Today’s U.S. faster payments market is not the one we envisioned. In market for five-plus years now, RTP® and Zelle® laid the foundation of faster payments in the country but, as with most new payment systems, challenges inhibit adoption. Volumes in both networks have grown but are not at the levels expected for a country with our population size, bank account ownership and economic activity. Don’t get me wrong — there is a lot of enthusiasm around the new payment rails and opportunities here. The initial results from the 2023 Faster Payments Barometer are in and are very encouraging. Nevertheless, in the absence of a mandate to implement any payment system, financial institutions and their service providers have moved forward at their own pace, resulting in a jumbled ecosystem. And while the majority of accounts can be reached via RTP or Zelle, most financial institutions have yet to join either. Many financial institutions on RTP are “receive only” and have not started to send payments. Even today, not all core banking software providers enable RTP payments. Another important factor has been the palpable sentiment of “wait and see” adopted by many financial institutions after the Federal Reserve announced in 2019 that it would also introduce a new, instant payments system. Fast forward to today and indeed the industry is eagerly anticipating the July 2023 launch of the FedNowSM Service. I’m certainly in that camp. I say this not only because I expect that the Fed will put forward a quality product but also because of the certainty that it brings. We know there will be multiple faster payment networks and that they have similar capabilities. We know that ACH-like interoperability between the three open loop networks is not on the table. Instead, it will be up to each bank in the United States to create the illusion of interoperability.
How do we get closer to the faster payments market we envisioned? Let’s kick off U.S. Faster Payments 2.0 in which the industry focuses collective efforts on advancing faster payments as one of the ways we pay.
We can debate about whether this call to action is premature, but we can also recognize that achieving end user ubiquity and market adoption will take time. So let’s get started! Over the past two weeks, Glenbrook colleagues have identified opportunities for providers in the new faster payments ecosystem and offered insights from other countries on next steps in evolving the networks. Now I am offering three suggestions for what U.S. Faster Payments 2.0 will need to entail to get us closer to the envisioned faster payments market.
1. Grow the market, not just the individual networks
We are fortunate to have four major card networks serving the U.S. market, each serving some similar, as well as some unique, market needs. It’s a vibrant, growing, and competitive ecosystem. For faster payments to take hold in the U.S., there needs to be a similarly vibrant ecosystem. Besides RTP and Zelle, there are alternatives in market that allow consumers and businesses to easily transact instantly within their respective closed loop environments (e.g. Venmo). FedNow will soon compete with all these options for financial institution market share and adoption. In this context, the real question is whether the market for faster payments can grow sufficiently to support so many networks. For multiple payment networks to prosper, the total market size will need to grow exponentially. While many factors will need to come together to reach this level of growth, it’s encouraging that the U.S. Treasury is moving to be a part of the FedNow ecosystem. Payments to/from the government are typically catalytic for payment system adoption. We saw this in the early days of the U.S. ACH and more recently as Pix in Brazil rapidly become the vehicle by which government benefits were quickly and easily disbursed during Covid. We need to be ready to serve all use cases, regardless of network.
Collective industry efforts can grow the overall market in ways that no single provider can.
These efforts might include market readiness efforts for specific industry verticals, use case adoption, or consumer awareness campaigns.
The objective here is not to crowd out marketing by individual networks or financial institutions but rather to grow awareness around faster payments as a way to pay.
End user awareness gains could be attained by a shared promotional campaign to foster faster payment adoption just as NACHA and industry partners popularized the term Direct Deposit to encourage electronic receipt of payroll.
2. Develop the retail commerce use case
Both RTP and FedNow appear to be pursuing B2B payment improvements as their core use case. Among the Big 3, only Zelle appears to have an explicit focus on P2B (or P2M if you prefer). B2B is certainly overdue for efficiency improvements.
Nevertheless, retail commerce also represents a huge opportunity to attract new end users and volume growth to the faster payments ecosystem.
We can debate whether retail commerce is underserved or overdue for efficiency improvements but an important observation from other markets is about usage patterns. End users simply make more digital payments when they are affordable, broadly accepted, and highly visible. Both Brazil’s Pix and India’s UPI offer encouragement as to how retail commerce can ignite faster payment ecosystems.
We can see this catalytic effect in Brazil, where person to business payments are now more than 20 percent of all transactions in just over two years. In March 2023, there were almost 684 million P2B transactions in the national instant payments system.
Developing this use case will take time and there may be unique considerations for the U.S. market that is accustomed to extensive consumer protections and the recourse provided by the card networks. In the Faster Payments Barometer, respondents consistently remind us that some form of dispute resolution should be a feature of faster payments. Such a move would represent a novel adaptation (some would say departure) from the classic model of instant payments where all payments are irrevocable – full stop. It may be radical but if the idea helps the ecosystem grow, it deserves a collective conversation about its desirability. Another consideration in developing a retail commerce use case is that faster payments are typically credit transfers and this implies transitioning to a payee-initiated payment process. The transition will be away from the pull model that consumers are used to when using a check or card. Request for Payment (RfP) is currently not optimized for casual payments in restaurants, for example. Similarly, we don’t have a standardized usage of QR code payment either. Both options, most especially QR codes, can also help overcome the lack of an alias directory in FedNow and RTP. The card networks have created just such a QR Code standard that is widely being adopted around the world –– but not in the U.S.
3. Collectively prepare to combat the inevitable fraud increases
This may be the most challenging of my three suggestions. Growing the market overall is, simply put, a good thing. Developing the commerce use case will have some controversial elements and will take effort — but it too will almost certainly be a good thing. Collectively combatting fraud increases will also be a good thing but it will also be very, very challenging. Combating fraud will also be a good thing for everyone, most especially end users, because they should feel safe in making a payment. Recent history shows that fraudsters migrate from targeting one financial institution or payment network to another with uncanny agility.
The fragmented nature of our faster payments ecosystem does not currently offer cross-network communication of fraud patterns and/or of suspected fraudsters themselves. Instead, fraud mitigation is today largely left up to the individual financial institution which only sees one aspect of the fraud picture.
Techniques and scams will be added, and cycles repeated. It is encouraging that FedNow will have a negative list screening function and that some financial institutions offering Zelle are notifying users of potential fraud indicators in the context of initiating a payment, but success will likely require much more in this journey. The best single vantage point in a payment network is typically that of the network itself because it encompasses a view of both the sending and receiving sides. But the view from the middle is not sufficient because it lacks an important “know your end customer” perspective. In an ideal world, the center and the endpoints would inform each other about fraud patterns, thereby curtailing the fraudster’s ability to easily move shop to a different financial institution. How will we accomplish this type of communication on an inter-network basis? There are promising industry examples of collective fraud mitigation among the card networks from decades past and more recently, the ACH network has organized to combat fraud in a coordinated fashion. For faster payments to be successful, end users need to have much more awareness about its benefits, it will need to be slam dunk easy to use, and they need to feel confident in the payment method itself. Achieving these asks will surely be a lot easier if the industry works collectively. We’re interested in your thoughts too. Is U.S. Faster Payments 2.0 a premature concept? What other considerations should be on the table?
