Real Time Payments: Where Are the Big Banks?

After the hoopla surrounding FedNow’s launch last year, reality is starting to set in.

Payments professionals have been basking in a warm glow as a steady stream of media coverage lauds the long-awaited arrival of faster payments and the uplifting role played by those professionals in bringing the long-dormant, slow-innovation paradigm of physical payments to a rightful close.

But some troubling signs have surfaced that suggest the enthusiasm might be premature. They point to a fundamental misreading of whether the big banks that are necessary to effect critical-mass adoption of real-time payments are going to join the real-time party this year—or even years from now.

The latest sign that something might be amiss arose quietly before the December holidays, though few took any notice. At least four of the big banks—mainstay owners of The Clearing House, its Payments Company and its RTP network (TCH/PayCo/RTP)—quietly made changes to their payments policies. The changes imposed on consumer-facing real-time payments the same transaction-amount and number limits the big banks have in place for consumer payments on the Zelle network.

For example, Bank of America’s online-banking service agreement, updated the first week of December, now includes new rules for using TCH’s Real Time Payments Service (RTP) for the new, high-demand Request for Payment (RfP) mode that enables many new payments modernization use-cases (see illustration A on page 25).

These are the same limits BofA imposes for Zelle consumers sending certain transfers (see illustration B on page 25).

The following week, on Dec. 15, Chase announced in its online “Transfers Agreement” its own RTP/RfP limits. These are somewhat higher than BofA’s, but are commensurate with what it imposes on Zelle users (see illustration C on page 26).

Two other Big Five banks were reported to be limiting their consumer-facing account payments to $5,000 and $10,000. Compare that with TCH’s current overall limit: $1 million per transaction (rumored to soon rise to $10 million), or the per transaction limit at the Federal Reserve’s rival service, FedNow, currently at $500,000 (but expected to rise soon to $1 million).

The rationale of the four big banks sounds plausible. RfP is a new service, and brand-new use cases offer little in the way of track records on which to base risk management. Besides, real-time payments were—at least in the TCH lens—supposed to be targeted at business-to-business transactions, limiting if not replacing ACH use, and constituting a new revenue opportunity because faster payments are better for many applications, and should warrant “value-based” pricing.

Rushing into consumer applications, on the other hand, is not obviously a priority, and point-of-sale applications remain anathema to most the big banks.  And nobody at TCH wants a replay of the problems the big banks have had with Zelle. So why not take some time with new use-cases and limit the risk until experience warrants?

Nay to A2A

Coupled with other perplexing signs recently, these consumer application-targeted limits could weigh against substantive innovation in digital payments any time soon. And they further underscore the need for the Federal Reserve, and FedNow, to provide another means of deploying real-time payments with more latitude on the flexible (RfP) mode (“How to Tap Real Time’s Potential,” September 2023) for all those users—consumers, merchants, and corporates—who are demanding digital payments innovations.

The complexities of meeting this marketplace need can be seen with real examples of recent attempts to field unconventional RfP use cases. Here, what some of the big banks are doing with and through TCH as their network instrument is creating head-scratching moments for the industry.

The first example involves a mid-size regional bank with a strong portfolio of cash-management customers offering sports betting, gaming, and gambling services. Seeking higher security (vs. cash), cost savings (vs. ATM fees and wires), and convenience (compared to check and ACH delays) for its customers, the payment-platform support provider for these corporate clients entertained a direct-to-bank payment option, using mobile phones, that took just five clicks to execute and was real-time over RTP.

The bank had already built an award-winning application for a similar payments-platform provider to dispense payouts to customers of the client’s merchants, generating millions of payments over RTP in 2022 and 2023.

In this new RfP application, consumers could load the digital accounts they already had from these merchants (a “pay-in” function), comply with all relevant regulations on gaming-account use (such as frequency of account loadings), and make their bets without further impediments. What’s not to like?

The bank, which had worked on the application for a year, had been led to believe that this use-case application had been “grandfathered” by TCH governance committees. It was preparing to go to market with the expectation of monitoring usage to share the results with other TCH members.

That’s because some banks have a moral aversion to supporting betting and gaming activities and didn’t want to open a new market sector without proper controls in-place—if they opened it at all—though they supported these merchants for card and ACH payments.

On July 20, FedNow launched—right on time. FedNow offered an alternative to TCH’s 6-year-old RTP network, with contrasting, very low network fees, a purported willingness to support just about any digital payments use case banks wanted to try, and a commitment to open up the RfP mode to an open, blank slate of innovations that consumer, merchant, and corporate users craved. These included point-of-sale applications and legitimate applications for legitimate users—such as gaming.

But two weeks later, following a year of TCH member banks experimenting with a host of potential applications—and after six months of laboring over what risks and liabilities should be addressed—TCH published a mere handful of RfP applications it was willing
to support.

These permissible use cases included pretty much vanilla extensions of conventional bank payments services, typically already provided by the ACH network, though a bit faster (see illustration D on page 28).

This made payrolls work better, appealed to gig workers needing to get paid daily, and enabled a variety of cash-out disbursements to happen quickly—from unloading Venmo and PayPal accounts to winnings from online gaming and betting (which apparently did manage to pass the moral test).

What was more interesting was what use cases the TCH governance committees did not allow.  First, grandfathering of the gaming pay-in application by that mid-size bank was revoked after all (both for a correspondent banking configuration TCH doesn’t allow, and as a digital wallet loading application)—reportedly at the behest of a couple of the very biggest TCH banks.

Meanwhile, widely desired moves to accommodate digital-wallet loads via RTP—which some big banks view as competitive and perhaps unworthy in terms of security, while other banks were eager to accommodate—were also forbidden (especially, one big bank told me, for Apple).

In fact, the only account-to-account use-case contemplated was for consumers who might load their investment accounts from funding accounts within the same institution. Many dozens of other A2A applications, under development or in testing, were nixed until further notice.

Clarity, Please

But all the big banks have investment-brokerage customers whose clients are frustrated with the vagaries of settlement timing for account loads using ACH.  Even slight delays in funding availability can cause missed investments—a great use-case for real-time payments.  But what if you want to load your brokerage account from accounts held at multiple banks? Or set up multiple investment accounts, one for each bank?  Outside the TCH community, the rules just aren’t clear.

Another one of the many obvious use cases clamoring for real-time payments—one that seemingly every big bank gravitates to and appeared to be approved as a B2B use case by TCH—is moving payments among parties to a real-estate purchase via the title-and-escrow industry. When TCH’s starter-gun shot off Aug. 2, several banks and many providers scurried along to relieve 5,800 title-and-escrow companies of their 40-year dependency on paper checks and wires.

Most concluded that the Aug. 2 TCH rules would accommodate this use case as a permitted application. After all, delays for turning paper checks into good funds could go away, making earnest-money deposits much more timely and effective for both buyers and mortgage brokers. And the costs and hassles of hundreds of thousands of last-minute wires to balance out mortgage proceeds to the penny—as most states require—could soon be a thing of the past.  Cheaper, faster, and safer payments would float all title and escrow boats—what a use case!

But then the transaction limits that creeped in at the end of the year, which minimally accommodate nearly all of the nation’s earnest-money payments, raised concerns about whether much larger transfers for down payments, closing payouts, and mortgage proceeds would be precluded. So some banks, and many corporate customers, have been insisting on clarity from TCH as to what might actually be allowed.

And no wonder! A lead manager for the RTP service at one of the big banks recently told a corporate customer that these limits really are just a way “to limit the move to use cases involving consumers on the front-end” and that corporate customers “could still get the sizes of transactions they needed as they always have.”

Another corporate customer of a large bank was told any complications in rolling out use cases for RTP “wouldn’t matter that much as we’re in a position to guarantee your ACH transactions if you need to for good funds.” Causes for head-scratching, to be sure.

Buying Time

Then, early last month, a TCH governance committee reportedly recommended funding of digital-wallet loads via RTP after all—so long as the funds remained in-use in the wallets and not immediately transited out. Conceivably, this accommodation could even resurrect the possibility of RTP loads for gaming wallets, if TCH’s PayCo board proceeded, as many expected it would, to approve the recommendation in their mid-month meeting. If so, that’s another (but widely welcome) head-scratcher.

TCH (and FedNow) also need to expand their security premises.  Some of the big banks are asking for the equivalent of Merchant Category Codes (MCCs) that they have for card acceptors, but applied to originators of Requestors for Payments like digital wallets. However, there are no acquirers in real-time payments to make that lift, so originating banks will have to do it—or simply accept all the liabilities they have for bad actors as they do today.

Ditto any real-time fraud checks. In the card world, Visa and Mastercard can touch more than half a dozen data points in less than a second. Banks looking to add real-time security checks to real-time payments to avoid real-time fraud will have to figure out how to do that and still keep the transaction under the desired three-to-five second duration—something neither real-time payment network appears designed to do.

These and other security challenges, as volume scales, are likely to be the next big hurdles to adoption once the big banks settle on what they are willing to allow over these networks.

No doubt TCH itself is genuinely focused on the efficacy of payments. It processes $2 trillion a day, and half the country’s ACH and wire payments. But its member banks—and especially the very biggest ones—can only be viewed as moving slowly and tentatively on new use cases, perhaps buying time to figure out which way the winds of marketplace competition might be blowing.

After all, they have at stake the lion’s share of merchant and corporate customers. The top 10 banks control 60%-90% of the revenue in just about any payments segment.

And they face substantial losses of revenue this year from a wide variety of challenges to their legacy payments: more antitrust cases; loss of overdraft fees; dictates from the Consumer Financial Protection Bureau on consumer privacy and junk fees; extension of Durbin dual-routing to online debit; reduction of debit card interchange; and maybe even inception of the Credit Card Competition Act (“Who Will Route Transactions?” September 2023).

‘The Big Hope’

Still, despite the availability of the most interesting new payments networks in decades, enlisting banks to participate in developing interesting new payment use cases is likely to remain a discouraging proposition, at least for the rest of this year.

The Clearing House, in business with RTP for six years, has integrated about 450 banks that represent about 70% of the nation’s demand-deposit accounts. If they all were live and supporting a wide variety of use cases, the real-time payments marketplace would be cooking.

FedNow, in business for eight months, has about 400 banks integrated or in pilot with third parties, representing about half TCH’s level of DDA penetration (35%). Interestingly, if you added the FedNow banks to the TCH banks, you only get an increment of 2% to 3% more DDAs. So FedNow is more likely to move the chains from 72%-73% to 100%, but that movement will be coming mostly from smaller FIs. And many of those remain wary of their ultimate fate with the TCH banks.

It’s still early, but what’s clearly missing, and needed, is real big-bank participation on FedNow, beyond their perfunctory bromides about supporting it, integrating it into their APIs, and fostering customer choice. FedNow has demonstrated the capacity, capability, and readiness to let marketplace competition emerge and take root, for the benefit of all.

So the big hope now of the rest of the payments ecosystem is that some of the big banks will decide it’s time to reach for more than just what’s “allocated” to them by their even bigger brethren, and push for more innovation faster—if not on one real-time network, then on another. After all, there’s a choice now.

——Steve Mott is the principal at payments consultancy BetterBuyDesign.