud schemes.

On the business side…

The ability to make instant B2B invoice payments, and to issue requests for such payments to their own accounts, illustrates why real-time payments are an increasingly attractive alternative to wires, ACH and even card payments in terms of speed, ease of use and cost. Many businesses now issue instant payments to gig and temporary workers in addition to relying on RTP for everything from insurance payments to customer reimbursements. These use cases also enable businesses to hang onto their cash longer than traditional payment methods that carry higher fees and require more steps to execute.

56% of U.S. companies say they will be using real-time payments by 2024, according to a recent U.S. Bank survey.

"Instant loan funding is something FIs can look at as well," says Jeff Bucher, senior product manager at Alkami. "If you can instantly fund a loan, that's a big benefit to account holders. It will make consumers and businesses want to do business with you."

In a trend accelerated by the pandemic

"Most people are looking for the iPhone experience," Bucher adds. "They want to click on an app and get things right away, and they expect to do that with digital banking. They want a streamlined interface, and they expect robust capabilities—including instant payments—at their fingertips." With popular peer-to-peer payment systems such as Venmo and PayPal now joining the RTP network instead of relying on ACH transfers to move money into consumer bank accounts, instant payments are increasingly a baseline expectation for account holders. And with PayPal and Venmo introducing options for fee-based services that speed up such money transfers, it's clear that consumers are open to paying for the convenience of real-time payments.

FIs that add real-time payments to their digital banking portfolio, including the ability to instantly pay loans as well as make person-to-person payments, can see their operational costs go down as well, Bucher says. The transition from ACH to real-time systems also means that FIs benefit from data-rich transaction messages on the ISO 20022 standard, generating additional insights into account holders that can lead to new revenue-generating products.

"For consumer and business account holders, real-time payments are about answering four key questions: Who do you want to pay? How much do you want to send? When do you want it to get there? And what is the fee if there is one? You don't need to get more complicated than that," Bucher concludes.

The bottom line: Banks and credit unions that don't move into real-time payments will put account holder acquisition and retention at increasing risk.

For more insights into the real-time payments trend, visit Alkami's Money Movement page and listen to Jeff Bucher's recent appearance on the Alacriti Payments Podcast episode "The Importance of Modern Payments in Digital Banking."