We are in the early stages of fast payments here in the U.S. Zelle and RTP are live and the FedNow Service is about to launch. In the near-term, I expect fast payments ecosystem stakeholders will stay hyper focused on simple yet critical enablers of connectivity and volume. For example, connectivity will depend on financial institution and PSP readiness and volume will depend on end users understanding and embracing the system. Once these enablers are in place, how might the U.S. fast payments ecosystem evolve?
Other countries’ experiences with instant payments provide a window into potential future paths. At Glenbrook, we pay close attention to payments activities across markets. Here are three trends we see as these systems mature:
Trend 1: Fast payments systems become ‘thicker’. It is not uncommon that fast payments systems start with a “thin” system that focuses on providing basic clearing and settlement services, very very well. Starting with essential services allows for efficient time to market and financial institution adoption. However, as they mature, we often observe fast payments systems adding value-added services that bring new utility and volumes.
Sometimes these services aim to support new use cases. Most systems start out prioritizing one or two use cases. In the U.S., for example, Zelle started with P2P. P2P is easily attainable relative to other use cases. Juxtapose P2P with P2M – P2M use cases tend to be difficult to enable but also provide extremely attractive volumes. As a result, while many systems don’t start with P2M as a priority use case, they work to enable it as soon as possible. (Interestingly, RTP prioritized P2M bill payments (using Request for Payment) in addition to Business-to-Business payments, perhaps with this in mind).
Other systems also appear to take note of the P2M use case. For example, PayTo is a new service provided by New Payments Platform (NPP) Australia that supports recurring and ecommerce payments through NPP, the corresponding fast payments system. And though already deeply entrenched into how Brazilians pay, Pix is also focusing on adding support for recurring payment needs. Zelle did go on to add the P2M use case for small businesses but this also appears to be the goal of Paze, Zelle’s sibling at Early Warning Services, but all indications are that these will be two separate, distinct efforts.
Sometimes these services are in support of enhancing all use cases. Let me share an example: Approaches to addressing evolve. In my humble opinion, the use of aliases is a critical enabler of fast payments. User friendly addressing approaches allow a sender to answer: who am I sending money to? Can the receiver share their address in a way that is meaningful for both of us? Addressing deserves its own Payments Views post but I do want to highlight a few observations:
In the US, Zelle is the only fast payments system with a directory (FedNow has said they are considering a directory). This is unique. Most fast systems start with some form of addressing, albeit simply. Perhaps the fast system supports the use of account number and one or two alias types (i.e. commonly, a mobile phone number or email).
We are also starting to see new addressing types emerge. Most notably, Brazil’s Pix system supports randomly generated aliases – the most widely used alias for Pix transactions. Similarly, Bolivia developed a QR code* solution to support simple payments, which has been an impressive success. Addressing optionality allows end users to optimize information exchange in a way that most aligns with their goals (e.g. privacy, efficacy).
*QR codes can be considered an initiation channel or an address. For the purposes of this post, I am discussing QR codes in their role as an address type.
Sometimes these services are in support of enhancing the integrity of the ecosystem. For example, Pix is further building out their fraud mitigation services. Similarly, EBA Clearing is in the process of adding a fraud detection layer for SEPA payment systems, including SEPA INST (Europe’s instant payments system).
Trend 2: Third parties innovate on top of fast systems. This is a classic evolution as payments systems mature. PSPs leverage system rails to facilitate transactions and provide their own unique value-added services to system participants (and end users), for which they charge fees. Form3 and Banked in the UK provide financial institutions connectivity to UK Fast Payments Scheme along with value-added services like simplified implementations and insulation from scheme rules. This is just one example of role they can play. Take a look at my colleague Joanna Wisniecka’s recent Payments Views post for more on potential PSP roles.
Trend 3: Fast payments systems support other payment types. A core defining feature of fast payments systems are that they support account to account transactions. Some fast payments systems are breaking out of the mold. For example, NPCI announced last year that India’s UPI system will allow end users to use their RuPay credit cards to make UPI payments.
The US is in the early days of fast payments. How these global evolutions will inspire the journey of the U.S. market is still an open question. Perhaps we will draw from other markets; perhaps we will write our own story. Stay tuned for the next Payments Views post by my colleague Elizabeth McQuerry who will offer some ideas on needed efforts to grow U.S. faster payments.