Within financial services, payments are one area that has undergone significant transformation in recent years with the emergence of faster payment services such as FedNow and The Clearing House’s Real-Time Payments network. Yet, the big question that remains to be seen is how financial institutions will scale and monetize these new payment options.
The Financial Brand explores this in a recent article.
“To date, many banks and credit unions seem to be treating faster payments as a commodity service, with only one in five banks plans on commercial-side instant payments to be a revenue generator within three years. Half as many — one in 10 — expect consumer-side instant payments to produce revenue, according to Cornerstone Advisor’s 2024 What’s Going on in Banking report,” the article says.
The article also reveals that some bankers and financial institution executives are calling FedNow a “solution” for customers. Ron Shevlin, author of the report and Cornerstone’s chief research officer, argues that FedNow is actually a “capability” and what banks and credit unions do with the capability is what matters.
The capabilities of a network like FedNow can be combined with a financial institution’s products and service offerings to create new options for account holders. According to The Financial Brand article, “Banks and credit unions will then be able to price and market those combined offerings to the appropriate market segment. That’s when revenue comes. It will take some time and effort for banks and credit unions to get this right, says Shevlin. And he believes successful product design may require partnering with fintechs.”
Cornerstone’s latest research showed that 18% of banks and 14% of credit unions already offer some form of real-time payments, meaning there is tremendous room for growth. Much of that growth is expected to occur this year. The research firm predicted that 32% of banks and more than one one-third, 36% of credit unions are expecting to offer at least one real-time payment option by the end of 2024.
Additionally, another 28% of banks and 34% of credit unions expect to adopt at least one real-time payment platform next year or further out in the future.
Financial institutions can choose from a handful of real-time payment systems, and can participate in more than one. The type of preferred real-time payment platform differs, depending on a variety of factors and in many cases, it’s worth adopting multiple. Pidgin’s founder and CEO, Abhishek Veeraghanta explains why in this article for CU Management.
Currently, the FedNow system, which was just launched in July, appears to be gaining traction quickly. According to Cornerstone, more than half (51%) of banks and a slightly higher percentage (52%) of credit unions are planning to use the service to offer real-time payments for their account holders. The Clearing House RTP network, meanwhile, was cited by nearly a quarter (23%) of banks and about half (12%) as many credit unions. This smaller cohort may simply be that financial institutions have already connected to The Clearing House’s RTP network, as this was launched back in 2017. Other solutions were cited by 14% of financial institutions.
Once financial institutions have deployed the right technology and network connections to support real-time payments, it’s time to consider the use cases.
The most popular uses of real-time payments, according to the report, are business-to-business payments (banks) and account-to-account transfers (credit unions). Other popular uses include last-minute consumer payments, recurring bill pay, government tax and fee payments, ad-hoc bill pay, sweep accounts, consumer retail purchases, e-commerce, business-to-consumer disbursements such as rebates and returns, and cash pooling/concentration.
As you can see from the figures above, the real-time payments opportunity is just beginning for financial institutions. As they look at different payments platforms and different business opportunities, they should work with a payment partner that has expertise with the different payments platforms and the different challenges and opportunities in order to optimize the benefits for their institutions and their customers.