The Market for Real-Time Payments in the U.S. Remains Fragmented and Uncertain
Real-time payments have become a focal point as the Fed, NACHA, and multiple private sector ventures attempt to address a variety of real and perceived gaps in the U.S. payments market. Multiple potential use cases have given rise to a variety of business models, with no clear winner(s) at this time. However, many of these use cases represent opportunities to dramatically alter how consumers and businesses conduct payment transactions. Card-issuing banks and other payment providers should closely monitor developments in this space to understand when and how they should support these new solutions, how the Fed views its role in designing and implementing a top-down solution, and what actions may be necessary to mitigate the disruptive impact of this activity on current payment products.
The U.S. Federal Reserve stated its desire to improve the country’s electronic payment systems and outlined a series of perceived gaps vis à vis other international markets. The agency is pursuing five broad goals: Speed, Security, Efficiency, International, and Collaboration. Since 2013, the Fed has released two policy papers related to this effort, organized two standing task forces, and recently appointed an experienced Fed executive to the new position of Payments Strategy Director.
Much of the focus has been on a real-time payment infrastructure that is faster, safer, and lower cost than existing card and ACH systems. The “credit-push” transactions would originate from the payer’s bank (as opposed to the recipient’s bank, as card transactions do today) and would be settled in minutes or seconds, rather than days. There is not yet consensus, however, around how this infrastructure should be designed and implemented, largely due to the significant investment required.
Absent a unified industry solution, several private-sector parties are taking a go-it-alone approach. Some of the providers are partially motivated by the desire to avoid a government-mandated solution that could be even more disruptive to the current system. These parties —including FI industry consortia, payment processors and networks, and non-traditional technology competitors (see Figure 1) — are developing and launching advanced payment platforms and real-time payments initiatives to achieve disparate objectives and address specific (sometimes narrow) use cases. Potential applications for credit-push transactions focus primarily on B2B, but also include C2B, A2A, and P2P, each with unique demand and functional attributes.
Figure 1: Next-Generation Payment Platforms and Real-Time Payment Providers in the U.S.
Note: *Dwolla has expanded its offering to include real-time DDA transfers to accounts at participating financial institutions.
Source: Company statements and press releases; First Annapolis Consulting industry analysis.
The U.S. market for next-generation payments remains highly fragmented: no provider has yet consolidated a meaningful position, and no clear and coherent business model has emerged as a distinct winner. Some of these providers are developing truly innovative real-time payment services, while others are developing registry/directory services on top of existing infrastructure. Some smaller, proprietary solutions have been faster in getting to market, while the larger initiatives led by major processors and consortia must move more slowly. These larger initiatives, however, may be best positioned for long-term success due to their scale and strong backing from industry stakeholders.
While real-time payments are still nascent, significant investment by so many parties suggests there is long-term strategic value in these services and virtually guarantees that one or more viable solutions will emerge. Real-time payments could meaningfully lower costs and increase efficiency, but could also disrupt existing payment-card economics, particularly if migrated to the POS environment. Card-issuing FIs, in particular, should closely monitor developments in this space, with a focus on three key areas.
- Understanding: FIs should continue to monitor the Fed’s developing industry roadmap to understand the potential implications of a government-mandated solution, as well as the value of different private sector business models.
- Partnership: FIs will be key partners for many of these services, providing account connectivity and marketing support for large-scale initiatives.
- Response: FIs should consider how they can take action to protect and grow revenue by listening to customers and working with partners and vendors to understand the business case and financial opportunity of these new services.
As private-sector services continue to progress and the dual task forces empanelled by the Federal Reserve issue their final recommendations, U.S. banks that rely heavily on payments revenue should be prepared to take quick action to address these changes in the payments market.
For more information, please contact Stephen Kiene, Senior Consultant, firstname.lastname@example.org, specializing in Debit and Prepaid.
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