Despite the variety of core payment networks in the US that are easily accessible and used by the majority of banks and account holders – such as cash, wires, cheques, credit cards, debit cards and automated clearing house [ACH]) – unique challenges inherent to these systems persist.
With shortcomings such as lack of payment speed, cost transparency, accessibility and availability, banks and non-bank payment providers have each developed their own means to solve these issues. New products are commonly developed that layer services and functionality on top of these existing payment networks – to speed funds availability or provide faster notification, for example – to circumvent the existing systemic deficiencies of these legacy payment networks.
Yet despite these efforts, the US has been unable to achieve the ‘holy grail’ of the payments experience – payment in real-time. The reason for this lack of a system-wide, real-time payment option in the US is that the existing networks that provide core clearing capabilities are….old; even the “newest” payments network, ACH, was developed more than 40 years ago. A workable solution with sufficient technology to handle the needs of such a network simply did not exist until now and the answer has been to start again from scratch.
The Clearing House (TCH), an operator of industrial strength payment systems that is owned by 24 US banks*, has taken the initiative to build a brand new payment system from the ground up, utilising modern technology to finally provide a method for moving US payments in real-time. Due to be launched later this year this new system, called the Real-Time Payments (RTP) network, provides an opportunity to redesign how funds move between business partners, individuals and all market participants, while addressing the need for speed, availability, data, risk management and transparency of payments.
Defining real-time: a matter of interpretation
In the world of payments, the phrase “real-time” can carry different meanings and interpretations, depending where you stand along the payment spectrum. Does it refer to how fast the sender can receive an acknowledgment that the payment has been received by the other party? For the receiver of a payment, does real-time refer to the speed of availability? Is it how fast payment notification is received, or how fast it can be reconciled? For banks, does real-time refer to the speed at which a transaction settles between financial institutions? The answer to all of these questions is that real-time means all of these things in all of these scenarios.
Because of the many different criteria by which the speed of a transaction in real-time could and should be measured, many payment solutions in the past have used “real- time” to describe just one or a few features of their products and services. Yet the challenge (and reality) has been that real-time solutions in the US market today address only a portion of the payment continuum. Examples include payments with real-time notification but delayed settlement, or real-time availability to the receiver but delayed settlement between banks.
TCH’s new payment system attempts to solve this conundrum by featuring a holistic solution that addresses the need for real-time at all points of the transaction, including:
- Instant clearing and settlement of funds (less than 15 seconds) between banks and the sender/receiver.
- Final and irrevocable payments to US accounts (for credit push-only payments, providing control to the debtor of each payment).
- instant availability to the receiver.
- 24/7/365 sending and receiving availability.
- Robust messaging, including remittance advices; requests for payment, information and return of funds; and acknowledgements.
- ISO 20022 formatting, the global messaging standard. Plans are for the network to eventually provide interoperability to other payment networks globally.
- Accessibility to any US bank, with a goal of eventually reaching all global banks and account holders.
In its infancy, the network will place a US$25,000 limit per transaction to closely monitor and control the type of activity within the system early on. Current plans include increasing that limit over time, which may occur as soon as within the first year of activity.
A glimpse at real-time in action
The RTP network will provide many of these real-time features that are just not possible with the payment systems available today. Think about the ability to send a payment at any time of the day, any day of the year, knowing that within 15 seconds or less the payment will be cleared and settled, with notification sent to all parties. Such increased speed and efficiency at all points in the payments continuum offer all parties to a transaction – from individuals to small businesses to large operations – access to expanded payment scenarios and capabilities that can help tightly manage their liquidity and transform business operations.
A restaurant, for example, that must quickly purchase an ingredient required for a new menu item can instantly place the order for that ingredient with the supplier. Instantly, the supplier can instruct their bank to send an electronic request for payment through the RTP system to the restaurant, with the option to instantly pay for the ingredient. By choosing the “pay now” option, the restaurant instantly pays the vendor via a RTP credit transfer and the receiving bank instantly confirms to both parties that payment has been received. The vendor then sends an acknowledgement instantly back through the RTP system to the restaurant, confirming that the ingredient is on its way.
The RTP system also allows for the urgent payment of large bills just as quickly. A tuition bill, for example, that a student realises is due within hours can be easily paid on time using the network. The student can instantly look up the college account listing in an industry directory and send the money to the school’s account at their receiving bank. The receiving bank can then instantly confirm to both student and school that the payment has been received, easily making the payment deadline.
There are many additional examples of how RTP can create more efficiency in the payment process than exists today. The examples below show the range of payment types that can be covered via the network, from business to business (B2B), business to consumer (B2C), consumer to business (C2B), peer to peer (P2P) and even payments made to and from the government (federal and municipal).
The network can facilitate both the receiving and paying ends of these scenarios; including the ability for receivers to:
- Post payments on nights and weekends.
- Originate and receive instant and irrevocable payments 24/7/365.
- Reduce returns and benefit from finality of payment, such as for non-credit worthy customers.
- Receive payments from consumer home-banking platforms.
- Send invoices, bills and payment reminders to customers.
- Issue electronic payment requests
For payers, the RTP network can help to quickly:
- Disburse health savings account transactions.
- Originate research center payments from healthcare providers.
- Issue disaster relief and claim payments for insurance companies.
- Make urgent B2B payments (US$25,000 or under), including conditional and after-hours payments
- Receive instant and irrevocable payments 24/7/365.
- Implement contingency methods for payroll payment needs; especially for hourly, temporary or terminated employees.With these diverse use cases in mind, any payment within an organisations’ transaction flow should be evaluated to see if using the RTP network may be more efficient.
A real-time future – right around the bend
Under TCH’s direction, a select number of early-adopting banks* are already preparing and working with clients to launch this network in the first half of 2017. As more banks continue to join the network and enable their clients to send and receive payments, the long-term vision for the RTP network is to continually grow throughout the first few years of its availability.
This will create challenges in the early years, as only certain banks/accounts will be accessible via the system. As a result, banks will need to address this challenge for their clients by providing both transparency on valid receivers and the option/ability to reroute payments to other networks, such as via ACH. However, with certain banks and participants already planning to participate from the outset, projections are for the network to reach ubiquity in the near- to mid-term, which should eliminate this issue.
The global real-time trend
The US is not alone in the need for real-time payments, and many countries are much further along in developing the required networks. Indeed, the US is actually catching up to a global trend that includes more than 17 countries currently using or developing domestic real-time payments systems of their own. Many also offer 24/7/365 processing that provides payment clearing within minutes or seconds. While countries such as Brazil, Mexico and South Korea have had these systems up and running for over a decade, others such as Sweden, the UK, India and Singapore have built them more recently.
With an eye toward true globalisation of these separate real-time networks, several of these countries are already joining the US to plan for how these systems could interoperate with each other, and are developing criteria for incorporating the ISO 20022 common formatting payment standard into one potential global network.
The next and even more challenging piece of this puzzle will be the governance and regulatory impact of these cross-border payments. Yet with a proven industry track record around developing and maintaining other global payment schemes, such as cross-border wires and certain international low-value clearing networks, a workable process for a global RTP framework seems achievable. Imagine 24/7/365 real-time global payment capabilities…it may soon be a reality for many (if not most) countries.
Bringing users aboard
As this year’s launch of the RTP network for the US approaches, a primary goal for all industry players will be educating network users for a clear understanding of the system’s comprehensive capabilities. It will be the responsibility of banks and payment providers alike to work with their clients across all segments – including corporates, banks, insurance companies, healthcare providers, broker dealers, asset managers, real estate management companies, mortgage companies, government entities, utilities, small businesses and individuals – participants that can all utilise this network and leverage its features and accessibility to drive efficiencies, reduce risk and deliver an enhanced user experience.
With a true real-time payment experience poised to become reality, organisations and payment provider clients of all shapes and sizes should anticipate working closely with their banking partners to determine how their (and their clients’) supply chains may benefit from this ground breaking – and fast approaching – new payment network. Its arrival, along with its transformational payment capabilities, is right around the bend.
*BNY Mellon is a founding member of TCH and among the early-adopter banks for the RTP network.