As a general maxim, ‘better, faster and cheaper” wins in the marketplace. The broad rollout of faster payments in the US is set to test this idea.
As widely communicated, the Federal Reserve launched its faster payments service, FedNow, in July 2023. Together with The Clearing House’s RTP and Nacha’s Same Day ACH, the US now has three world-class faster payment systems; will they be used?
To collect information about market demand for these new faster payment services, as well as latent customer interest, Barlow Research surveyed over 400 businesses to gauge their awareness and likelihood of utilizing these new payment capabilities.1 Among the study’s findings, three particularly standout:
1. Clear customer demand
2. Willingness to pay
3. The onus is on banks to market this service to their customers
These survey data are the basis for our headline, The Slow Road to Faster Payments. Given the two-sided nature of payment networks, without a more concerted effort by banks to promote the availability and merits of faster payments (across Same-Day ACH, RTP and FedNow), it seems likely that it will take many, many years for these new services to reach their potential. With clear demand from their business customers, the time for banks to act is now.
Businesses have various options for how they can both make payments as well as receive payments. Each payment choice – check, ACH, credit card, debit card, wire – has its own unique set of attributes including cost, speed, acceptance and finality. And, depending upon the payment in question, one particular payment mechanism may be better suited than others.
Until recently, other than wire transfers, none of the existing US payment systems provided the ability to truly move money in near real-time.3
This led the Federal Reserve to initiate a review of potential enhancements to the US payment system. In January 2015, after two years of research and stakeholder consultation, the Fed released its white paper, Strategies for Improving the U.S. Payment System. One of the paper’s key recommendations was for the industry to support faster payments.
Since the document’s release, three new faster payment capabilities have been launched, as shown in Exhibit 1.
Source: Banking & Payments Group
There was extensive commentary in the industry leading up to this summer’s launch of FedNow. Much of the discussion focused on technical details about FedNow and/or contrasted this service with other options in the market. In our view, these discussions missed the mark.
All three faster payment systems share the same basic go-to-market model – they sell their service to financial institutions, and these financial institutions, in turn, provide this capability to their customers (Exhibit 2). As a B2B2B service, the primary focus should be on the downstream market for faster payments, i.e., for the payment operator’s customers’ customers. That’s what we discuss below.
Source: Banking & Payments Group
We surveyed banks’ business customers to gauge their interest in using faster payments. When asked if they would be interested in making or receiving real-time business payments, if their primary bank offered a real-time payment solution, the majority said yes (Exhibit 3). Not surprisingly, more businesses expressed interest in receiving payments more quickly than in paying others more quickly, but the interest level is remarkably robust in both directions. These interest levels are true across all business sizes.
Source: Barlow Research Flash Panel Survey, “Interest in Real-Time Digital Payment Capabilities,” August 2023
Asking why a particular business is or is not interested in using faster payments provides insights into their current behavior, preferences and constraints. For example, among those interested, one of the most commonly cited reasons was the flexibility to make payments on-demand; conversely, the largest barriers to adoption are concerns about the non-reversibility of real-time payments, the record-keeping benefits of paper checks and simply inertia (if the current approach “works” there’s no obvious case for change). Exhibit 4 highlights a few of these direct comments from business customers.
Source: Barlow Research Flash Panel Survey, “Interest in Real-Time Digital Payment Capabilities,” August 2023
Being interested in using faster payments is necessary but not sufficient. This customer interest needs to further translate into a willingness to migrate payment transactions from their current means to this new, real-time option. Respondents indicated that they would plan to shift about 22% of their outbound payments, on average, to one of these new faster payment methods, if their bank were to make this service available to them.
For business that frequently utilize online bill payment, the projected transaction migration rate is around 30%; by contrast, businesses that prefer to pay via credit or debit cards, their anticipated transaction shift to real-time payments is approximately 15%.
One of the major unknowns associated with the rollout of a new payment capability is, will customers see sufficient value to be willing to pay a transaction fee? Given all of the alternatives already in the market, will the incremental utility associated with payment speed command a price premium?
We asked our businesses what they thought would be a “fair per-transaction fee” for faster payments, both for sending payments as well as for receiving payments more quickly (Exhibit 5). Not surprisingly, 20-30% of businesses said zero – they were not willing to incur any additional cost for making or receiving faster payments. But the majority of the market does ascribe monetary value to payment speed.
Source: Barlow Research Flash Panel Survey, “Interest in Real-Time Digital Payment Capabilities,” August 2023
Some banks have expressed concern that real-time payments will cannibalize their wire business. The demand levels suggest that this concern is misplaced.
The survey results paint a compelling picture: a majority of businesses are interested in using some form of faster payments, believe that they would migrate about one-fifth of their volume to a new service, and are prepared to pay a premium for this transaction speed.
Yet, despite this broad-based demand, actual usage of faster payments remains low. After 6-7 years in the market, Same-Day ACH represents just ~2.5% of total ACH transactions and RTP volume is small relative to the overall opportunity. When we ran a workshop with business bankers recently, only 30% said that their FI planned to support FedNow within the next year or so.
Why this disconnect between customer demand and market reality? The primary culprits are reach and awareness:
ATM/debit networks faced exactly the same challenge in their early days. These networks agreed to ‘gateway’ transactions to each other, recognizing that a rising tide raises all ships. For faster payments in the US to reach its full potential, we believe that inter-operability will also be required.
Whether businesses’ general lack of awareness is a lack of marketing, or simply a lack of effective marketing, is unknown but it does not change the conclusion. The banking industry as a whole needs to ‘up its game’ if faster payments is to reach its potential.
Tony Hayes is the Founder and Managing Partner of Banking & Payments Group LLC. He can be reached at tony.hayes@bankingandpaymentsgroup.com
This article was developed in collaboration with Barlow Research Associates Inc., and the survey was administered by Barlow Research. Barlow is the leading research firm focused on business banking, with decades of experience gathering first-hand feedback from business banking customers across all sizes and industries. For questions or to learn more about Barlow Research, please contact Youa Yang, Managing Partner, at yyang@barlowresearch.com, 763-253-1825 or visit https://www.barlowresearch.com.
1 Data from Barlow Research Flash Panel Survey, “Interest in Real-Time Digital Payment Capabilities.” Survey was conducted in late August 2023 and gathered feedback from a nationally representative sample of businesses across markets and business types. Of the 408 respondents, the businesses are segmented into two groups by annual sales revenue: Small Business ($100K-<$1MM) (n=257) and Middle Market ($10MM-<$500MM) (n=151).
2 Among companies not using faster payments already, 53% of small businesses and 52% of middle market companies are interested in using faster payments to send/make payments; 57% of small businesses and 67% of middle market companies are interested in using faster payments to receive/accept faster payments.
3 We define money movement as the transfer of funds, which means the money has settled into the recipient’s account. This is distinct from how payment cards operate, whereby the authorization is (usually) provided in real-time but the settlement is performed via an end-of-day batch process.
Consumer-oriented money transfer services, such as Venmo, give the impression of moving money instantaneously since both the sender and the receiver are notified “in real time.” In reality, since of transfer of funds is dependent upon a non-real time payment system, such as Visa Direct or Mastercard Send, the money movement lags the notification.
4 Despite the rapid growth of Same Day ACH, six years after launch, it represents ~2.5% of total ACH volume.
5 RTP is growing, with TCH reporting ~40% transaction growth from Q2 2022 to Q2 2023, from 41 MM to 58 MM transactions. In July 2023, TCH reported that RTP had surpassed the 500 million payments milestone since its launch, suggesting that the network has earned cumulative revenue of approximately $22.5 million over the past 5 ½ years.
6 35 banks are part of the Fed’s “Early Adopter Financial Institution” program. Without inter-operability between RTP and FedNow, a lack of scale may hamper total transaction volume.
The Fed appears to be taking a hands-off approach to market adoption. In a speech at the Federal Reserve’s Seventh Annual Fintech Conference (in September 2023), Michael Barr, the Federal Reserve vice chair for supervision, said, “We have provided the rails. Innovation by private depository institutions will determine whether these services reach a broad range of households and businesses.”
7 More detailed pricing information, including the split between small businesses and middle market companies, is included in the full report. For questions or to participate in a comprehensive multi-client study of faster payments, scheduled for early 2024, please contact Barlow Research.
