The Slow Road to Faster Payments

The Slow Road to Faster Payments

In collaboration with Barlow Research Associates

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, on July 20. 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

  • More than 50% of businesses indicate interest in using a faster payment service2
  • If these companies began using real-time payments, these businesses expect to migrate an average of 22% of their total outgoing monthly payment volume to a real-time payment option over the next year
 

2. Willingness to pay

  • Businesses report a willingness to pay for speed, with ~$2.50 being seen as a “fair price” for sending $1,000, while nearly $100 is seen as reasonable fee for receiving $100,000 more quickly
  • Banks may be under-charging for the utility of moving high-value transactions in real-time
 

3. The onus is on banks to market this service to their customers

  • Even with these levels of interest, most businesses state that their bank has not promoted these new capabilities (with smaller businesses being the least aware)
  • Despite years of planning, many banks remain undecided about whether or not to provide 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.

1. Rollout of Faster Payments

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.

Exhibit 1: Timeline for rollout of Faster Payment schemes

Source: Banking & Payments Group

  • First, Nacha rolled out Same Day ACH in 2016. Building on its existing ubiquitous two-sided network of ODFIs and RDFIs, Nacha developed the standards for the two ACH network operators and all of the participants to send and receive ACH files multiple times throughout the day.
    • Same Day ACH (SDA) offers a unique value proposition. It is faster than “standard ACH” (but not real-time), and it is very low cost (SDA has a 1¢ per transaction surcharge over ACH’s minimal rates). This combination has proven compelling: SDA dollar volume grew 86% YoY (2022-2021) while overall ACH network volume expanded by 6%.4
  • Second, The Clearing House introduced Real-Time Payments, RTP, in November 2017. Billed as the first new payment system to be introduced in the US in 40 years, RTP offers enhanced data and messaging capabilities, increased security and real-time funds availability.
    • Responding to the Fed’s call-to-action for the industry, the large bank owners of The Clearing House invested to build a brand-new real-time payment system. Today, the RTP system has over 350 participating FIs, with access to approximately 65% of all US DDAs, and processed about 170 million transactions in 2022.5
  • Third (and most recently), the Federal Reserve launched its real-time payment service, FedNow. This went live on July 20.
    • FedNow has many similarities to RTP, in terms of both functionality and in terms of pricing. However, there are (at least) two notable differences: (1) FedNow is operated by a public sector organization (not a bank-owned association) and (2) as a new-to-market provider, FedNow has different DDA coverage.6

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.

Exhibit 2: Go-to-Market model for Faster Payment schemes

Source: Banking & Payments Group

2. Customer demand

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.

Exhibit 3: Customer interest in Faster Payments

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.

Exhibit 4: Commonly cited reasons for interest/lack of interest in Faster Payments

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%.

3. Willingness to pay

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.

  • For payments of $1,000, the average fee that was deemed fair was ~$2.50 for both sending and receiving faster payments
  • As the transaction value increases, so does the fee that businesses report being willing to pay (while the absolute value increases, the transaction cost as a percentage of the payment amount decreases)
  • As the transaction value increases, businesses put a greater premium on receiving money more quickly, reporting being willing to pay $97 to receive $100,000 faster than today, versus $91 to send a similar amount

Exhibit 5: “Fair price” for Faster Payments
Fair price is as self-reported by each business7
Computed as weighted average, includes responses of zero

Source: Barlow Research Flash Panel Survey, “Interest in Real-Time Digital Payment Capabilities,” August 2023

If businesses migrate their current check or ACH volume to one of the faster payment methods (Same Day ACH, RTP or FedNow) and pay a per-transaction fee that reflects these averages, the industry gains. Businesses pay what they regard as a fair price in exchange for faster payments, and banks replace older, lower revenue payments with newer, higher-revenue alternatives.

Some banks have expressed concern that real-time payments will cannibalize their wire business.  The demand levels suggest that this concern is misplaced.

  • Wires do not represent 22% of a typical business’s incoming or outgoing payments mix. In order to achieve this level of migration, most of the shift must be coming from non-wire sources
  • Banks charge around $25 for a domestic wire transfer. As the data show, businesses are willing to pay considerably more than this, depending upon the size/importance of the transaction. Far from cannibalizing wire income, if priced correctly, real-time payments could boost forward-thinking banks’ income.

If you build it, will they come?

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:

  • Each of the three faster payments systems works independently of the others. A bank using RTP cannot send money to a bank using FedNow, and vice versa; similarly there’s no connectivity between Same Day ACH and the two real-time systems. A system with access to 50% of all DDAs will only be applicable to 25% of total payments demand (50% of senders x 50% of receivers).

    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.

     

  • Given the B2B2B nature of the industry, adoption of faster payments is dependent upon banks promoting this capability to their business customers. But, when asked if their bank had marketed the ability to make or receive faster payments, most businesses said no.

    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.