What payment companies want from real-time payments | PaymentsSource

The Clearing House’s real-time payments network and the Federal Reserve’s FedNow have gained hundreds of banks, but overall acceptance of instant settlement is still low, leading bankers at this week’s Clearing House annual conference to question that path for future growth.

Just over 1,050 financial institutions are live with the Federal Reserve’s FedNow service as of Nov. 11, according to the central bank, and The Clearing House lists 649 financial institutions on its website that are enrolled in its real-time payments network. By comparison, there are more than 8,000 banks and credit unions in the United States. 

The question comes at a time when global payments technology and infrastructure are evolving at a fast clip and banks become more vocal about the importance of payment and money movement services to their bottom line.  

Truist Financial, for one, doesn’t think of payments as a separate business within the bank, but the business of the bank, said Bill Rogers, chairman and CEO of Truist Financial at the convention this week in New York. 

“Payments is the grease and the oil and the fuel that drives the economy, and I think we’ve all reinforced our knowledge that payments are what helps drive deposits,” Rogers said. “Those things are inextricably linked, and we know how important the stability of the deposit platform is for all our institutions.” 

And many of those users are only equipped to receive instant payments and are not set up to send them, leading to a proverbial chicken-or-egg dilemma. 

Different financial institutions have different reasons for limiting their instant payments to receive only. Navy Federal Credit Union, for one, has only turned on receive capabilities for instant payments, Dietrich Kuhlmann, president and chief executive at the $180.8 billion-asset credit union, said at the conference. 

“The reason we haven’t turned on send yet is because we’re waiting to get the right fraud engine in so that we’re in front of that fraud before it happens,” he said. 

Sacramento, Calif.-based Golden 1 Credit Union is also only set up to receive instant payments, largely due to functionality limitations from one of its vendors, Fiserv, Dustin Luton, senior vice president, said in an interview. 

“We can’t currently send through FedNow. We’re looking to be able to send most likely sometime in 2025,” Luton said. 

Ubiquitous instant payment adoption will need widespread buy-in across industries to “really take off,” Navy Fed’s Kuhlmann said. 

“Growing these networks is going to take time, because frankly for this ecosystem to take off, everyone has to be connected,” Kuhlmann said.

Will merchants push ‘Send’ adoption?

Receive capabilities are vital for financial institutions, said Tede Foreman, president of payments solutions at Jack Henry, but send capabilities will likely also come to be expected by small businesses that need funds faster.  

“We’re really [focused on] getting our financial institutions, both credit unions and banks, to enable receipt. We consider that to be table stakes, Foreman said, adding, “We’re actually seeing higher deposits now come into banks’ and credit unions’ core systems.” 

Merchants could be a key driver in promoting send capability adoption from their own financial institutions, said Jamie Walker, CEO of Elavan, a payment processing and merchant services subsidiary of U.S. Bank. 

“As U.S. Bank rolled out the uses of real-time payments, we were one of the first and largest use cases as we started using this service to fund our merchants real time,” Walker said. “We service over 70,000 merchants today and funding them has been a huge advantage to those customers.” 

Square, which is a point-of-sale and card processing division of Block, is the largest sender of real-time transactions to credit unions using Columbus, Ohio-based Corporate One Federal Credit Union’s technology to connect to the payment networks, said Melissa Ashley, president and CEO of the corporate credit union. 

Elavon’s Walker expects that instant payments will become vital small businesses within the next four to five years. “It will become the expectation of our merchants … to get those funds quicker. Today, it’s very much a value add for customers of U.S. Bank.” 

Eventually, the sender of the funds will end up dictating which instant payment rail, whether its FedNow or The Clearing House’s RTP, is used, said Jack Henry’s Foreman. 

“We’re encouraging [our clients] to go with both [networks]. Interoperatability is ultimately where we’d like to see everything go, so they can exchange,” Foreman said. “We’re not really driving one set or another. We’re building into our faster payment hub smart routing, and least-cost routing, so we’ll know whether or not a merchant or a biller has the ability to accept FedNow or RTP.” 

Foreman said that Jack Henry’s 1,700 clients are split evenly between RTP and FedNow. 

Corporate One also has credit union clients on both payment rails, and encourages others to do the same. “They don’t control the user experience of where the fund is coming from.”

What is the Fed’s role in selling real-time payments?

The Fed has an important coordination role to play in the widespread adoption of instant payment settlement technologies through its FedNow payments rail, according to Fed Gov. Christopher Waller, chair of the central bank’s internal payments committee. 

Waller said getting enough uptake for a system to benefit from a network effect is beyond the capability of a private sector entity, such as RTP network, which is run by The Clearing House and owned by a consortium of large banks.

“The role we’re playing with FedNow is to help with that coordination problem using our existing connections to those thousands of institutions,” Waller said in a speech at this week’s TCH conference. “And that approach is consistent with my overall view of the appropriate role of government, to narrowly address problems like those of coordination that can’t always be efficiently solved by the private sector alone.”

Industry, on the other hand, is better suited for the experimentation and risk-taking needed to determine what kind of products are viable, Waller said.

Absent from Waller’s remarks were any specific praise for instant payments or sales pitch for FedNow. Instead, during a question and answer session with Rodgin Cohen, senior chairman for the law firm Sullivan & Cromwell, Waller expressed skepticism about the rush to faster payment settlement.

“What I’ve been trying to stress in my discussions with international counterparts is you want faster, cheaper and safer, all three of them. It’s not just the first two, and that’s where I want the discussion to go,” Waller said. “If you can’t always think about just making it cheaper and faster and throw away safety.”

Waller said having multiple systems in place to carry out the same tasks — namely FedNow and RTP for instant payments — is its own form of safety precaution, as the systems can serve as fallbacks for one another should either go down. 

In discussing the government’s role in payments, he noted it was important that public networks not be used as a tool to bring down market costs by undercutting private systems. He also said the government should not provide a blank check to systems that are not actually filling a market gap, pointing to the Fed’s decision to shutter its cross-border FedGlobal ACH system last year.

“We created Global ACH 20-something years ago because of this ‘need’ for better global payments. We put a lot of money into it, we built it and nobody used it. Well, we finally shut it down. I mean, we’re not going to run this thing for decades, and nobody’s using it,” he said. “At the end of the day, we can’t just build systems, and if nobody uses them, just keep paying for them and running them. At some point you gotta cut the cord and call it a day.”

Some in the audience for the speech felt Waller’s off-the-cuff comments — whether he meant them to or not — outlined the standard by which future wind downs would be enacted. 

Aaron Klein, a senior fellow in economic studies at the Brookings Institute and faster payments advocate, said the remark appeared to set the stage for the shuttering of FedNow, which has seen little usage since going live last summer. 

“Waller is planting the seeds to eliminate FedNow. He said if we build a payments system and no one is using it, we should shut it down. Today, FedNow fails that test,” Klein said. “He’s laying the groundwork to end FedNow, which is currently a great Fed flop.”