US Instant Payments Research: Time US banks left legacy behind?

Unlike other markets around the world, instant payments are yet to take off in the US. This is for several reasons. 

For a start, balancing the impact of instant payments on existing card-revenue business lines is a step-change in the way US banks operate. Retail and Corporate bankers are traditionally siloed. With instant payments, they must come together and go-to-market as one system, to address the payment needs of the bank’s entire customer base. 

But first they need to update their legacy banking systems. Payments modernization projects, however, are costly, risky, and time-consuming. As a bank, you’re unlikely to modernize unless there’s a good reason to. 

In other parts of the world, that good reason has been government mandates. Europe is currently implementing legislation that will make instant payments the new normal, which is forcing banks within EU member states to rapidly upgrade their systems to get ready in time for the deadlines. The situation is altogether different in the US. 

US Banks face potentially disrupting existing revenue streams for a lengthy, unproven instant payments project, which may increase fraud and fail to provide a direct income (instant payments are free in most parts of the world). 

As a bank, you’ve also got to choose between one of two instant payments schemes, the Real-time payments network (RTP) and FedNow, which makes the situation even more complex. Many are sitting on the side-lines as a result, waiting to see how things play out.  

Competition from FinTechs 

In the meantime, banks face competition from pre-funded third-party wallet apps like Venmo and Cash App, who already do an okay job of near-real-time payments. With Venmo, you and I can split our dinner bill (nearly) instantly without needing to trade banking information. It in part satisfies the need for fast and affordable account-to-account transfers for consumers and small businesses, but it represents an existential threat to the bank’s interchange fees. 

And so retail bankers are fighting back with Zelle – a third party account-to-account P2P service connected to RTP – and Paze – a direct pre-funded wallet app (both owned by the Early Warning Services, which is owned by a consortium of banks, some of whom are involved in The Clearing House, which owns RTP).

Zelle is as good an account-to-account solution as Venmo and Cash App, with more users and the added benefit of being slightly cheaper. Paze offers a secure way to pay in a bank-owned digital journey. In that sense, they (sort of) take the pressure off, but as a bank, you still lose out on card revenues. Both only solve part of the instant payments puzzle.  

Meanwhile corporate use cases are wide open. Insurers, funds dispersal, real estate, and medical payments to name a few, offer opportunities for banks looking to build an instant payments proposition. Banks have a huge opportunity in these areas to focus on the niches they have expertise in and gain a meaningful advantage.  

While consumers are well looked after, are banks meeting demand for their corporate customers? How do apps like Zelle, Venmo and Cash App impact instant payment adoption? And are legacy systems holding banks back?  

We surveyed 300 senior payment professionals at US banks to find out. Download the report to discover.