It’s a common experience. Someone puts a shiny new piece of technology in front of you, and they say that it’s going to change everything: faster, smarter, easier, safer. Great, you think, but … what does it do?
Everyone acknowledges the potential of real-time payments (RTP), but it’s still relatively new. In the long-term, the most exciting thing about RTP is the way it will integrate with open banking technology to catalyze further innovation. On the other hand, there has long been a lack of awareness among consumers and decision-makers of how we stand to benefit from broader real-time payments adoption. RTP connection is already a standard among the largest institutions; it’s the mid-sized to local institutions that are next in line now.
So why use RTP? The most obvious benefit is speed, and while that’s certainly a selling point, the evidence suggests that speed by itself is not enough to get executives on board. They need to see a clear advantage and fortunately, there are plenty. We’re going to go over a few of these RTP use cases, broken down by the different players that might initiate them. Many of these situations cross sectors, the main difference being the specific details of the transaction. For example, any organization with employees would benefit from real-time payroll, but a credit union might see different benefits than a government agency.
The most emphatic case one could make for a government-accessible RTP network is evidenced by the recent U.S. stimulus bills. The benefit is clear—the sooner financial assistance can reach a person who needs it, the better. Even after we recover from our current economic crisis, there will still be strong use cases.
Real-time payments could streamline every step of an often arduous tax process, from collecting to refunding – while saving money on paper checks and manual processes. Payroll would be accelerated, as would government-to-citizen compensation for working expenses like transportation or equipment. Despite modernization efforts, paying fines and other incidental fees to the government can still be a nuisance. Having the option to request and accept payment in one place could make the process easier for all parties.
Regional Bank or Credit Union
Many regionally-focused financial institutions are in the process of deciding whether to connect to a real-time payment system. Thus far, it has been a resource-intensive and time-consuming process, leaving many waiting for a strong use case to justify the investment.
Real-time banking services are already a selling point and will become even more highly sought-after in the near future. The pandemic accelerated the trend line for adoption. Initial use cases include allowing customers or members to receive their paycheck in real-time as soon as work is completed, P2P payments that allow vendors or family members to receive their funds immediately, and real-time bill pay which is good news for last minute payers. The introduction of these use cases will cause members or customers to consider switching if their current account doesn’t allow them to do the same.
Verticals like insurance or utilities that need to make regular disbursements to their customers will see their processing expenses diminish—in time leading to a drastic reduction in paper checks, if not getting rid of them altogether. This makes both employees’ and leaderships’ lives easier. But more importantly, it satisfies the consumer’s desire for convenience. It might not be long before even same-day processing float is considered substandard. Similar to the stimulus payments mentioned above, insurance disbursements go out to people when they are in immediate need of assistance. Real-time payments would allow an insurance agent to transfer funds to a client as soon as the claim is verified. For example, a car insurance provider could immediately provide funds for transportation from the scene of an accident, or to hire a rental car. As with many industries, real-time payments access is already incentive enough for many consumers to switch to a more modern provider.
Whether it’s to an end consumer or otherwise, any industry that issues loans can benefit from a real-time infrastructure. Being the first to offer this capability presents a huge marketing advantage. A car loan provider could offer on-the-spot financing and request-for-pay. This shortens the borrowers to-do list. They can send the first payment immediately and from then on receive a monthly request-for-payment message. All the client has to do is accept the request, and then the payment is instantly received by the lender.
In comparison to traditional transfer systems, real-time payments are resource-efficient. They provide a single point of contact for both the payment message and information regarding the payment. The ISO 20022 standard employed for real-time payments provides the data necessary for ease of processing into backend systems, as well as increased fraud protection. The result is a significantly streamlined workflow, and efficiency that pays off in shrinking operation costs. The data-rich messages sent on real-time networks allow for better cross-sell opportunities, improved forecasting tools, and automated transfer services.
Small to Medium Business
Businesses can be made and broken in the time between initiating payment and final settlement. This is especially true in times of economic pressure. For example, a manufacturer operates at a deficit from the time they ship to the time they receive payment. If this same business can receive funds as soon as they make a sale, their growth trajectory has a better foundation. They can close sales and purchases in real-time and immediately redirect the funds.
Another use case for businesses is payroll. Employees can receive paychecks instantly and with more flexibility, and the payor does not need to account for the float period— funds deduct immediately. If the business is accustomed to that float period, they can nudge their payday to the date that the payment would be received without any disruption to their current budget. This is an especially important feature for employees in the gig economy or those who work irregular hours. Overall, businesses see happier workers, increased revenues, and accelerated growth.
One appealing use is P2P. If a convenient interface is provided, real-time payment is more appealing than both cash and competing mobile payment services like Venmo or CashApp. Mobile payments offer convenience but in a closed-loop system. If a customer needs to make a mortgage payment, for instance, they need to transfer funds to their bank account. This means either waiting at least a day for a free transfer or paying for an “instant” transfer.
The use of banking aliases could drastically simplify sending P2P transfers through a bank’s real-time option. An alias would allow users to share a memorable, unique identifier rather than an account or routing code. Best practices have yet to be established, nor has a convenient method of standardizing these aliases between different banks. Once these hurdles are crossed, however, consumers will be happy to simplify their finances.
As we mentioned a few times, consumers, especially Millennials and Gen Z, are willing to switch service providers to access real-time payments networks. In fact, 30% of consumers believe that access to real-time payments is a key factor when selecting a financial institution. This goes for banks, credit unions, utilities, payroll providers—if your firm is moving money at any scale and wants to win life-long customers, then moving to real-time is a necessity. But this demand is itself an opportunity.
Alacriti’s Cosmos for RTP® enables credit unions to quickly and seamlessly connect to The Clearing House’s RTP® network and deliver innovative real-time payment services to their members. Alacriti’s solution allows credit unions to rapidly leverage the power and convenience of RTP to drive new revenue without the burden of significant infrastructure overhauls or capital investments.