F I N Z L Y

Banks are in different stages of real-time payments adoption. The diffusion of innovation has followed the laws of science, with roughly about 2.5% of banks being the innovators and the others following suit.

With the launch of the RTP and the FedNow real-time payment schemes, while few banks are taking advantage of the easy onboarding process, the adoption curve is typical of the science of innovation diffusion, with a majority waiting to adopt in reaction to peer pressure.

What stops banks from leveraging the level playing field?

Banks are caught in the quagmire of having to justify the ROI for real-time payments adoption in order to make an actionable business case. This difficulty in ascribing a number to a nascent but fast-developing market potential has left many banks and credit unions in a state of indecision and lethargy. The inertia is already creating leeway for the quick and opportune entry of non-financial institutions, fintechs and challenger banks to enjoy the early market share. Eventually, these banks are forced to catch up with these players and the forward-thinking financial institutions who have already implemented real-time payments.

While most business cases need numbers to justify the ROI, with real-time payments, the returns are measured qualitatively until banks begin to garner enough insight into the transaction volumes and dollar values over a period of time. As always, in retrospect, only time can generate usable indicators and markers.

Many banks justify their procrastination by their dependency on core providers to offer real-time payments solutions. Some of the more adroit banks are already using or evaluating alternative vendor solutions to connect to the TCH’s RTP and FedNow networks.

In short, this is a common trend we see with those banks who are fumbling on the adoption decision:

  • Harping on core’s inability to innovate
  • Limited by back-office operational efficiency
  • Cost and resource considerations
  • Educated enough on the topic, but unsure about how to monetize it
  • Implementation challenges

Most of these problems are inherent to banks, but a shift in approach from mere introspection to a creative exploration of the  customer expectation standpoint, and the qualitative growth opportunities on offer, can work wonders for banks’ harnessing of real-time payments.

What are the different drivers for banks to adopt real-time payments?

The adoption and diffusion of any new innovation follows the S-curve suggested by Everett Rogers, and real-time payment adoption is no exception. Real-time payments discussions are trending in the boardrooms of the forward-thinking and laggards alike, with the difference being the ability to grasp the contextual benefits from the adoption.

The innovators: Driver of the business case: The “novelty” of the innovation

This is the fraternity of banks who are the primary drivers of the innovation, investing sizeable amounts of time, money and resource into real-time payment adoption. Primarily large banks,  including The Clearing House’s member banks, many of them have been involved with the development of RTP as a payment scheme. Enthusiastic, early on, to take advantage of the novelty around the concept, they are now showing maturity in terms of seeing steady volumes of real-time payment transactions through their banks.

As far as use cases go, they are quickly adapting their business models to offer instant payment options on services like BillPay using the ‘Request for Pay’ features. Most of these FIs are sending and receiving payments over the network to serve their enterprise business customers, who provide a greater ROI for FIs. According to Levvel, the largest share of organizations using the RTP network are the large and mid-sized enterprises.

The time is ripe and the stage is set for banks to be innovators by participating in the FedNow program, which is still in its formative stages.

The Early Adopters: Driver of the business case: The “benefit” of the innovation

The early adopter banks have researched enough to perceive the qualitative benefits of real-time payments, in terms of the convenience and the value they can offer to their customers. Many of these banks offer new products to their existing business customers, such as real-time disbursement of loans to Small Business Banking customers and same-day payroll processing for business customers. Rather than looking at the new payment modality as a threat that can potentially cannibalize other payment modalities, these banks carefully consider the value that they can deliver to their customers. These banks tend to be visionaries and eventually influencers, who are clear about their customer segment for real-time payments, and they envisage easy sailing by showing the qualitative value, in addition to the speed and convenience, in return for customer loyalty.  

The early adopters of TCH’s RTP are either implementing or currently considering implementation, mostly beginning with the RECEIVE functionality and eventually ramping up to SEND.

As far as FedNow goes, we will see an influx of the early adopters at the end of 2022, when it will be ready to launch in production. Currently these banks are building their business case for adoption or in conversations with solution providers.

The Late majority Adopters: Driver of the business case: “becoming irrelevant and customer expectations”

The late majority are the banks who are blinded or short-sighted by the existing limitations of their current legacy core systems, so much so that they can neither see the novelty nor the benefit of the innovation. Any attempts to ideate the business case for real-time payments do not go beyond discussions around core limitations, back-office operational considerations, cost and resource constraints. These banks are either doing nothing or frantically searching for a quantitative metric to justify their investment on instant payment implementation. While these banks battle to produce these numbers as a business case certitude, or depend on nascent and unstable statistics, they are missing out on the low-hanging fruit- serving the small and midsize business customers, who can greatly benefit from the convenience of liquidity and the value of the data and messaging that each payment carries.

Wake-up call: Lessons learnt from innovators and the early adopters

The innovators and the early adopters offer great lessons for the rest of the banks:

  1. Don’t wait for customers to ask in order to get started with a business case- they may never ask, but may just move to the bank next door
  2. Try to provide innovation inside your current product portfolio. This way, you can start with your existing customers. Examples include real-time payments used for loan disbursement, wealth management, bill payment, payroll etc.
  3. Take advantage of the level playing field offered by both the TCH and the Fed. All banks have equal opportunity, irrespective of their size or transaction volume over the networks
  4. Connecting to the RTP or becoming an early adopter of the FedNow program is straightforward and quick. Don’t assume complexity and resort to inaction.
  5. Reach out to third-party vendors who connect directly to the instant payment networks, leaving the heavy-lifting to them without having to worry about the SLAs for direct connection or the infrastructure investment to do so. According to a recent Levvel survey, 76% of respondent organizations plan to utilize third-party providers to adopt RTP
  6. Start with RECEIVE transactions, as many banks do initially, and eventually adopt SEND participation levels

Banks, irrespective of their size, are adopting instant payments through easy schemes provided by the Fed and TCH. The time is ripe and the market is marching towards maturity. There is no doubt that banks that act now will be able to get a clear head start.

Suja Ramakrishnan, Director of Marketing, Finzly

suja.ramakrishnan@finzly.com

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