Infocus Real-Time Payments May Be Approaching a Tipping Point Real-Time Payments May Be Approaching a Tipping Point

InFocus Real-time payments may be approaching a tipping point Real-time payments may be approaching a tipping point

Top takeaways

The Federal Reserve System traditionally has A Federal Reserve-operated RTGS system provided payment services to the banking will likely yield opportunities for payments industry. Considering this, it would not be ecosystem players to drive innovation unprecedented for the Federal Reserve to operate and bring to life solutions to address the a Real-Time Gross Settlement (RTGS) system; it is industry’s pain points. seeking public comment on that possibility.

This article outlines the impacts and opportunities for new and incumbent payments industry stakeholders if the Federal Reserve decides to become an RTGS operator.

InFocus | Real-time payments may be approaching a tipping point 2 Overview: Real-time payments landscape the convenience they provide, such as the ability to pay another individual on-the-spot using a mobile phone application.1 In the last Real-time payment processing (RTP) is gaining traction globally. four years, the US market has seen real-time payments gain traction Consumers and businesses value faster payment services for with different players in the industry (figure 1).

Figure 1. Real-time payments in the US

• TCH RTP launches • TCH selects Vocalink to develop RTP system • Zelle launches RTP • Federal Reserve convenes Faster • WeChat and Alipay partner with select • Digital payments grow 11% YoY Payments Taskforce US payments companies • B2B RTP expected to drive growth

2015 2016 2017 2018 2019 and beyond

• MasterCard acquires Vocalink • WeChat and Alipay expand to US market • Visa launches VisaDirect • US Faster Payments Council (FPC) formed • NACHA rolls out same day ACH settlement • Visa partners with MoneyGram to enable faster • The Faster Payments Taskforce solicits cross-border payments proposals for RTP solutions • Federal Reserve seeks public comment (2018) on developing RTGS service and liquidity management tool

InFocus | Real-time payments may be approaching a tipping point 3 US Federal Reserve’s Figure 2. The Federal Reserve and payments technology in the US role in payment technologies’ growth Faster Payments Taskforce formed (2015) The US Federal Reserve System historically has NACHA establishes EBT played an important Local ACH linked with the and Electronic Check (1995) Federal Reserve System (1978) role in advancing Special Committee new digital payments on Paperless Entries frameworks—including formed (1968) the introduction of TCH announces Federal Reserve seeks Local clearing houses plan to build RTP public comment (2018) on: pricing for FedWire established (1972) Federal Reserve system (2014) 1. RTGS service prices ACH and Fed 2. Liquidity management services in 1981, which Wire services (1981) tool NACHA The Faster Payments establishes 94 increased access Federal Reserve Bank implements Taskforce solicits character format ACH operating system (1996) proposals for RTP beyond Federal Reserve as standard (1975) solutions (2016) member banks. Now, TCH Launches the Federal Reserve is RTP (2017) focusing on advancing Federal Reserve implements Electronic NACHA formed (1974) Funds Transfer Act (Reg. E) (1979) real-time payment processing in the United 1970s 1980s 1990s 2000s 2010s 2019

States (figure 2). ACH Growth Journey RTP Growth Journey

InFocus | Real-time payments may be approaching a tipping point 4 In its efforts to introduce a ubiquitous payments solution, the To date, the Federal Reserve Board has not committed to any action Federal Reserve Board on October 3, 2018, issued a request for on real-time payment processing or indicated if it will even take one. public comment on two potential actions that would facilitate However, based on history, it would not be unprecedented if the real-time interbank settlement of faster payments while increasing Federal Reserve decides to become an RTGS system operator. the resiliency and security of services offered to the public:2 1. The development of a service for real-time interbank settlement of real-time payments 24 hours a day, seven days a week, 365 days a year (24×7×365); and 2. The creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24×7×365 basis to support services for real-time interbank settlement of real-time payments, regardless of whether those services are provided by the private sector or the Federal Reserve banks.3

InFocus | Real-time payments may be approaching a tipping point 5 Opportunities stemming from a Federal Reserve RTGS system • When Unified Payments Interface (UPI)-based payments were introduced in India, Yes Bank was quick to collaborate with Real-time payment processing is reaching a tipping point. A Federal PhonePe, a UPI-based payments fintech. Typically, Indian banks Reserve-developed, ubiquitous, RTGS system has the potential have developed such capabilities in-house. However, Yes Bank’s to become the de facto global standard and to help usher in a strategic collaboration allowed it to quickly create a plethora new wave of innovation by existing and new payments ecosystem of business- and retail-centric UPI solutions. In 2018, the bank players. In our view, this system would help players to differentiate, claimed 22 percent of the UPI market share, making it the creating opportunities to increase market share. It would also trigger second-largest player. Most of these transactions are generated technology innovation supporting new use cases and improved through PhonePe.4 customer experience. We have seen this happen in other countries and anticipate it also will be the case in the United States if the Fed becomes an RTGS operator.

Strategic partnering to meet customer needs Ecosystem players could take advantage of the Fed’s common platform by building strategic partnerships that would bring innovative, customer-focused products to market more quickly and efficiently.

InFocus | Real-time payments may be approaching a tipping point 6 Differentiating products and services • Faster payment services have provided a platform for UK payment service providers and third parties to deliver innovative Increasing competition is likely to drive new and incumbent players products to help meet customer and merchant expectations. to launch products that attract customers to their platform through For example, Skrill’s Rapid Transfer provides instant payments creative experiences and competitive pricing. They will need to make from consumer to merchant while providing existing payment strategic positioning choices on where to play and what products/ processor services like chargebacks and refund processing.6 services to offer and design their growth model to meet customers’ ever-increasing appetite for innovative payments solutions. • India’s UPI-based payment system has garnered half the value of India’s credit card and debit card swipes. Its introduction created • Paytm, India’s largest mobile e-commerce website, is making its a wealth of innovative payment solutions with very high adoption apps feature-rich to encourage customers to use them for all rates. With the release of a more merchant-friendly UPI 2.0, the their financial needs. Offering an attractive feature set is helping number and value of merchant transactions is expected to rise, Paytm to rapidly grow its customer base and gain a competitive leading to a projected annual growth rate of 90 percent over the advantage. Paytm has completed its integration with the UPI; next five years.7 using Paytm’s mobile payment mode, BHIM UPI, users can transfer money instantly between bank accounts and make payments to accepting merchants.5

InFocus | Real-time payments may be approaching a tipping point 7 Triggering technology innovation • Real-time payment systems are increasingly being viewed as an extension of cross-border correspondent banking transactions. If a Federal Reserve-operated RTGS system becomes the global A pilot conducted by SWIFT, global provider of secure financial standard, it may trigger countries with and without an existing real- messaging services,8 and banks from China, Thailand, Singapore, time payments infrastructure to invest and innovate in RTGS so they and Australia linked SWIFT’s Global Payments Innovation (gpi) can participate in the US system. It also may serve as the catalyst for correspondent banking transactions with New Payments Platform current US payments providers to upgrade their technology while (NPP), Australia’s real-time payment system transactions. This retaining the market advantages they have developed over the last pilot demonstrated that domestic, real-time systems are central several years. to achieving faster cross-border payments. The introduction of the new RTGS system will require incumbent players to continue and, in some cases, accelerate their investments in core systems transformations. This will be required to mitigate risks associated with operations, security, and fraud prevention when implementing a real-time payments system. The investments that existing US players have made to date will not be wasted. RTGS can address a number of pain points to help incumbents accelerate their use case development, including lowering costs of real-time interbank settlement and the ability to collaborate with global players around a defined standard and ready-made liquidity management tools. InFocus | Real-time payments may be approaching a tipping point 8 What’s next?

Over the last four years, we have seen increased momentum from the private sector and the Federal Reserve to prepare for a major evolution in the US payments industry. Some smaller financial institutions, corporations, and merchants might be concerned whether or not a commercial real-time solution controlled by a large bank-owned consortium would provide a level playing field in relation to pricing and policy representation. However, based on recent discussions and conference presentations, it appears that small bank consortiums may be prepared to give their larger Consumers, households, and businesses will benefit by having a counterparts a chance. The good news is that financial institutions faster, more secure digital payment platform that offers multiple, cost- that want to roll out payments solutions in the near term can choose effective ways to access funds. among a number of marketplace options. The introduction of either a commercial or federally operated RTGS system—or both—presents If you want to learn more about opportunities for your organization opportunities for current and new ecosystem players to innovate to participate in the burgeoning real-time payments market, we and provide unique products and services with competitive pricing. should talk.

InFocus | Real-time payments may be approaching a tipping point 9 Endnotes

1. “Federal Reserve Board seeks public comment on potential actions to facilitate real-time interbank settlement of faster payments,” Board of Governors of the Federal Reserve System news release, October 3, 2018, https://www.federalreserve.gov/newsevents/pressreleases/ other20181003a.htm.

2. Ibid.

3. Ibid.

4. Pratik Bhakta, “Paytm accounts for third of the 190-million UPI transactions,” Economic Times, May 8, 2018, https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/paytm- accounts-for-third-of-the-190-million-upi-transactions/articleshow/64072118.cms.

5. Ibid.

6. “What is rapid transfer?,” Skrill, https://www.skrill.com/en/business/rapid-transfer/.

7. Bhakta, “Paytm accounts for third of the 190-million UPI transactions.”

8. “Swift gpi: Cross-border payments, transformed,” SWIFT, https://www.swift.com/our-solutions/ global-financial-messaging/payments-cash-management/swift-gpi.

InFocus | Real-time payments may be approaching a tipping point 10 Contacts

Christopher Allen Managing Director | Deloitte Consulting LLP [email protected]

Zachary Aron Principal | Deloitte Consulting LLP [email protected]

Maanas Godugunur Manager | Deloitte Consulting LLP [email protected]

InFocus | Real-time payments may be approaching a tipping point 11 About Deloitte

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