'Banks must recognise customers’ interest in real-time payments.'
When the pandemic hit, the industry had to pivot to a new normal overnight, as customer needs and preferences changed. Now, as we emerge from the pandemic and look forward, banks must be prepared to rapidly meet changing needs – a new unknown, as it were. As found in Celent’s ‘The State of the Nations for Payments Modernization’ report, 83% of banks believe the pace of change from regulation will increase, all while banks face growing competition from non-banks at the expense of banks. In payments, banks must recognize customers’ interest in real-time payments and make them part of their digital toolkits.
Today, real-time payments are clearly a global success, present in more than 50 countries and the fastest growing payment type with volumes globally growing by 39% in 2020.
First, banks need to believe there is an opportunity. In some countries, notably the United States, banks often don’t see the benefit of offering real-time payments, despite their clients demanding it. Yet, offering real-time payments can help deliver the experience that will attract and retain customers.
Secondly, banks must recognize customers’ interest in real-time payments. If a customer’s bank or credit union doesn’t offer real-time payments, the customer will go where they can access them. A clear example is Zelle, where volumes grew by 49% in 2021, processing approximately 2 billion transactions, with 850 active participating financial institutions, yet had users from more than 7,000 FIs. That roughly translates into more than 6,000 banks not serving their clients.
Thirdly, the key to success in making money from real-time payments is explicitly positioning them to customers. Banks need to make clear the benefits of real-time payments, and therefore why businesses will want to adopt them – and, of course, pay for them. Globally, the most successful banks in real-time payments are those that have left nothing to chance.
Much of the value of real-time payments comes from their efficiencies. These are provided by a few key features.
Many real-time payments are irrefutable once they leave the sending bank. With irrevocable, good funds, the recipient can use the payment when they see it. This offers a more streamlined experience than other payment types that may be cancelled, recalled, or reversed. This can also accelerate working capital by days – particularly valuable for small businesses.
Real-time payments also allow payments to be made, and importantly, received, at any time, 24/7. This improves on card payments, where most merchants don’t get the full benefit of the transaction until it is paid into their account, often days later.
Also, real-time payments are a single message that can facilitate greater levels of automation and speed throughout an entire transaction, using APIs that can be embedded in a business value chain to drive everything from order placement to payment, release of goods, and shipping, for example.
Leading banks have hundreds of use cases, so these really are noteworthy ones! Many use cases are based around the facets of the real-time payment as they aren’t ‘just’ a faster ACH. They can offer greater certainty than other payments. This is clear when selling high-value goods, where it’s risky to release products until funds are guaranteed. In the case of a used car sale, for example, most forms of payment are expensive, risky, and slow. Real-time payments, on the other hand, deliver funds into a dealer’s account, no matter the day or time, helping to close the sale when convenient for buyer and seller, and enabling the seller to buy more stock instantly.
Real-time payments also offer process improvements through greater efficiencies. At a quick-serve restaurant, with staff on varying shifts, the owner typically pays staff biweekly (not preferred by the workers who need funds faster) or with cash (not preferred by owners, who’d need to calculate shifts and keep cash on-hand for the pay envelopes). Instead, banks can support a timekeeping solution that triggers real-time payments to employees as soon as they end their shift.
Another important use case is instant banking. More and more banks make instant loan decisions, but paying the loan doesn’t happen as quickly, leaving customers waiting for funds. Real-time payments enable the entire loan process in minutes. Not only is this more efficient for the bank, but it also creates an easier and more valuable process for customers, improving the overall experience.
Banks need to have the mindset that real-time payments are a product worth managing: engage customers by making the features and benefits clear; highlight how real-time payments differ from other payment types; illustrate the use cases for real-time payments; Emphasize why those differences benefit customers and deliver value.
Banks also need to ensure that the experience of using real-time payments is seamless and easy. Communicating this requires thorough evaluation of the customer experience – and how that experience may be unique for different customers and occasions.
By considering and communicating the overall value of real-time payments, banks can tap into opportunities presented by them. Importantly, these include reducing customer churn and the ability to win over customers from other financial institutions.
This interview was first published in Payment Methods Report 2022, the most updated overview of trends and developments in the payment methods space and the innovative technologies that these methods work upon, emerging consumers habits, and strategies on how to win at conversion and retention.
Gareth Lodge is Principal Analyst, Global Payments, at Celent. He’s a leading expert on bank payment processing; payment networks and infrastructures; and real-time payments, a topic he has been active in since 2006. Prior to Celent, Gareth worked for Secura Monde International, TowerGroup, and VocaLink Ltd.
Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. For over 20 years, Celent (part of the Oliver Wyman Group, a wholly-owned operating unit of Marsh McLennan) has helped senior executives make confident decisions around technology strategies to execute at scale.
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