We've heard several financial institutions intend to delay deploying instant payments capabilities, such as FedNow and The Clearing House's RTP Network, until 2025 as part of broader cost-control initiatives.
While instant payment adoption is in its early stages – just 7% of U.S. financial institutions participate in instant payments based on data from federal regulators and The Clearing House – we assert that taking a "wait-and-see" approach, while seemingly a low-risk expense management play, could turn out to be a costly mistake.
While the percentage of participating financial institutions is relatively low, the combined reach of the RTP Network and FedNow extends to more than two-thirds of all U.S. checking accounts. Rapid growth in instant payments is predicted to be a top payments trend in 2024, and there are strong indications that it will reshape the U.S. payment ecosystem in the future.
By choosing to delay entrance into instant payments until next year, banks and credit unions risk having their business customers turn to a participating competitor to satisfy their instant payment needs.
The entrance of a new competitor providing instant payments could cost a financial institution more than just fee income opportunities with a business customer. Instant payment origination methods (e.g., APIs) are not standardized, resulting in business customers consolidating dealings to just one or two financial institutions.
As a result, banks and credit unions that have established an instant payment-originating relationship with business customers have a strongly defensible position. For those delaying participation, it introduces the additional risk of losing out to financial institutions – many of which are keen to capture the entire business relationship.
This scenario can be avoided. The business case for financial institutions to participate in and originate instant payments is strong, driven by the generation of fee income, the creation of operational efficiencies, acquiring and retaining customers, and using instant payments to improve FI-provided products and services (e.g., loan disbursements).
Banks and credit unions, at a minimum, should conduct a complete cost-benefit analysis to understand the impact of instant payments on their organization. They should evaluate if their customers/members – both retail and commercial – are participating in any instant payments use cases or plan to do so in the future. Those customers are a flight risk. In summary, if financial institutions are going to delay their instant payments participation, they need to ensure that what looks like a low-risk, cost-saving opportunity doesn't become much more expensive.
It is worth noting that new use cases are being tested daily, and adoption is quick – less than 18 months from pilot to industry requirement – so regular assessments of your customers' activity are a must.
The Bottom Line
We believe the concept of instant payments is here to stay and that most, if not all, financial institutions should include participating in the solution in their strategic planning.
If you have yet to take a serious look at instant payments, reach out and let us help you evaluate your specific business case and set a strategy that puts you on the right path.
Join SRM during our scheduled Tech Talk session on January 18 to learn more. I will discuss the latest instant payments trends with Cheryl Gurz, Real Time Payment Product Manager at The Clearing House.