The Time is Now for Immediate Payment Investment
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Under today’s custodial banking system, it can take less time for an individual to withdraw cash, hop on a flight across the globe and hand-deliver it to their recipient than it does to transfer the same amount through banks. And while an argument can probably be made that this is a result of advancements made in transportation, the reality is that moving funds across international borders has been, and continues to be, a highly cumbersome activity for financial institutions.
The process, which involves having to transfer money from one correspondent bank to another (and any number of others in between) en route to its final destination, has always been inefficient. But without a viable alternative, customers have had no choice but to deal with the delays and costs associated with moving their funds – until now. Modern regulation, emerging technologies and customer demands are shaping a new reality for payment service providers. Can they rise to the occasion?
Regulators Push Industry to Move in Payments
Changes in payments regulation is driving industry transformation. For example, the May 2015 announcement by NACHA to amend NACHA Operating Rules and allow same-day ACH payments in the U.S. has incentivized banks to invest in new methods to enable customers to move money faster. Yet despite these new guidelines, as well as the expansion of businesses internationally and the adoption of digital payment solutions, the global landscape for enterprise payments still remains very much in a state of flux. By mid-2015, 16 countries had already implemented fully operational immediate payments solutions. The service available in the vast majority of these countries exceeds the basic required features as they include highly desirable optional features to enhance customer value. Many other countries are at various stages of immediate payment evaluation or implementation, most notably the U.S., with the prospect of pan-European instant payments following close behind. So, what is coming down the pike for payments?
Investing in Immediate Payments at the Right Time
Revenues for cross-border payments are expected to grow by more than 6 percent annually and reach an estimated $100 billion globally by 2024. But customers will be looking for immediate gratification, which is incentivizing banks around the world to transform their operations to settle in real-time. With new technological improvements coming every day, banks are finding that investments in emerging, immediate payment systems also have the potential to decrease their operating costs and reduce regulatory overhead.
The adoption of same-day ACH payments in the U.S. will likely create a more competitive atmosphere in the market for wire payments. Prior to NACHA’s decision to adopt real-time settlement, clients in need of an immediate movement of funds were left with no choice but to send it via wire, where funds transfer in hours as opposed to the two-day period guaranteed through ACH. Given that fees from wire transfers have traditionally generated around ten times the income for financial institutions, a change to this dynamic should present an opportunity for banks to re-position themselves in the market by adopting pricing strategies consistent with their delivery speed. Yet given that the majority of wire volume is above the $25,000 ceiling placed on same-day ACH, the cannibalization of these fees may not be immediately imminent, but looming on the horizon.
Cash – No Longer King
Banks can’t wait to get away from cash. Cash is a dirty, heavy and expensive way for banks to give customers access to funds. A key benefit that financial institutions hope to realize from their investments in real-time payments capabilities is a move away from cash, which should open up new pools of cost savings. As more transactions progressively shift away from cash and towards payment cards and mobile payments, banks and other financial institutions will be able to shed a number of annoying expenses.
Due to its tangible nature, the physical state of paper currency and coins does make them safe from the hackers and malware that torment the digital space. However, cash also carries a number of costs – particularly around management, security and transportation. Given that these items have traditionally been of the highest priority for banks, a shift away from physical currency and towards digital payments is expected to open up a new source of profit for financial institutions and reduced expenses for their clients. Currently, U.S. retail businesses lose about $40 billion annually due to the theft of cash while the U.S. government loses from $400 billion to $600 billion of under-reported taxes due to cash transactions.
The Best Customer is a Happy Customer
For merchants and individuals, the evolution to real-time payments will undoubtedly have a positive net outcome. Businesses will find it easier to expand beyond their borders and consumers will be able to access funds in more convenient ways, including on mobile and cloud platforms. Employees from all walks of life will also benefit, as their wages will be received and processed faster. The financial institutions that adapt to these market opportunities first with compelling use cases will be in the best position to win over consumers and merchants. But the real question that remains is which providers will successfully address this opportunity?
The Path Towards Adoption
In order to implement these real-time capabilities, financial institutions will need to make a number of investments to their existing payment processing systems. Those unable to upgrade their legacy technology to seamlessly integrate with new software and services will face regulatory pressure, as the NACHA ruling mandates participation from all sending and receiving parties.
The implementation of the NACHA rule changes will occur in three phases over a three-year period, beginning in September of 2016.
- Pending the receipt of written confirmation from the Federal Reserve, ACH credit transactions will be eligible for same-day processing to support hourly payrolls, P2P payments and same-day billing functionalities.
- During Phase 2, set to go into effect in September of 2017, same-day ACH debits will become enabled, opening up use cases for monthly consumer payments like mortgages, loans and credit cards.
- Phase 3, effective in March of 2018, will make funds from credit transactions available in real-time.
For financial institutions, this type of phased implementation should provide a solid foundation for developing other innovative services. Leadership teams are now aware of the steps required in advance of the NACHA rule changes and fully prepared to consider how changes to the rules, tools and technology will impact their businesses. That being said, based on the statement by NACHA President and CEO, Janet Estep, that she views these changes as a “building block” that can foster “immediate action” in the marketplace, it is certainly possible that this is just the first of many steps in the journey to modernized payments.
Recognizing the massive opportunity at-hand, new entrants and large technology firms alike have begun to flood the market with solutions for cross-border payments. These players, that offer their services primarily through commercial and custom software, have been able to successfully eliminate the outdated, international ‘middle man’ model. As a result, participants in both the B2B and P2P market segments now have the ability to move funds across the world in seconds, not days. Is the payments landscape about to shift irrevocably?
“The Time is Now” is Part I of a Capco series investigating the shifting seas in payments services. Stay tuned for Part II, entitled “Which Does What How?” where we will take a snapshot of payments stormy seas and make sense of emerging capabilities.