Hi all, Julie here.
We’ve talked about payments perhaps more than any other portion of fintech here. Can you blame me though? The space is huge and there is so much going on! Buy Now Pay Later, E-commerce, and the topic of today: Real Time Payments.
Much like the pieces I worked on about Ramp and NVIDIA, Orum paid me for my work here. Like I’ve said before though, I turn down offers from companies that I don’t believe are worthy of my readers' time. Whether Orum, Moov, or someone else tackling this space ends up doing the best is still tbd, but diving into this topic is 100% worth your time. Let’s get started.
How To Think About Payments
There are four main elements to think about with payments. Cost, reliability, transparency and speed. It is very difficult, if not impossible to have all the best of all four.
As a quick review, low value payments in the U.S. are typically made by cash, card (debit and credit), ACH or by check. The 2019 Federal Reserve Payments Study (sadly this is the latest one but I expect the next one will be super interesting given everything that’s happened since then) shows the above charts. These are great examples of how payments have changed.
There are pros and cons to all of these for everyone involved.
- Cash can be cheap, it's fairly reliable and quick to transact. However, it can get lost or stolen pretty easily. Cash is also limited to physical transactions, which explains the rise of other payment methods such as cards and ACH.
- Cards are fast and reliable, but they are expensive for merchants and potentially for consumers if those merchants raise prices due to that cost. There’s also the aspect of money from card transactions taking a few days to hit a business’s bank account, which can hurt cash flow.
- This brings us to the Automated Clearing House (ACH), a network to move money between banks electronically that doesn’t rely on checks, wire transfers, card networks, or physical cash. As you can see from Figure 2 above, ACH is the most used non-cash payment method by value. In 2020, there were 26.8B transactions made (+8.2% YOY) with a value of nearly $62T. That’s roughly 3x US GDP. If you looked closely, you might have noticed that the number of ACH payments is eclipsed by cards, but it still sits at the top in terms of dollar value. This is because of its strengths, which are ubiquity and cost. ACH is used for transactions of all sizes that require a reliable payment method. However, they traditionally have not been speedy transactions, with the exception of Same Day ACH which has three processing windows to allow for same day settlement of funds.
Benefits of the RTP Network
While it’s hard to be the best in cost, speed and reliability, that doesn’t mean companies aren’t trying. The typical way to do that is by looking for and adding real-time payment (RTP) capabilities. The Clearing House (TCH), a payment system privately owned by FDIC insured member banks (e.g. JPMorgan Chase, BofA, Citi, BNYM, Deutsche Bank, Wells Fargo etc) launched the RTP Network in 2017 to provide real-time payment capabilities to participating institutions in the U.S.
There's also FedNow from the Federal Reserve, a real-time payments network that is anticipated to launch in 2023. This is very similar to The Clearing House’s system above, but this system will be operated by the Federal Reserve banks and will be open to all U.S. financial institutions with no requirement to become a member.
By providing a real-time payment system, TCH and the Fed are aiming to solve those three key problems we noted above.
- Speed: It is real-time, so you can’t get much quicker than that. This means that the use cases for RTP are expanded beyond less frequent and higher value payments. We will dive more into the use cases a little later. The funds settle and receipt is sent within seconds. Super helpful to all sorts of businesses and consumers.
- Reliability and transparency: RTP is available to all FDIC institutions and credit unions who choose to become participants on the RTP network, which makes it reliable to the consumers and businesses that use it. It’s also live and operates 24/7/365, including banking holidays, settles funds within seconds, and provides payment certainty. The RTP system is a “push payment system” meaning that the sender initiates the payment and funding takes place before the transaction is sent to the network, meaning a transfer can only be made if the sender has the funds available.
- Cost: RTP has volume discounts at scale, so the businesses that use it may not ever get to see the $0.045, but some other fee that can vary from $0.15-$1.00+. The benefit of this is that the speed provided by OCT and the irrevocability of wires come at a much lower cost via the RTP Network. This makes RTP the cheapest payment solution that is both instant and irrevocable. It is cheaper than wire transfers, but more expensive than ACH and same day ACH given its improved speed and 24/7/365 operation. No missed cut off times.
Beyond moving money, it also has a built-in rich and flexible messaging functionality to help with bill or invoice payments, as well as allow for the ability to return funds via the same network if necessary. The ability to enrich payment transactions with data makes it a great tool for the reconciliation of payments, something that keeps many finance teams awake at night. Sort of like the payments boogieman.
RTP use cases
Access to the RTP network is only available to financial institutions, but fintechs like Orum and Moov and third-party payments providers have solutions to enable businesses to embed RTP functionality in their products and services.
You might be asking why we even need these companies in the first place. Shouldn’t RTP have been a thing ages ago? Well, it is in some countries, but those tend to be places that have newer payments systems in general. That means companies don’t have to use super old rails that weren’t built for RTP. They were built for snail mail or something. Our payments system, as Moov has pointed out, wasn't built for a time when there was “The Cloud,” digitally based or open sourced.
Imagine trying to have to make the post office get your mail as quickly as Amazon delivers all of your packages or even faster. It’s not easy. You basically have to work with and around these rails to create a system that will make all of this move a lot faster. I’m glad Orum and Moov are working on this since I sure as hell am not smart enough to do that myself.
Given the strengths of the RTP network, it can be used for all sorts of use cases. Payroll has been one unexpected use case. Back when RTP launched in 2017, early wage access (EWA) was not really a thing but over the past few years it has become a highly sought after segment and feature. Incumbent banks, neobanks and companies are using EWA as a selling point to attract customers and talent and RTP is powering use cases to allow gig economy workers and delivery drivers to have immediate access to their earned wages, providing much needed liquidity for these workers whose incomes can be volatile and on non-traditional cycles that don’t match most monthly billing cycles. Companies like Paychex are also using RTP for regular payroll cycles to reduce the time for direct deposits to hit employees' accounts from up to three days to instantly.
In the merchant processing space, cash flow and forecasting can be a huge problem area for businesses where cash might take three to five working days to actually hit their bank accounts after the customer makes a payment. The speed of RTP can eliminate this delay and allow businesses better visibility into their cash flow forecasting capabilities and allow them to pay their bills on time. This has been increasingly important during the pandemic for retail focused merchants who have suffered immeasurably.
In the consumer space, it was found that consumers own 5.3 accounts across all types of financial institutions which means they need to send money in between them on a frequent basis. RTP payments can facilitate that in real time and provide consumers with the money they need, in the account they need without having to pay three days in advance. Whilst apps like Venmo and Cash App appear to instantly send money to users, they are still built on older payment rails and cashing out into a traditional bank account can take a few days or cost money. RTP can provide a better solution to ensure consumers get their funds without delay so they can make important payments.
These are just some of the use cases that the RTP network is seeing amongst their customers but the exciting thing about fintech is there are likely a lot more use cases to be built on top of the network over time.
Orum & Momentum
So now that all of you are super excited about RTP, how can businesses add RTP capabilities to their products and solutions? Or even better, how can businesses enable smart, and real-time money movement, without having to build direct integrations to the banks themselves? This is where Orum’s Momentum comes in, providing easily embeddable, API based products that enable enterprise partners to easily integrate money movement capabilities. This will take place across multiple rails, including RTP, as well as ACH, and eventually FedNow, and will be 24/7/365. This in turn allows companies using Momentum to provide their end users with smart, real-time, and fully-automated money movement.
Through its partnership with two of the largest financial institutions in the US (announcement coming soon, I’m told), Orum’s Momentum will be able to route transactions across multiple rails, including but not limited to RTP, ACH, and others, and intelligently select which rail to move money on, based on Momentum’s smart-decisioning engine powered by proprietary intelligence (read-up more on Foresight, Orum’s predictive risk intelligence offering) that optimizes for speed, cost and risk. In other words, Orum has built an orchestration layer on top of payment systems to route funds to the most appropriate rail to optimise for speed, cost and risk. AKA: building around the existing rails rather than trying to replace them.
Some really cool applications would be:
- Daily payouts to creatives and gig economy workers
- Real-time account funding for neobanks & brokerages
- Just-in-time payment on delivery between businesses & suppliers
- Accelerated self-driving money for personal finance / wealthtech
Currently, a business would have to integrate individually with solutions for each type of payment method which takes time away from the core business. Not only that, but it would have to manually build a smart solution to route payments to the most appropriate method which again probably isn’t its core competency.
Maybe this is why I can't send money instantly anywhere yet… Even when something like Square’s Cash App instantly deposits my funds, it's simply fronting me the money, it's not actually moving that fast.
But with products like Orum’s Momentum, it feels like we’re one step closer to instant money movement becoming a reality.