Real-Time Payments Are Here: Now What?

Explore the potential risks and rewards of three real-time payments use cases that can turn a must-have feature into a revenue and retention driver.

Introduction

Real-time payments are finally gaining traction in the United States. Consumers and businesses conducted 76 million transactions over the Real-Time Payments Network (RTP), totaling $42 billion, in the first quarter of 2024, according to the bank-owned payment platform operated by The Clearing House.[1] FedNow, which officially launched last summer, is also building momentum for its real-time payments rails, reporting 870 financial institutions have connected to the network with 1,000 more in the pipeline, up from just 35 last summer.[2]

While most of the largest banks are participating (or planning to) in both RTP and FedNow, some banks are only setting up to receive transactions. Some are beginning implementation while others are still developing use cases for real-time payments that will strengthen customer relationships and generate new revenue streams.

If you’re a banker or payments head looking to stake a claim in real-time payments, this whitepaper can help inform your strategy by exploring three use cases:

• consumer-to-business payments
• business-to-business payments and
• cross-border payments.

While there is some overlap in these categories, you’ll discover nuances for each segment as well as the trends and customer preferences driving demand.

But deciding which use cases to prioritize is really only the first step. You’ll have to invest significant time and resources to operationalize real-time payments—not to mention spur adoption and usage while protecting yourself from compliance, financial and regulatory risks. At a time when most payments operations teams and budgets are stretched thin, technology tools, including real-time transaction monitoring and data analytics, can make or break your real-time payments rollout.

Download a PDF copy of our Real-Time Payments Are Here: Now What? guide!

Real-Time Payments By the Numbers

Banks have an immense opportunity to dominate the real-time payments space. Here’s a snapshot of trends, specific use case forecasts, and a look at consumer and business sentiment that’s driving demand. To be competitive, you’ll need to firm up your strategy fast. Up to 90% of today’s retail payments revenue is at risk of changing ownership, according to Bain & Company.[3]

Consumers and Merchants Embrace Consumer-to-Business Payments

Competition for retail merchant and consumer accounts is getting fierce, according to Bain & Company, which estimates that as much as 90% of today’s retail payments revenue is at risk of changing ownership from banks to independent software vendors, major technology firms and others.[10]. As annual card growth dips from 7% in 2018 to 6% through 2026, annual growth for account-to-account (A2A) payments will be around 8%. While not all A2A payments are real-time, the popularity of A2A payments through Zelle and the RTP network since their respective 2017 launches, along with the newly available FedNow, will continue to advance A2A payments adoption.

At the same time, recent open banking initiatives have enabled third-party services to link with users’ bank accounts using APIs, making instant payments between individuals and businesses fast, easy and frictionless, IR’s Senior Product Manager of Payments & Infrastructure Jamie Pearson notes in a recent blog post.

Pearson calls A2A payments a “significant disrupter of legacy payment value chains.” And he’s not alone.

Instant A2A payments and non-card linked digital wallets will account for more than 50% of eCommerce payments globally by 2028, estimates U.K.-based consultancy Juniper Research.[11] That’s a major shift, especially for Western markets that have long been dominated by debit and credit card payments.

Merchants Like Lower Costs, No Chargebacks

Even with the recent $30 billion settlement in the 19-year merchant interchange fight with Mastercard and Visa,[12] real-time push payment options have substantial appeal for merchants. Not only are they cheaper to accept as noted above, there are no chargebacks to manage—a considerable expense with rising first-party, sometimes called “friendly fraud,” where genuine transactions are mistakenly or intentionally challenged by cardholders. For digital businesses, 75% of card-not-present fraud is first- party fraud, Datos estimates.[13]

With no reversals or chargebacks, real-time payments could be attractive to merchants and banks alike. You might be concerned that real-time payments would cannibalize your debit and credit interchange or acquiring revenue, but consumers and merchants are likely to make the shift with or without your help.

A Federal Reserve survey,[14] which described instant payments as a type of faster payments, found that 75% of consumers already use faster payments.
Seven in 10 businesses and consumers say it’s important that their primary bank or credit union offer faster payments.

Losing in-store and eCommerce transactions would also mean losing a key touchpoint with customers that could create damaging ripple effects in the bank- customer relationship.

Regulators and law enforcement in multiple jurisdictions have been sounding the alarm about the substantial rise in scams that entice victims to send money through authorized push payments. The Federal Trade Commission received more than 850,000 complaints about imposter fraud in 2023, resulting in about $2.7 billion dollars in losses.[15]

Regulatory Risk Rises with Rising Fraud

Although fraud prevention is often touted as a benefit of real-time push payments, push payment scams have proliferated as consumers have adopted P2P services like Zelle, Cash App and Venmo. Such scams and the regulatory scrutiny that comes with them could be cause for concern for banks launching real- time payments in the United States.

In January, Manhattan District Attorney Alvin Bragg Jr. sent letters to CEOs of Venmo, Cash App and Zelle, demanding immediate action to strengthen fraud protections for consumers. And in the U.K., where real-time payments are well-established, the Payment Systems Regulator created a new rule requiring push payment providers to issue refunds in certain instances, citing £239.3 million in losses in the first half of 2023. The rule, which requires sending and receiving institutions to split the reimbursement costs 50/50, goes into force in October 2024.[16] What’s more, HM Treasury issued a policy note in March proposing to extend the processing of authorized push payments to up to four days for suspicious transactions. If Parliament passes the legislation, it will also go into force in October.[17]

Extending processing and settlement timelines could curtail many of the benefits of real-time payments for consumers and businesses and introduce added complexity for banks. (See “Section 4: Solving for Risks and Pain Points” for more details on operational challenges.)

For its part, Early Warning Services LLC, the network operator of Zelle, reports that “less than one-tenth of 1% of transactions are reported as fraud or scams, and that percentage keeps getting smaller.” Citing
a “layered security approach,” Early Warning said it sends real-time insights to participating FIs to assess potentially high-risk transactions and in-app alerts remind consumers to only send funds to people or businesses they know and trust.
Despite scam reports, P2P apps as well as TCH’s RTP continue to surge in popularity for consumers and businesses who are looking for faster, cheaper ways to pay. If you ultimately decide not to enable consumer- to-business payments, you can expect customers to go elsewhere for that capability.

What Businesses Want from Real-Time Payments

One of the sticking points for some financial institutions evaluating real-time payments is the view that it’s only a cost center. It’s true that consumers are not likely to pay for the privilege of sending and receiving real-time payments unless they are cross- border (see Section 3), but business customers could present revenue and retention opportunities.

In this section, we dig deeper into commercial payments trends and where you can potentially use B2B real-time payments to drive revenue and fuel your commercial customer retention strategy.

More than 150,000 businesses each month are sending real-time payments over the RTP network, TCH reported in October 2023. Corporates plan to dramatically increase their use of real-time payments in the next five years to benefit from lower transaction costs, improved transparency into the payment process, increased efficiency and better cash flow, an Association for Financial Professionals survey found.

In fact, 99% of corporates with annual revenues of $1 billion to $9.9 billion expect to send real-time payments in the next five years.

Bolstering Your Use Case

When it comes to specific use cases banks plan to implement for instant payments, Cornerstone Advisors research shows that B2B payments are No. 1 (35%).
[19] Nearly a third of respondents (31%) said they don’t know which use cases they will deploy.
(See chart.)

Cornerstone’s Chief Research Officer Ron Shevlin cautions banks to stop thinking about FedNow as a “solution,” but rather as a “capability.”

Why?

“You don’t price—and sell—capabilities. You package capabilities into a solution—a ‘product’ or ‘service offering’—then determine what pricing options are most attractive to your target market and market the solution to them,” he explains. “Commercial banking clients, especially small businesses, don’t simply want faster payments,” Shevlin continues. “They want better cash management, simplified payments processing, automating invoicing, less cumbersome accounting processes, etc.”

In other words, creating more value beyond just enabling instant payments is key.

Businesses want value-added services, which can enhance your revenue and retention potential, including:

•  advanced fraud management tools
• real-time data dashboards for cash, client and liquidity management
• automated bill payments  
• advanced credit checking  
• biometric payments  
• tax and accounting system integration  
• and industry-tailored data insights

Commercial customers also are willing to pay 8.1% of their annual payments costs to gain these services, adding a revenue injection of $371 billion for the industry over the next five years, according to Accenture.[20]

However, the survey also showed that 33% of commercial customers would be highly likely to switch to another payments provider if value-added services were available at no cost. That means real-time payments likely need to be part of an overarching B2B value proposition and retention strategy, not just an income stream.

What’s more, you can’t afford to overlook the need for exceptional customer service. Only 46% of executives responsible for banking relationship decisions at corporations with $50 million or more in annual revenue consider the overall service quality of their primary bank as excellent or very good.[21] That leaves a lot of room for improvement, especially when you consider that a third of executives at companies with $1 billion or more in annual revenue said their organizations have 10 or more banking relationships.

If you want to be the “primary” bank, you’ll need to offer a variety of payment capabilities, including real- time payments, along with value-added services and world-class customer service.

Real-Time Cross-Border Payments: Higher Risk, Higher Reward

It’s difficult to imagine a segment with more revenue opportunity than cross-border real-time payments, particularly business-to-business payments. But
it’s also an area that’s historically fraught with complexity, lack of visibility and delays, in addition to risks from potential fraud, money laundering and terrorist financing. Then there’s regulatory and reputational risk if you don’t execute well.

Although there is significant consumer demand for faster, cheaper cross-border remittances—also a financial inclusion priority of the G20—most large banks aren’t likely to enter the space. The risks largely outweigh the revenue opportunity. However, B2B payments could be a different story.

In 2023, year-over-year revenue growth for publicly traded B2B cross-border payments companies tracked at above 40%, more than twice the mean for consumer-focused cross-border payments players, according to FXC Intelligence.[23] B2B cross-border payments represented a total addressable market of
$39.3 trillion last year, and by 2030 that will grow by 43% to reach $56.1 trillion.

Bain & Company analysis of the wholesale payments market also points to cross-border payments as an important use case to bolster innovative bankers’ position with their clients.

“Taking the lead in a proposition for high-priority solutions, such as a new data-rich, real-time payments infrastructure, and highly profitable use cases, such as cross-border transactions, is an option for some global banks and large regionals,” Bain analysts suggest.

“Since banks still hold a 95% share of wholesale payments, the market is theirs to lose. But dominance should not cause senior bankers to feel complacent or believe they can defer changes to their strategy or business model for at least a few years,” the brief continues.

“Even though banks will remain central to the business of wholesale payments, innovative offerings and capabilities from fintechs and software firms can displace banks that don’t keep pace.”

As banks determine which real-time use cases to pursue, most real-time payments rails have developed as domestic solutions and have transaction limits that are too low for large wholesale clients. However, many domestic networks already are collaborating to broaden their reach within regions such as Europe, the Nordics and Asia-Pacific. And since they’re all based on the ISO 20022 messaging standard, interoperability to support cross-border transactions will have one less hurdle to overcome. (See IR’s Complete Guide to Cross-Border Payments for a more in-depth look.)

“The big deal” with real-time payments is cross- border, ACI CEO Thomas Warsop told Payments Dive in March.[24]

“We’re starting to see some green shoots in cross- border payments and that it is now possible in a very limited way to use Pix, the Brazilian real-time solution, in Argentina. It’s very limited. It’s kind of hard to do, but it’s possible,” Warsop says. “[T]his is one of the most important things about FedNow because almost all of the largest bilateral trade occurs with the United States on one side or the other.”

Indeed, Fiserv said it would enable Brazilians to make Pix payments at U.S. merchants by 2025, with Mexico and Canada also forthcoming.[25]

Real-time payments rails in the United States are poised to expand connections with international networks as well. TCH began a pilot in October 2022 in collaboration with European partners to establish Instant Cross-Border Payments (IXB). Although TCH has not shared the results of the pilot to date, it was developed with the support of 25 financial institutions from both sides of the Atlantic.[26]

As for transaction thresholds that could limit the utility of cross-border real-time payments for commercial payments, TCH has increased its limit on domestic transactions to $1 million. FedNow caps transactions at $500,000, allowing participating financial institutions to adjust this cap as needed to meet their customers’ needs. The Federal Reserve plans to review and adjust the limit as needed.

The Fed has already been thinking about how to support cross-border functionality. Pairing U.S. real- time payments rails with cross-border payments represents “a significant opportunity for the U.S. payments ecosystem,” says the Executive Director of the U.S. Faster Payments Council Reed Luhtanen.[27]

“The idea of sending a frictionless, fast, cross-border payment has become a priority for the industry, and organizations must remain willing to embrace new technology, functionalities and processes,” he writes in a Forbes column. “While not an easy task, early adopters will secure competitive advantages.”

Solving for Risks and Pain Points

Participating in FedNow or TCH’s RTP network requires significant technology investments for banks with legacy core processing systems. Some financial institutions are working with third-party service providers to get to market faster and at a lower cost because payments stack modernization is a longer-term initiative. If you’re further along on your modernization journey, launching real-time payments without a
third party could offer greater control and flexibility with potentially less risk, depending on your in-house technology and real-time payments experience.

Whichever path to market you choose, a phased rollout will give you the opportunity to iron out technology kinks and button up your processes as you expand capabilities and use cases. It also enables you to gather valuable data to inform your strategy so you can begin to build forecasting, capacity and liquidity management models.

Real-time payments demand real-time settlement that must be available 24/7/365, which means you’ll need to address the following risks[28] and pain points before, during and after rollout:

• Liquidity management
• Third-party oversight  
• Missed SLAs and fees  
• Fraud and compliance
• Reputation and customer experience

Pain points that exacerbate risk

• Lack of visibility into transaction flows and potential bottlenecks
• Overly manual reporting and time-consuming investigations
• Lack of staffing to support investigations and monitoring
• No historical data

As you update your processes and operations to move at the speed of real-time payments, transaction monitoring technology can help mitigate your risks by delivering vital visibility into payment flows. However, monitoring by itself is not enough. You need an effective way to access actionable data in an easy-to- consume format—without impacting system performance.

Your payments operations teams will be more efficient and better equipped to troubleshoot and resolve issues before they become problems for your customers. Such tools should also be able to help you automate key actions that can keep your payments flowing smoothly at all hours, no matter how many staff, if any, are on shift.

Reporting Needs an Upgrade, Too

Reporting capabilities need to be just as seamless. If you’re relying on Excel spreadsheets and after-the-fact database queries, you won’t be able to keep up with the operational, compliance and risk management requirements of real-time payments. Your teams should be acting on data rather than hunting for it.

At the same time, you need to be able to spot any transaction anomalies quickly, especially after any system or program changes.

“It’s not always obvious whether an exception requires action or not,” explains IR’s Pearson. “If there is a pattern of anomalies by time, or by channel or by destination bank, then that can be a trigger to analyze further. For example, using IR’s Dynamic Thresholds after any system changes can help ensure that everything is operating normally. And if there are any anomalies, you can address them before customers identify the issue.”

Conclusion: Time to Place Your Bets

As a bank, you’re facing several competing priorities for your technology investments, along with increased regulatory pressure on multiple fronts—especially around third-party oversight—and legacy technology that’s stifling your ability to get to market as quickly as fintechs and other non-bank competitors.

It’s time to take a hard look at your existing customers and design a strategic roadmap that can not only protect those existing relationships but enhance them. You also need to look at where you are best positioned to win market share in new areas and how to get there, whether it’s building or buying technology or finding a partner that can help you scale innovative capabilities faster.

Whichever real-time payments use cases you decide to pursue, your transaction monitoring has to be able to keep up. That means, testing before you go live and managing your payments ecosystem afterward. With access to real-time visualized data, it’s easy to pinpoint potential issues and investigate bottlenecks before they become costly customer-facing problems (or worse). Over time, that data also will help you benchmark the health of your real-time payments programs, fueling strategy, capacity planning and forecasting.

Download a PDF copy of our Real-Time Payments Are Here: Now What? guide!

About Integrated Research Limited. (ASX: IRI).
Integrated Research (IR) is a leading global provider of user experience and performance management solutions for payment transactions and collaborative systems. We create value through our real-time, scalable and extensible hybrid cloud platform and our deep domain knowledge to optimize operations of mission-critical systems and improve user experience through intelligent and actionable insights. We enable many of the world’s largest organizations to simplify complexity and provide visibility over systems that millions of people can’t live without—systems that allow them to transact and collaborate. For more information, visit www.ir.com.

[1] RTP® Network Breaks Instant Payments Records, The Clearing House, April 2024.
[2] Fed seeks 8,000 financial institutions for FedNow, Payments Dive, April 2024.
[3] Consumer-to-Business Payments: A Strong Growth Outlook, but Only for the Well-Prepared, Bain & Company, April 27, 2023.
[4] American Banker data presented at The Payments Forum, March 2024.
[5] Reinventing commercial payments for profitable growth, Accenture 2023.
[6] Fasten your seat belts: Real-time, business-to-business payments are preparing for takeoff, Deloitte, 2023.
[7] Card payments are no longer the default choice for consumers - new research from Boku reveals, Payments Dive, March 2024.
[8] Reinventing commercial payments for profitable growth, Accenture 2023.
[9] Ibid.
[10] Consumer-to-Business Payments: A Strong Growth Outlook, but Only for the Well-Prepared, Bain & Company, April 2023.
[11] Card payments are no longer the default choice for consumers - new research from Boku reveals, Payments Dive, March 2024.
[12] Visa and Mastercard Agree to Merchant Rate Cuts and Acceptance Changes in a Major Settlement, Digital Transactions, March 2024.
[13] Mastercard Targets Friendly Fraud to Protect Small Businesses and Merchants, Mastercard, October 2023.
[14] Federal Reserve Surveys: U.S. businesses, consumers want faster payment options to help navigate evolving needs, May 2023.
[15] Curtailing Authorized Push Payment Fraud Means Curtailing Phone Scammers, Reserve Bank of Atlanta, March 2024.
[16] What are Authorised Push Payment scams? Payment Systems Regulator
[17] The U.K.’s Anti-Fraud Innovation Slowing Faster Payments Way Down, PYMNTS, March 2024.
[18] Federal Reserve Surveys: U.S. businesses, consumers want faster payment options to help navigate evolving needs, Federal Reserve, May 2023.
[19] Banks’ Revenue Opportunity From FedNow Instant Payments, Forbes, November 2023.
[20] “Reinventing commercial payments for profitable growth,” Accenture 2023.
[21] “Commercial banking 2025: Finding a new compass to navigate the future” Deloitte 2023.
[22] “Reinventing commercial payments for profitable growth,” Accenture 2023.
[23] 2023 In Cross-Border Payments: A Strong Response To A Challenging Year, Forbes, 2023.
[24] ACI CEO weighs in on FedNow, cross-border payments, Payments Dive, March 2024.
[25] Fiserv to let Brazilians use Pix in US, Payments Dive, April 2024.
[26] Immediate Cross-Border Payments (IXB) Pilot Set to Revolutionize International Payments, The Clearing House, October 2022.
[27] The Three Initiatives Driving the Cross-Border Payments Transformation, Forbes, April 2024.
[28] Key Risk Considerations for Implementing Instant Real-Time Payments, Federal Reserve of Atlanta, February 2023.