When Instant Payments Are Just Payments
January 3, 2020
In just three years, one word, one idea, has rewritten the payments rulebook: “instant.” Driven by faster phones, ingenious apps and sheer market force, the move to instant is pushing the boundaries of what’s possible with payments, opening up new worlds of risk and reward.
Rarely do consumers and businesses agree on anything as much as they have on instant. According to the most recent PYMNTS Disbursement Satisfaction Report, “Consumers’ instant payments adoption has increased nearly fourfold over the past three years, with 42 percent reporting they received at least one such payment this year compared to the 11 percent who said the same in 2017.” That number is even higher (nearly 62 percent) when counting people who received an instant disbursement, like ACH, from government or other sources in 2019.
FinTechs led this charge and fueled much of the innovation. Now, legacy FIs and a host of other players are scrambling to get a piece of the instant money action. Inspecting the “up-and-to-the-right” growth curve of instant payments, it’s no shock how many players want in. And as promising as things are in the early stages, there’s work to be done before instant becomes ubiquitous.
Making Money Fast
Want to make a CFO smile? Take a core business function – payments, for example – and then make it lightning-fast, less expensive and secure. The return on investment (ROI) of instant is obvious from the get-go: It requires no printing of watermarked paper checks, no envelope or postage and, most importantly, no more waiting for money to clear.
It doesn’t take an accountant to understand that companies will initially make money with instant simply by eliminating the back-office functions associated with paper mail. But that’s just the beginning. It’s been definitively shown that businesses and individuals will pay reasonable fees or percentages to receive their funds instantly. Between operational savings and new fees on crowd-pleasing new services like instant, the path to instant profitability starts to emerge.
Perception Becomes Reality
As instant money organizes itself largely around consumer preferences, there are important distinctions to be made. In the first place, not all instant is created equal. Real-time availability and real-time settlements are not the same, of course. And as consumers continue to warmly embrace instant money, old definitions and practices are becoming obsolete almost overnight.
As Ingo Money CEO Drew Edwards told PYMNTS, “There are enough rails in place today to provide ubiquity, choice and instant access to good funds for consumers. We need to give payors more options to deliver choice, and more ways to build trust with the consumers and SMBs that the funds they get instantly will not be clawed back.”
Risk vs. Reward
Instant money is shaking things up, which is to be expected. And the devils we know – garden-variety credit and bank fraud, phishing and bot attacks, online identity scams and the rest – may feel more comfortable than the devils we don’t know. These include advanced data security and new state and federal regulations governing payout mechanisms – to say nothing of the irrevocable nature of instant payments. You can’t pull them back.
It’s important to understand that the seeming “weaknesses” of instant are, in most cases, strengths that haven’t yet been fully deployed, like the many controls available with digital payments. Perhaps the best thing is the trackability of instant, a big departure from the paper past.
“Risk is always a concern when you are making a payment, when you aren’t face-to-face,” said Ingo Money EVP and CPO Lisa McFarland. “But companies need to keep their focus on the idea that risk and fraud are also associated with old, slow ways to pay. There isn’t more risk, or inherently worse risk, with an instant payment – it is just different risk.”
The instant payments revolution was driven by the convergence of two factors: the proliferation of gig economy workers after the Great Recession and FinTech creativity.
With the instant genie out of the bottle, its forward trajectory will be predicated on giving people what they want. That will play out as optionality, and payers are starting to think about what those options will be. In the end, consumers will tell them, but it’s up to the FIs to make it real.
“My bigger, long-term vision and goal is that with our marketplace, when the payee gets to choose, you have an environment where people will work to influence what the consumer chooses,” Edwards said. “Every time I go buy something, the first thing that comes to my mind is which card will reward me the most for making this transaction. Why can’t it work the same way when someone pays me?”
‘Float’ Drifts Away
As instant becomes ubiquitous, FIs will have to say goodbye to some sacred cows of banking. One of those sacrosanct things is “float” – the misunderstood intervals between when money is sent by a payer and when it becomes available as cash in the payee’s account.
Rumors have swirled around the magic properties of float for ages in banks and other FIs, including (but not limited to) rationale like “keeping the money longer is safer” and “we’re making more in interest every day we hold the funds.” Both of those things may have once been true, but float has been pushed out to sea on a tide of instant money – and it’s not coming back.
Instant Is Here to Stay
Surprising no one, the Disbursement Satisfaction Report found that basically all people want instant access to cash. More importantly, many today live paycheck-to-paycheck and have little or no savings. PYMNTS research shows that over 75 percent of working Americans who struggle to pay their bills would opt for instant payments to debit cards if offered the choice.
“If offered the choice.” That notion has become a “clarion call” for the financial services industry in general – and the payments sector specifically – as news of instant money smashes the old ideas surrounding paying and waiting for payment.
“We have a vision of the future coming really soon, where our disbursements marketplace allows payment recipients to choose not only where they want to get paid in terms of what account, but also when exactly they want that payment to happen,” said Edwards. “In this environment, we will see issuers/banks/wallets developing incentives to influence these choices, similar to what happens today with purchase rewards.”
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