What’s Holding Up Realtime Payments?

EXCLUSIVE – By 2020 The Clearing House (TCH) is expecting all banks and credit unions in the U.S. to be live with realtime payments (RTP). Many major banks are already in the midst of the process, TCH’s Realtime Payments Product Lead, Steve Ledford, told Bank Innovation. But as of right now, only seven banks are connected to a realtime payments infrastructure, according to The Clearing House.

One of those banks is Pittsburgh-based PNC Bank. The bank is set to go live with the second of three phases of RTP in the next few weeks, PNC Executive Vice President, head of product management, treasury management, Chris Ward, told Bank Innovation. The other banks are Citigroup, JPMorgan Chase, Bank of New York Mellon, U.S. Bank, SunTrust, and most recently BB&T.

But if TCH began talking about realtime payments as early as October 2015, then why is it taking so long?

Take PNC, for example. It was the third bank to go live with the first phase of RTP. Yet Ward told Bank Innovation that it won’t be until 2019 that it goes live with the final, third phase.

“It is a new payments system,” Ledford said. “It is a core payments system that needs to built.”

This is a multi-step process. Part of the reason it’s that way is because unlike ACH same-day payment, the use cases for realtime payments can involve moving very large sums of money. This type of payment is mainly non-commercial, and applies to B2B, B2P, P2B and P2P in instances such as account transactions, informal services (like babysitting), or non-commerce payments (rent).

THREE PHASES

The three phases, once a bank is connected to a RTP infrastructure, are receivables, origination, and request for payment. In the case of PNC, it is already live with receivables, and will roll out originations in the next 30-to-60 days, according to Ward.

The last phase, request for payment, is the most complex, Ward said.

“Request for payment is basically automatic billing, I wish they called it that,” Vinay Prabhakar, head of markets strategy, payments at Finastra, told Bank Innovation.

It involves an agile and secure infrastructure because these payments will be 24/7, and instant, but will also involve a lot more data than ever before, Prabhakar said, which will be of tremendous value to FIs.

To illustrate this, Prabhakar uses a B2B transaction between a restaurant and supplier as an example.

“Think about what needs to happen,” Prabhakar said. “Both these parties don’t have the same banks, so there must be a channel to connect. Ideally the supplier will connect their small accounting system to their bank, so they can send the invoice to the restaurant, through their bank, to the restaurant, via the restaurant’s bank.”

It’s important to know that this bi-directional data sharing is always done through a bank to avoid invoice fraud, Prabhakar said.

For the transaction to happen, the supplier’s bank needs to have “a lot of” information (including the address) on the restaurant and vice versa, Prabhakar said. The current banking core systems only allow around six or seven information fields. For that alone, the banks need to design their systems to incorporate all this additional data, such as pictures, mobile numbers, itemized list of inventories, etc.

Realtime payments, in other words, may required updated cores, something the industry has been slow to embrace.

This valuable data will allow FIs to provide more products and services to their customers as well as improve security and reduce fraud, both Prabhakar and TCH’s Ledford agree.

THE LAST PIECE

How to use this nvaluable data is probably the main reason why the last piece of RTP, request for payment, is so complex.

“It’s not the technology that’s the issue,” Prabhakar said. “It’s figuring out how to create a competitive business proposition. The question that banks are looking at is how can I differentiate my service from the rest, so that people will pay for my service as opposed to anyone else’s? That’s what is causing the banks to take time. It comes down to building a unique and valuable customer experience.”

But that’s not to say technology aspect is less cumbersome.

According to a study by The Federal Reserve and TCH in 2015, the estimated costs for financial institutions to implement realtime payments is between $4 billion and $7 billion, with larger banks incurring more costs than smaller ones.

“It is not enough to speed up the payment pacing, you also need to figure a way to accelerate the other components. If the other components are disjointed then there will be reconciliation problems,” Prabhakar said.

Once connected to a RTP platform, the bank then has to review its existing infrastructure, all the end-to-end channels between different parts of the bank as well as its core banking systems.

Banks also need to extensively evaluate their liquidity management systems since all transactions by definition will be in realtime and running 24/7.

SHADOW ACCOUNTING

This aspect is analogous to ATM deposits, where banks have shadow accounting in place for the weekends, meaning when you deposit a large sum via ATM on the weekend, the bank only reflects part of the amount in real time. The entire amount is not reflected until Monday.

At Finastra, part of Prabhakar’s job is to work with banks to get their systems running on RTP by providing an end-to end cloud-based solutions to enable such transactions securely. PNC Bank worked with Finastra to get connected to a realtime payments solution.

There is an obvious advantage to having realtime payments, which is customer experience and expectations. But also, some banks see a disadvantage.

“Some these banks are big card providers, and many have just rolled out same-day ACH, so they are being careful with how to extract value from this,” Prabhakar said.

But PNC’s Ward said he sees “plenty of opportunity for new revenues with RTP.” Both Finastra’s Prabhakar and TCH’s Ledford agree that there is untapped sources of revenue in the treasury management and corporate banking side.

As for customers, the advantage is straightforward: no more paper checks, getting paid immediately, and better reconciliation.

Ledford said that there are many banks beyond the seven above which are currently working on getting connected to its realtime system by the end of year. By that time, he said, about 50% of the total deposit base in the country will be connected.