The Secret to Generating Revenue With Real-Time Payments

Real-time payments through the FedNow Service or The Clearing House’s Real-Time Payment Network have huge potential. If credit unions are going to capitalize on that potential, they need to proactively develop the solutions their clients want.

If you try to guess the best way to serve account holders with real-time payments, you won’t see the adoption or revenue you could.

If you ask businesses and consumers where faster payments could help them, you’ll uncover opportunities you may not have imagined.

In this article, we’ll uncover how financial institutions are currently thinking about faster payments and some practical ways that you can develop products and services using real-time payments.

Why Change a Payment Ecosystem That’s Working?

The payment landscape in America is accelerating toward a low-cash (not a zero-cash) future. The Federal Reserve put it succinctly:

“The value of core noncash payments in the United States grew faster from 2018 to 2021 than in any previous FRPS measurement period since 2000,” according to the Federal Reserve Payments Study (FRPS).

According to the study:

• Paper check processing maintains a stubborn foothold in the U.S. economy. Check volume declined 7.2% between 2018 and 2021. That caused the average value of check transactions to jump from $1,908 in 2018 to $2,430 in 2021.
• ACH transfers for the same period increased from 28.5 billion (average transaction value: $2,250) to 36.2 billion (average transaction value: $2,536).

Wire transfer activity is covered in the Fed’s annual report, and the trend aligns with the findings of the FRPS. The average daily value of Fedwire funds transfers in 2022 was $4.2 trillion, an increase of 7.8% from the previous year, according to the Federal Reserve Annual Report 2022.

These numbers point to a digital payment ecosystem that is growing year over year. This may lead credit union leaders to ask, “What’s the incentive to adopt RTP and develop a new line of products or services?”

Cornerstone Advisors’ What’s Going on in Banking 2024 Report reveals the uncertainty that financial institutions are feeling about connecting to the latest payment rails and how to adapt their operations to monetize adoption of real-time payments.

Faster payments seem like an obvious improvement compared to “slow” payments. However, the benefits of this new technology don’t seem to be appreciated by the conventional banking system.

For years, fintechs like PayPal, CashApp, Zelle and Venmo have provided instant transfers to a connected account for a fee. How frequently consumers use this paid feature isn’t public information, but it’s enough to justify it.

The emergence of real-time transaction processing through FedNow and The Clearing House could level the playing field for credit unions.

Paying for Value, Not Just Speed

One way to look at the relative “slowness” of ACH payments is that it’s a feature that helps combat fraud.

If any payment made in real-time is irreversible, then it stands to reason that when fraud happens, it will be much harder to mitigate after the fact.

This explains why so many institutions have embraced FedNow as recipients of payments, but not senders. Everyone is happy to accept payments through the system, but they’re hesitant to send money and accept the risk and responsibility of an erroneous payment.

Because of this hesitance, the path to increased revenue and profit diverges. One route allows credit unions to participate at a minimum level in real-time networks while watching revenue from other forms of noncash payment grow. The other route requires institutions to investigate opportunities and develop new payment products and services.

The second approach treats real-time payments as a capability that can be woven into a workflow or experience for businesses and consumers.

Selling real-time payments as a standalone option will bring a predictably lackluster response.

If you wait for your account holders to tell you how they want to use real-time payments, you’ll wait a long time. Meanwhile, any institution that takes the initiative on this issue gains an advantage in stealing customers from you.

Here’s what credit unions can do to kickstart the development process for real-time-enabled products and services:

1. Identify the top candidates (businesses and consumers) using fast payment methods or high-value transactions, such as wire transfers.

2. Create and send separate digital surveys to your business clients and retail account holders. Ask about their transaction needs. Ask them where slow payments feel costly and where fast payments could unlock value. Ask them to imagine where instant payments could improve their financial life. Don’t be afraid to ask how much they would be willing to pay for instant payments.

3. Conduct in-person interviews with some of your best and largest clients. Invite them to collaborate with you on how instant payments could reduce costs, increase profits or just make life/business easier.

4. Analyze the results with your team and brainstorm new products and services. Explore what fee structures you could use and how to offer value that feels more significant than the fee.

Assume Real-Time Payments Will Disrupt the Current Payment Ecosystem If you feel like your current payment ecosystem is working well and you don’t want to shake things up, that’s understandable. After all, businesses and consumers will only access real-time payments networks if financial institutions allow it. You hold all the cards, right?

Wrong.

Be warned: Some credit unions and fintechs are working to build full-fledged real-time payment workflows and experiences. These organizations recognize that consumers and businesses are hungry for better ways to move money – if they can be the first to offer it, they’ll bring in new accounts by the droves.

You should ask, “How would we change our strategy if we knew our current noncash payment revenue was going to experience disruption?”

The last two decades have shown how fast and extensive technology can disrupt an established financial system. It’s not a matter of if. It’s a matter of when and how prepared you are when it happens.

Abhishek Veeraghanta is Founder & CEO of Pidgin, a real-time payments platform from the Atlanta-based VSoft Corporation.