Why banks have trouble selling real-time payments
- Banks need to understand how they monetize realtime payments services
- Currently there isn't a model for how banks should charge for realtime payments and it's hard to advocate for them without cannibalizing their credit card business
Real-time payments have landed in the U.S., but banks are still figuring out how to sell them to corporate clients. BNY Mellon, U.S. Bank, Citi, JPMorgan, PNC and SunTrust are the only banks using the Clearing House’s new real-time payments system.
One challenge is simply the legacy infrastructure on which most financial services companies today are built. Companies that provide ERP systems like SAP or Oracle have built their systems in a batch processing world and need to also become real-time.
“You’ve never needed real-time accounting, but now that you’re doing more in a digital world, real-time capability is table stakes,” said Christopher Ward, PNC Bank’s head of treasury management product management. “The experience for the consumer is going to drive change in the way companies embrace RTP.”
But today, there isn’t a model for how banks should charge for real-time payments. It’s the first new core payments infrastructure in the U.S. in more than 40 years (the first transaction on the system was completed in November between BNY Mellon and U.S. Bank). Banks won’t charge consumers for real-time payments, but they’ll charge their corporate clients and how much they charge them varies bank to bank depending on the markets, the size of the corporation and the volume they transact.
There are also few bankers that experienced the launch of a new payment rail 40 years ago that can apply those lessons today. Today’s bankers are better versed in how to work with and against fintech startups, challenger banks and companies like Amazon and Apple, said Vinay Prabhakar head of markets strategy for payments at Finastra.
Like most vendors, Finastra plays a big role in educating clients on their go-to-market strategy and on how to make consumer and corporate clients adopt real-time payments. One of the most glaring problems he’s seen clients grapple with is the conflict between faster payments and credit cards.
“Banks need to understand how they monetize these services,” Prabhakar said. “Most banks have lucrative credit card programs, so how do they roll out RTP without cannibalizing their credit card models?”
In the age of PayPal, Venmo and Square Cash, it’s easy to forget that most transactions that take place day-to-day aren’t happening in real time. They feel like they are, but they really just move money from one PayPal user’s balance to another. Moving that balance from PayPal’s banking partner to the customer’s own bank account is still a multiday process.
Even debit card transactions aren’t real-time when it’s a weekend. They’re still settled the next business day. Plus, the consumer culture in the U.S. cherishes its credit cards. Merchants make money on them and consumers love their rewards. But credit card payments are structured loan products, not money transfers.
“It’s like if for 99 miles you drive a brand new Tesla but for that last mile you have to get out of your new car and take a horse and buggy,” Prabhakar said.
When real-time payments reach ubiquity, it will allow the U.S. to have “faster payments interconnectivity” with other countries initiating payments, Ward said. That would allow the U.S. to keep up and even be competitive with non-traditional payments alternatives like China’s WeChat Pay or Alipay, who have grown their U.S. presence over the past year.
U.S. banks are not that far away from ubiquitous real-time payments, according to Ward, who said he thinks 90 percent of banks will have implemented real-time payments by the middle of 2019. PNC hasn’t met too many challenges itself trying to sell RTP, Ward said, but clients are still figuring out the best way to take advantage of it and whether they prioritize the needs of customers or suppliers.
“Think of how all other aspects of the economy are changing,” Ward said. “Digital payments need to do the same thing. It takes a while to gel in, but once it does, it will really take off.”