Friday , April 12, 2024

Real-Time Payments: New Possibilities, Competitive Issues

Unless there is a potential fraud issue or customer dispute, very few of the trillions of transactions that cross U.S. electronic payment networks annually attract any attention. But the first transaction last month on The Clearing House’s new real-time payments system was so different that BNY Mellon, the bank originator, invoked the late astronomer Carl Sagan in the transaction’s messaging that rode with the $3.50 payment to U.S. Bank.

“Exploration is in our nature,” said the message’s quote, lifted from Sagan’s 1980 book, Cosmos.

Highly unusual, but Tony Brady, digital investment platform officer at BNY Mellon Treasury Services, a unit of New York City-based The Bank of New York Mellon Corp., thought the occasion called for it. “With a new payments network, there’s only going to be one first transaction,” Brady says, adding that a product manager in his unit came up with the idea of using the Sagan quote.

TCH’s system, dubbed RTP, is the first that puts the U.S. on more or less equal footing with systems in other countries that can settle a transaction within minutes or even seconds. RTP uses technology from United Kingdom-based Vocalink Holdings, operator of faster-payment systems in the U.K. and other countries. Mastercard Inc. acquired a 92% stake in Vocalink earlier this year.

RTP comes online at a time when the U.S. is still sorting out use cases for new services that include same-day payments on the automated clearing house network and real-time debit transactions from Mastercard and Visa Inc. While merchants and banks want services that can clear faster than the traditional one to three days, not every transaction will need to settle in three seconds, as the first RTP one did Nov. 13. But demand clearly is building for faster options.

“We’ve spent the last two or three years talking to our clients,” Brady says. “The payments system … needs to be transformed and modernized.”

BNY Mellon has a large business in asset management, trusteeships, custodial financial services, and other services for corporate clients. In fact, the second RTP transaction, also with Minneapolis-based U.S. Bank on the other end, was for $24,013 and involved an insurance company that’s a mutual customer of the two banks.

Still, BNY Mellon is considering retail-banking options for RTP, including those involving business-to-consumer payments. Just a few include payments for payroll, insurance claims, and disaster relief reimbursements. Others could involve urgent payments by consumers to utilities, government, or other entities.

“There’s dozens and dozens of use cases,” says Brady.

Brady adds that at least on the wholesale level, providers have a chance to generate revenue from businesses from RTP transactions. For example, the system supports requests for payment from customers, which means a utility might be willing to pay a bank for a last-minute payment from a consumer who’s about to become overdue on his bill. That’s because the fee is likely to be less than the expense the utility will incur when the account becomes overdue, forcing it to initiate collections procedures, according to Brady.

TCH is owned by 25 U.S. banks. Payments consultant Steve Mott, principal of Stamford, Conn.-based BetterBuyDesign, wonders in an email to Digital Transactions if the banks will use the new RTP system “like one big hedge against any potential competition in alternative networks.”

Another question is how many smaller financial institutions “will buy into the [real-time payment] business model” so that receipt of such payments can happen at just about any financial institution, Mott adds. “If they don’t, it will be hard to attain ubiquitous receipt, and that will open the door to meaningful competition,” he says.

TCH, however, says it has arrangements with a number of third-party processors that will be able to plug smaller banks and credit unions into the system.

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