At long last, the United States has a real-time payments system. On November 13, the first transaction took place on the new system—a $3.50 transfer between BNY Mellon and U.S. Bank—and it took only took three seconds to settle. As one of the proposal submitters to the Faster Payments Task Force, The Clearing House (TCH) has with its Real-Time Payments (RTP) system certainly stepped up and delivered.
I really think—and hope—that this marks the beginning of a new era for payments in the United States. But if that’s truly going to happen, it will mean letting go of one constant in our payments system—the paper check.
Checks: Still alive and kicking
The United States is very special in that the government does not mandate a certain way of making payments; it is all up to the free market to determine how things are going to change. But this approach doesn’t always yield positive results; the U.S. is still heavily relying on checks, particularly for B2B transactions. Even though checks are largely considered inefficient and costly, they are still around because no one is forcing market players to abandon them.
For corporations, it can be a massive undertaking to change internal payment system infrastructures. There has to be a really good alternative payments system that not only is ubiquitous, but also can promise efficiencies and cost savings sufficient enough to provide a clear business case to make a change.
There are of course alternatives to checks; certainly ACH is filling a very important need for mass transfers, and cards are very useful for various business payments. But neither of these payment methods have managed to dethrone the almighty check. This is why I’m pretty excited about RTP. It is a new and extremely fast rail alternative that has entered the market. With real-time capability and the ability to carry extended remittance information space, it sounds promising.
So do I think RTP can make a difference? With thousands of financial institutions, such a change is not going to happen overnight, but I do think the potential is there. Financial institutions won’t want to be left out—especially when their competitors can offer their clients real-time payments. TCH is comprised of banks, and if RTP begins making headway with corporates, you can bet that non-TCH banks will want to get in on the action.
I also really like the fact that RTP is about actual real-time payments. Not long ago there was a lot of discussion around faster and near real-time payments. I never really cared for the near real-time discussions. Why not aim for actual real-time, right away? Real-time has been done in other countries for years—why should we do anything less than that? With real-time, a payment clears and settles within seconds, not relying on a bank making funds available quickly, etc. The Swedish system BiR (Payments in Real-Time) using the Swish application interface has worked really well for over five years, although not yet for B2B. The underlying infrastructure of RTP is very similar, in that it uses pre-funding to facilitate real-time. It is set up within the existing infrastructure and can achieve real-time without new technologies such as distributed ledgers or digital currencies. This could be important when it comes to actual implementation. If the changes a corporation has to do to benefit from RTP are minimal a major hurdle could be eliminated. It is then up to the banks to provide the vehicles for RTP usage.
Moving the needle
So, to recap, for real-time payments to truly catch on, and perhaps finally unseat checks in the B2B payments sphere, two important things need to happen.
- Banks need to get on board. Corporates trust their banks more than fintech startups who may be developing other real-time systems. TCH launching RTP is therefore a big step towards corporate adoption, and more banks following suit would only help.
- System changes need to be minimal. The reason checks have hung around for so long is because upgrading to a better system is costly and time consuming. The less painful adopting a real-time system can be, the more likely it is that it will happen.
Am I looking at this simplistically? Yes, but that is also one of my points. From a corporate perspective this needs to be looked at with a simplistic approach. Otherwise it might just be easier to stay with the check after all.
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