The tide is shifting from simple regulatory compliance as it relates to both open banking and real-time payments; banks should consider these initiatives as the competitive foundation to provide customer-facing enhancements.
A holistic real-time payments (RTP) strategy can mean new revenues, better margins and shorter time to ROI for banks, acquirers and payment processors. The appeal of real-time payments for consumers is apparent: the convenient and streamlined way to request, receive, and payments means consumers can take better control of their finances.
On the other side of the coin, there is also great potential for Request for Payment (RFP). RFP enables billers to send electronic requests for payment, rather than paper bills. In turn, customers can make digital payments via mobile or desktop as a credit push. This eliminates several cost factors, including postage and processing fees for paper checks. RFP could reduce the number of hands touching each transaction by facilitating a fully digital experience.
For banks, it will be a critical factor in increasing revenue for banks. Merchants have a lot to gain via RTP; banks that support it will have the advantage, while banks that don’t will likely see a shift of business to the competition.
Real-time payments have continued to gain momentum in the US, with several major banks embracing instant person-to-person (P2P) mobile payments. This has been facilitated by the clearXchange (now Early Warning) platform for banks like JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co and U.S. Bancorp. This launch into P2P by large banks was largely due to the disruption from Silicon Valley startups that fueled the P2P transaction hype.
The transition to broad-scale RTP rails is still in the early stages when it comes to ACH payments. More recently, The Clearing House (TCH)—an entity responsible for processing half of US ACH payments—partnered with VocaLink (acquired by MasterCard) to deliver a US-version of the UK’s Faster Payments system. As of the end of the 2018 third quarter, TCH had onboarded 36 institutions to its RTP network. It’s expected that this number will increase to 3,000 by the end of June.
As far as ACH transactions go, TCH operates one of the two switches for the nationwide automated clearing house network; the other is operated by the Federal Reserve. It’s an interesting relationship that continues to evolve as the Fed has also issued a proposal for real-time payment settlement. One could argue that this makes sense as it pertains to avoiding monopolization. Without private-sector alternatives, the Fed could even the playing field as a competitor in the RTP space with TCH, particularly with cross border RTP, which requires coordinated central bank settlement.
Others argue that beyond the cross-border RTP considerations, the Fed would not offer anything greater than that which already exists. Between TCH, Mastercard Send, Visa Direct, PayPal, Venmo, and Zelle, the breadth of credit push use cases has largely been covered. Both MasterCard and Visa could support instant interbank payments. In short, the ecosystem for Same Day ACH, RTP, and Cards is flourishing.
The push towards RTP is coinciding with the prevalence of open banking, sparking a new set of benefits for consumer and corporate services as well as regulatory compliance. According to an Ovum report, 87% of all banks report having a clear strategy for developing open banking APIs, or application programming interfaces, up from 59% in 2017.
On the consumer end, digital overlay services will make Request to Pay (RtP) and other cashless initiatives more common. RtP can streamline payments across sectors like home lending, local government and utilities. As alluded to earlier, corporate services stand to benefit in terms of accounts receivable and payable. Manual reconciliation processes can be simplified and made faster by APi-enabled systems.
Similarly, the highly manual processes around regulatory compliance can also be simplified. Banks face scrutiny for compliance with Know-Your-Customer (KYC), Anti-Money Laundering (AML), and Counter-Terrorism Financing (CTF) sanctions. Compliance includes navigating a multi-step manual process that becomes costly and burdensome, slowing the speed of payments. APIs that drive two-way communication between banks and accurate lists and measures can facilitate automated screening that is highly accurate.
As open banking regulation and RTP infrastructure continue to converge, we will continue to see them reinforce each other as new applications manifest within the banking ecosystem. With both factors set to be a future competitive differentiator for banks, it will be crucial for banks to make strategic decisions that take each into account. The tide is shifting from simple regulatory compliance as it relates to both open banking and real-time payments; banks should consider these initiatives as the competitive foundation to provide customer-facing enhancements.