InFocus Real-time payments may be approaching a tipping point

InFocus | Real-time payments may be approaching a tipping point 2

Real-time payments may be approaching a tipping point

Top takeaways

The Federal Reserve System traditionally has provided payment services to the banking industry. Considering this, it would not be unprecedented for the Federal Reserve to operate a Real-Time Gross Settlement (RTGS) system; it is seeking public comment on that possibility.

This article outlines the impacts and opportunities for new and incumbent payments industry stakeholders if the Federal Reserve decides to become an RTGS operator.

A Federal Reserve-operated RTGS system will likely yield opportunities for payments ecosystem players to drive innovation and bring to life solutions to address the industry’s pain points.

InFocus | Real-time payments may be approaching a tipping point 2

InFocus | Real-time payments may be approaching a tipping point 3

Figure 1. Real-time payments in the US

2015 2016 2017 2018 2019 and beyond

• TCH selects Vocalink to develop RTP system• Federal Reserve convenes Faster

Payments Taskforce

• TCH RTP launches• Zelle launches RTP • WeChat and Alipay partner with select

US payments companies

• MasterCard acquires Vocalink• Visa launches VisaDirect• NACHA rolls out same day ACH settlement• The Faster Payments Taskforce solicits

proposals for RTP solutions

• WeChat and Alipay expand to US market• US Faster Payments Council (FPC) formed• Visa partners with MoneyGram to enable faster

cross-border payments• Federal Reserve seeks public comment (2018)

on developing RTGS service and liquidity management tool

• Digital payments grow 11% YoY• B2B RTP expected to drive growth

Overview: Real-time payments landscape

Real-time payment processing (RTP) is gaining traction globally. Consumers and businesses value faster payment services for

the convenience they provide, such as the ability to pay another individual on-the-spot using a mobile phone application.1 In the last four years, the US market has seen real-time payments gain traction with different players in the industry (figure 1).

InFocus | Real-time payments may be approaching a tipping point 4

Figure 2. The Federal Reserve and payments technology in the US

20191970s 1980s 1990s 2000s 2010s

Special Committee on Paperless Entries formed (1968)

Local clearing houses established (1972)

NACHA establishes 94 character format as standard (1975)

Federal Reserve prices ACH and Fed Wire services (1981)

NACHA establishes EBT and Electronic Check (1995)

Faster Payments Taskforce formed (2015)

Federal Reserve seeks public comment (2018) on:1. RTGS service2. Liquidity management

tool

TCH announces plan to build RTP

system (2014)

The Faster Payments Taskforce solicits proposals for RTP

solutions (2016)

TCH Launches RTP (2017)

Federal Reserve Bank implements ACH operating system (1996)

Local ACH linked with the Federal Reserve System (1978)

Federal Reserve implements Electronic Funds Transfer Act (Reg. E) (1979)NACHA formed (1974)

ACH Growth Journey RTP Growth Journey

US Federal Reserve’s role in payment technologies’ growth

The US Federal Reserve System historically has played an important role in advancing new digital payments frameworks—including the introduction of pricing for FedWire services in 1981, which increased access beyond Federal Reserve member banks. Now, the Federal Reserve is focusing on advancing real-time payment processing in the United States (figure 2).

In its efforts to introduce a ubiquitous payments solution, the Federal Reserve Board on October 3, 2018, issued a request for public comment on two potential actions that would facilitate real-time interbank settlement of faster payments while increasing the resiliency and security of services offered to the public:2

1. The development of a service for real-time interbank settlement of real-time payments 24 hours a day, seven days a week, 365 days a year (24×7×365); and

2. The creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24×7×365 basis to support services for real-time interbank settlement of real-time payments, regardless of whether those services are provided by the private sector or the Federal Reserve banks.3 

To date, the Federal Reserve Board has not committed to any action on real-time payment processing or indicated if it will even take one. However, based on history, it would not be unprecedented if the Federal Reserve decides to become an RTGS system operator.

InFocus | Real-time payments may be approaching a tipping point 5

Opportunities stemming from a Federal Reserve RTGS system

Real-time payment processing is reaching a tipping point. A Federal Reserve-developed, ubiquitous, RTGS system has the potential to become the de facto global standard and to help usher in a new wave of innovation by existing and new payments ecosystem players. In our view, this system would help players to differentiate, creating opportunities to increase market share. It would also trigger technology innovation supporting new use cases and improved customer experience. We have seen this happen in other countries and anticipate it also will be the case in the United States if the Fed becomes an RTGS operator.

Strategic partnering to meet customer needs

Ecosystem players could take advantage of the Fed’s common platform by building strategic partnerships that would bring innovative, customer-focused products to market more quickly and efficiently.

• When Unified Payments Interface (UPI)-based payments were introduced in India, Yes Bank was quick to collaborate with PhonePe, a UPI-based payments fintech. Typically, Indian banks have developed such capabilities in-house. However, Yes Bank’s strategic collaboration allowed it to quickly create a plethora of business- and retail-centric UPI solutions. In 2018, the bank claimed 22 percent of the UPI market share, making it the second-largest player. Most of these transactions are generated through PhonePe.4

InFocus | Real-time payments may be approaching a tipping point 6

InFocus | Real-time payments may be approaching a tipping point 7

Differentiating products and services

Increasing competition is likely to drive new and incumbent players to launch products that attract customers to their platform through creative experiences and competitive pricing. They will need to make strategic positioning choices on where to play and what products/services to offer and design their growth model to meet customers’ ever-increasing appetite for innovative payments solutions.

• Paytm, India’s largest mobile e-commerce website, is making its apps feature-rich to encourage customers to use them for all their financial needs. Offering an attractive feature set is helping Paytm to rapidly grow its customer base and gain a competitive advantage. Paytm has completed its integration with the UPI; using Paytm’s mobile payment mode, BHIM UPI, users can transfer money instantly between bank accounts and make payments to accepting merchants.5

• Faster payment services have provided a platform for UK payment service providers and third parties to deliver innovative products to help meet customer and merchant expectations. For example, Skrill’s Rapid Transfer provides instant payments from consumer to merchant while providing existing payment processor services like chargebacks and refund processing.6

• India’s UPI-based payment system has garnered half the value of India’s credit card and debit card swipes. Its introduction created a wealth of innovative payment solutions with very high adoption rates. With the release of a more merchant-friendly UPI 2.0, the number and value of merchant transactions is expected to rise, leading to a projected annual growth rate of 90 percent over the next five years.7

InFocus | Real-time payments may be approaching a tipping point 8

Triggering technology innovation

If a Federal Reserve-operated RTGS system becomes the global standard, it may trigger countries with and without an existing real-time payments infrastructure to invest and innovate in RTGS so they can participate in the US system. It also may serve as the catalyst for current US payments providers to upgrade their technology while retaining the market advantages they have developed over the last several years.

The introduction of the new RTGS system will require incumbent players to continue and, in some cases, accelerate their investments in core systems transformations. This will be required to mitigate risks associated with operations, security, and fraud prevention when implementing a real-time payments system.

The investments that existing US players have made to date will not be wasted. RTGS can address a number of pain points to help incumbents accelerate their use case development, including lowering costs of real-time interbank settlement and the ability to collaborate with global players around a defined standard and ready-made liquidity management tools.

• Real-time payment systems are increasingly being viewed as an extension of cross-border correspondent banking transactions. A pilot conducted by SWIFT, global provider of secure financial messaging services,8 and banks from China, Thailand, Singapore, and Australia linked SWIFT’s Global Payments Innovation (gpi) correspondent banking transactions with New Payments Platform (NPP), Australia’s real-time payment system transactions. This pilot demonstrated that domestic, real-time systems are central to achieving faster cross-border payments.

InFocus | Real-time payments may be approaching a tipping point 9

What’s next?Over the last four years, we have seen increased momentum from the private sector and the Federal Reserve to prepare for a major evolution in the US payments industry. Some smaller financial institutions, corporations, and merchants might be concerned whether or not a commercial real-time solution controlled by a large bank-owned consortium would provide a level playing field in relation to pricing and policy representation. However, based on recent discussions and conference presentations, it appears that small bank consortiums may be prepared to give their larger counterparts a chance. The good news is that financial institutions that want to roll out payments solutions in the near term can choose among a number of marketplace options. The introduction of either a commercial or federally operated RTGS system—or both—presents opportunities for current and new ecosystem players to innovate and provide unique products and services with competitive pricing.

Consumers, households, and businesses will benefit by having a faster, more secure digital payment platform that offers multiple, cost-effective ways to access funds.

If you want to learn more about opportunities for your organization to participate in the burgeoning real-time payments market, we should talk.

InFocus | Real-time payments may be approaching a tipping point 10

1. “Federal Reserve Board seeks public comment on potential actions to facilitate real-time interbank settlement of faster payments,” Board of Governors of the Federal Reserve System news release, October 3, 2018, https://www.federalreserve.gov/newsevents/pressreleases/other20181003a.htm.

2. Ibid.

3. Ibid.

4. Pratik Bhakta, “Paytm accounts for third of the 190-million UPI transactions,” Economic Times, May 8, 2018, https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/paytm-accounts-for-third-of-the-190-million-upi-transactions/articleshow/64072118.cms.

5. Ibid.

6. “What is rapid transfer?,” Skrill, https://www.skrill.com/en/business/rapid-transfer/.

7. Bhakta, “Paytm accounts for third of the 190-million UPI transactions.”

8. “Swift gpi: Cross-border payments, transformed,” SWIFT, https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi.

Endnotes

InFocus | Real-time payments may be approaching a tipping point 11

ContactsChristopher AllenManaging Director | Deloitte Consulting LLPchrallen@deloitte.com

Zachary AronPrincipal | Deloitte Consulting LLPzaron@deloitte.com

Maanas Godugunur Manager | Deloitte Consulting LLPmgodugunur@deloitte.com

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