Instant payments: Going real time, all the time has been saved
Perspectives
Instant payments: Going real time, all the time
Standardizing instant payments in the United States
With the adoption of networks such as RTP® from The Clearing House (TCH) and FedNow® from the Federal Reserve gaining momentum, are instant payments a viable alternative to Automated Clearing House (ACH) systems? Explore the enablers for instant payments to become an alternative to ACH in the United States, based on lessons from the global markets.
Instant payments in today’s market
Instant payments are central to the evolving payment landscape, with many markets adopting them to boost economic efficiency. However, their adoption in the complex US financial ecosystem has been slow due to unclear use case prioritization, significant technology modernization costs, and fraud concerns. Despite slow uptake of instant payments, US financial institutions (FIs) may see a decline in ACH and Same Day ACH volumes. Our report analyzes global adoption enablers drawing insights from the United Kingdom, Australia, India, and Brazil; assesses the impact of instant payments on ACH volumes; and reviews the necessary capabilities for instant payments to potentially replace ACH.
ACH versus instant payments: Impact of instant payments on ACH
Key takeaways from across the globe
Impact of instant payments on ACH systems: Global trends show slowing growth—or even a decline—in usage of the local ACH equivalent. Adoption of instant payments is slower in markets with mature card infrastructure such as the United Kingdom and Australia. However, in countries such as India and Brazil, a shift from cash to instant payments and widespread merchant adoption is evident. Additionally, both regulators and FIs are interested in modernizing the payment infrastructure.
Enabling instant payments adoption: An analysis of geographies that are leading the adoption of instant payments reveals three differentiating market factors:
- Regulatory push (for example, Brazil’s central bank has mandated participation in Pix, its instant payments network, for larger FIs)
- Government incentivization (for example, India has an incentive scheme to cover network cost for low-value consumer-to-business instant payment transactions)
- Lack of card infrastructure (for example, emerging markets are leapfrogging from cash to instant payments, without going through the plastic card adoption phase)
Each geography has unique nuances such as access to the banking system, complexity of the overall financial system, and demographic affinity toward electronic payment methods. However, the insights drawn, based on the evolution of their respective payment ecosystems, provide indications on the potential evolutionary pathway for the US payments market.
Instant payments as an ACH alternative in the US market
Impact of instant payments adoption on ACH in the United States: Instant payments adoption in the United States has been slower than expected . Both The Clearing House (TCH) RTP® and the Federal Reserve’s FedNow® have seen increased participation and transaction volumes recently, boosted by the momentum created by the launch of FedNow® by the Federal Reserve in July 2023. At the same time, ACH and Same Day ACH transactions continue to grow, due to the continued growth of electronic payments, desire for cash removal, and the early stages of instant payments maturity.
Instant payments as an alternative to ACH: Despite the limitations, ACH still offers distinguishing features and capabilities that make it attractive for certain use cases. To become a viable alternative to ACH, instant payments must increase their availability and limits, while providing compelling use cases to overcome the stickiness for ACH developed over the years. To replace ACH, instant payments must have:
Why does this need to happen?
- ACH has practically universal availability.
- Instant payments adoption is limited in smaller and medium-sized regional FIs but is expected to pick up in the next 18–24 months.
How will it happen, and who will likely do it?
- After the launch of FedNow®, the adoption of both TCH RTP® and FedNow® has increased,1 and the momentum is likely to sustain.
- The Fed’s ability to promote FedNow® among the long tail of smaller and medium-sized regional FIs will likely result in increased adoption of instant payments.2
Why does this need to happen?
- ACH offers debit-pull transactions for specific use cases, such as recurring subscription payments.
- Instant payments are credit-push by design, and RfP transactions are offered by only a small set of FIs.
- Since the receive RfP capability is not mandatory for the FIs to participate in either the TCH RTP®3 or FedNow®4 network, and introduces additional technology and operational requirements,5 it is anticipated that RfP will likely see limited adoption.6
How will it happen, and who will likely do it?
- Variable recurring payments (VRPs) offered by instant payments can improve upon the ACH functionality by offering immediate payments and notifying both parties about changes, interruptions, and cancellations.7
- FIs will invest in VRPs to provide the capability as a modern alternative to direct debit.
Why does this need to happen?
- ACH networks—the Electronic Payments Network (EPN) and FedACH—are interoperable. Wire networks—the Clearing House Interbank Payments System (CHIPS) and Fedwire—are also interoperable.8
- Market fragmentation is a major concern given the current lack of plans to establish interoperability between the two instant payment rails—due to several smaller FIs that are waiting for a clear winner to emerge, resulting in slower adoption.
How will it happen, and who will likely do it?
- The Fed has expressed its commitment9 to work toward interoperability between FedNow® and TCH RTP®.
- However, due to the differences in the ISO 20022 implementations, TCH and the Fed will likely have to negotiate the nuances of technical connections, which could take many years.10
Why does this need to happen?
- ACH payments are reversible in the event of an incorrect or unauthorized transaction.11
- However, instant payment transactions are irrevocable and open additional fraud types such as account takeovers (ATO), authorized push payment (APP) fraud, fake quick-response (QR) codes, etc.12—an improved fraud management strategy is required to manage this risk.
How will it happen, and who will likely do it?
- Due to increasing rates of frauds, regulators will likely push for increased liability for FIs to protect the consumers (for example, in the United Kingdom, FIs are required to reimburse the APP fraud victims13).14
- To lower the operational risks, FIs will likely move beyond the baseline fraud management capabilities recommended by the networks and take incremental steps toward developing increasingly aspirational capabilities—such as leveraging consortium data pooling for enhanced fraud models, developing risk-based segmentation and a 360-degree customer view using fraud vectors consolidated across the customer life cycle with signals sourced across systems.15
Why does this need to happen?
- ACH offers a $100 million limit (Same Day ACH offers a $1 million limit), which makes it more attractive for large businesses.16
- TCH RTP® has a $1 million limit,17 while FedNow® has a $0.5 million limit,18 which can be lowered by FIs to align with risk profile and business needs.19
How will it happen, and who will likely do it?
- The rationale to increase the transaction limit from $100,000 to $1 million for TCH RTP® was market demand to enable new use cases,20 which still seems valid.
- Both TCH and the Fed will likely monitor the usage and adjust the transaction limits over time, balancing against fraud and operations risks.
Why does this need to happen?
- ACH transaction cost for FIs is lower than that of instant payments, and the pricing for the larger FIs is lower than that for smaller FIs, due to ACH volume discounts.21
- Instant payments have a flat pricing model for both networks in the United States with no volume discounts.22
- The network pricing reflects the cost advantage for ACH: the Federal Reserve charges $0.0035 per ACH payment23 versus the corresponding charge of $0.045 for FedNow® payments.24
- The gap in pricing offered to clients by the FIs is even higher: The median price for processing an ACH debit/credit is 40 cents,25 while the median price for an instant payment is under $2.50.26
How will it happen, and who will likely do it?
- Since the instant payment networks currently operate on a cost recovery model,27 the prices will likely reduce with an increase in the transaction volumes.
- As the FIs shift the transaction volumes from ACH to instant payments, we will likely see lower fees. This requires the FIs to price the instant payment offerings at par with the ACH offerings for increased customer adoption.
- The networks as well as the FIs will likely invest in increased processing capacity to handle the increase in instant payments transaction volumes.
Why does this need to happen?
- ACH is ingrained in business processes and ERP for several institutions—retail customers have set up regularly scheduled transactions on ACH.
- Since customer stickiness has developed over the years for ACH, instant payments will need to offer compelling use cases such as bill pay, payroll, rental, buyer/supplier, loan funding, insurance payouts, and peer-to-peer (P2P) payments28 for customers to switch.
- Instant payments can maintain feature parity with ACH, with the adoption of capabilities such as RfP, transaction scheduling, and fraud protection29—encouraging retail and small business users to transition.
- Since businesses currently have accounts that can send and receive payments via ACH, FIs will need to provide a streamlined way to enable instant payments.30
How will it happen, and who will likely do it?
- FIs will likely offer differential pricing for specific use cases to make instant payments cheaper than existing payment methods to push price-sensitive customers to adopt instant payments.
- To incentivize the large businesses to invest in upgrading the established processes to use instant payments, FIs will likely make the investments in the development of value-added services targeted specifically at large businesses, such as treasury automations (using the additional data fields in the ISO 20022 messages).
- The networks will likely continue to push for broader RfP adoption (for example, zero-dollar RfP introduced by FedNow® to enable billers to assess end-customers’ ability to receive and act on RfPs31), and the FIs will potentially see increasing value in adopting RfP capabilities, which will help further expand the use cases available to the customers.
Why does this need to happen?
- ACH supports bulk payments, which are ideal for regular, high-volume payments use cases—such as payroll processing for medium and large businesses, and government agencies.
- Since instant payments are processed on a per transaction basis rather than in batches—a standardized industry approach to processing bulk payments through instant payments will be necessary to provide businesses and government agencies more time to transition their systems to instant payments.32
How will it happen, and who will likely do it?
- Payments industry players across the value chain (including FIs, networks, and payments service providers) will need to collaborate to develop a standardized approach to process bulk payments through instant payments, which seems less probable in the current stage of instant payments maturity in the United States.
Instant payments are here to stay
Based on the available data, we anticipate that ACH will coexist with instant payments in the US market for the foreseeable future. Choice of payment systems is likely to be dependent on the use case. Even if instant payments match its features and reliability, ACH will continue to be the preferred payment method for bulk transactions, use cases where transaction cost rather than immediate settlement is a priority, or transactions involve smaller FIs not on the same (or any) instant payments network.
As a result, FIs will need to be prepared to adopt a multirail payments strategy to maintain their market share amid the growing competition. Usage of ACH and instant payments will be determined by specific use cases. Orchestrating such a complex effort in a dynamic landscape is extremely challenging. However, the financial institutions will have to plan for it, to continue to stay relevant.
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Managing Director, Banking & Payments
Deloitte Consulting LLP
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Endnotes
1 John Stewart, “FedNow’s rising adoption buoys its biggest rival, as well,” Digital Transactions, December 15, 2023.
2 Peter Conti-Brown and David A. Wishnick, Private markets, public options, and the payment system, Brookings Institution, April 17, 2020.
3 The Clearing House (TCH), “New to RTP? Start with receive only,” May 20, 2019.
4 The Federal Reserve, “FedNow® Service: Additional questions and answers,” last updated May 3, 2024.
5 TCH, “Requirements for Request for Payment customers,” May 10, 2017.
6 TCH, “RTP® network expands Request for Payment (RfP) availability,” press release, August 2, 2023; Aliya Sumar, “11 things you wanted to ask about the FedNow Service,” Alacriti, July 31, 2023; Federal Reserve Bank Services, “FedNow® Service Participants and Service Providers,” last updated July 22, 2024.
7 Charles Damen, “What does the industry really think about variable recurring payments (VRPs)?,” press release, Credit Today, accessed July 30, 2024.
8 Sarah Speights, “Interoperability between RTP and FedNow,” Modern Treasury, November 16, 2022.
9 Loretta J. Mester, “An update on the Federal Reserve’s instant payments service: FedNow®,” presentation for the Summer Institute 2023: Macro, Money, and Financial Frictions, National Bureau of Economic Research (Cambridge, MA), July 12, 2023.
10 Yizhu Wang, “More efforts needed to make FedNow, RTP interoperable, Clearing House CEO says,” S&P Global, July 20, 2023.
11 Danielle Antosz, “Real-time payments vs ACH: Which should your business use?,” Plaid, accessed July 30, 2024.
12 Rocio Wu, “There are gaps in the US real-time payment system. Who will fill them?,” Forbes, April 20, 2023.
13 PYMNTS, “UK wants to turn faster payments into four-day payments,” March 12, 2024.
14 The Pew Charitable Trusts, Can regulators foster financial innovation and preserve consumer protections?, September 10, 2020; TJ Horan, “Real-time payments fraud: Are new regulations and liability shifts coming?,” FICO Blog, September 5, 2023.
15 Zachary Aron et al., Accelerating adoption of instant payments for US regional financial institutions, Deloitte, 2023.
16 Sara Seguin, “Real-time payments: RTP vs. FedNow,” Alloy, April 17, 2023.
17 TCH, “TCH to raise RTP® network transaction limit to $1 million,” press release, April 6, 2022.
18 Federal Reserve Bank Services, “Federal Reserve announces FedNowSM service pricing approach, credit transfer limit,” press release, January 27, 2022.
19 PYMNTS and TCH, Real-time payments: How speed is changing the mix of business payments, 2022.
20 PYMNTS, Real-Time Payments Tracker®, July 2022.
21 TCH, “RTP®: Frequently asked questions,” accessed July 30, 2024.
22 Federal Reserve Bank Services, “Federal Reserve announces FedNowSM service pricing approach, credit transfer limit”; TCH, “RTP: Simple, transparent, uniform pricing for all financial institutions,” accessed July 30, 2024.
23 Peter Lucas, “The ACH’s star still burns bright,” Digital Transactions, February 1, 2024.
24 Ibid.
25 Ibid.
26 Ibid.
27 Adriana Nunez, “Q&A: The real-time payments trends TCH’s product and strategy head is watching,” EMARKETER, October 11, 2022.
28 Aron et al., Accelerating adoption of instant payments for US regional financial institutions.
29 Ann H. Spiotto, Credit, debit, or ACH: Consequences and liabilities, American Bankers Association, September 2001; DataVisor, Digital Fraud Wiki, accessed July 30, 2024.
30 Michele Bullock, “Modernising Australia’s payments system,” speech for the Australian Payments Network Summit (Sydney, Australia), December 12, 2023.
31 FedNow® Service, “FedNow® Service announces ‘zero-dollar request for payment’ market practice,” June 15, 2023.
32 Bullock, “Modernising Australia’s payments system.”
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