Instant payments have been on the radar for some time – The Clearing House’s RTP Network has been operational since late 2017. But the Federal Reserve’s launch of FedNow, the second instant payments network in the US, has reshaped the landscape – shifting the dialogue from “if instant payments will take hold” to “when and how will they take hold.” This was evidenced when over 1,750 people joined the Fed’s recent town hall on the topic – a potent indicator of market interest.
As a result, financial institutions, businesses, and payments industry service providers across the payments ecosystem must act now to develop plans for when and how they will participate so they are best positioned to serve customers’ needs.
New Value Propositions, New Use Cases
Determining the right approach will be driven by use cases. Instant payments offer a unique combination of immediacy, 24/7 availability, irrevocability, and enhanced data. Their value proposition will enable participants in the payment ecosystem to address business needs better than legacy payment solutions. Industries already altered by instant payments include payroll (earned wage access) and digital wallets, where the benefits of instant payments have transformed business models.
Drawing on history, new payment models tend to have a similar impact on the payment ecosystem. Consider the advent of direct deposit, which leveraged the ACH network in the 1980s. This new use case improved the lives of millions of Americans who no longer had to wait countless hours in teller lines to deposit paychecks. It also dramatically changed the interaction between financial institutions and their customers as they no longer had a guaranteed bi-weekly touch base.
As previously noted, instant payments are already driving similar changes for select industries. Based on interest in the topic seen at the Fed’s Town Hall and the recent MAG 2023 Annual Conference and Tech Forum, it’s likely that more breakthroughs are on the horizon.
More an Addition than a Substitution
History demonstrates that innovations like instant payments are often accompanied by prognostications of how they will make existing practices irrelevant. These bold statements often prove false as the new and improved value proposition won’t provide a better solution for every use case, and seldom addresses the needs of every segment.
This is why legacy payment methods are rarely retired and despite decades of digital payment innovation, checks and cash remain prevalent in the US and have been resistant to extinction.
While it’s possible to identify trends and see where markets are headed, nobody can precisely predict where an innovation will take hold. This was seen in 1980s with ACH direct deposit and most recently with instant payments. One of the most-popular current use cases, digital wallet unloads, wasn’t even contemplated by industry experts.
The Bottom Line
Financial institutions, businesses, and payments industry service providers should realize that instant payments will materially change some business models – but not all of them. It’s imperative that participants in the payment ecosystem develop a strategic view of “when and how” instant payments could present opportunities and/or pose risks for their specific customers and business models. There is no one “right” answer. However, thoughtful analysis will be essential as these entities begin developing their instant payments roadmaps.
