There was substantial buzz when Walmart announced that—with Fiserv’s help—it was launching support for real-time payments through FedNow and the RTP network last year. However, for all the speculation that real-time payments will be the way of the future, there are reasons most consumers aren’t using pay-by-bank at retailers yet—and might not start any time soon.
In the report Implementing Pay-By-Bank: A Guide for Merchants, Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, discussed the use cases for instant payments, the limiting factors delaying adoption of real-time payments, and the future of pay-by-bank in retail environments.
The Benefits and the Use Cases for Merchants
Real-time payments appeal to retailers because they don’t come with the 2% to 3% interchange fees that credit and debit card transactions bring. Merchants receive their funds in real time, which means they can reconcile transactions quickly.
Instant payments can also be a powerful tool in many merchant use cases because of their around-the-clock availability.
“If you’re a business and your supplier says, ‘I’m not going to ship you any more pizza boxes until you pay the bill,’ you can use those technologies to push that money out,” Apgar said “If it’s 3 o’clock on a Sunday afternoon, you can say, ‘Fine, supplier, you got the money in your account.’ Unlike Fedwires that require manual intervention—so it’s only business hours—and ACH—that runs in batches and is posted only during business hours—real-time payments go 24/7, 365.”
This functionality could be a boon for a payment processor that is paying a merchant for its daily credit card sales. It could also be a powerful tool for insurance companies because they could resolve claims instantly and get victims of natural disasters and other incidents on the road to recovery.
Both of these use cases are unhindered by an attribute of U.S. real-time payments that is often considered a drawback: There is currently no way to dispute an instant payment transaction. This characteristic also opens up another potential use case.
“Let’s say you’re on a website selling a car and somebody says, ‘Here’s $5,000 for this rust bucket and I’ll FedNow it into your account.’ As a seller, when that money hits—here’s the title, here’s the keys, have a nice day. It’s cash in the bank,” Apgar said. “There are use cases where that is a valuable attribute, but buying stuff from a merchant is not one of them.”
No Dispute Mechanism
This irrevocability is one of the main challenges to the broader merchant use case for real-time payments. Most consumers have become accustomed to having the capability to dispute transactions that are suspicious or erroneous.
In this way, real-time payments operate similarly to peer-to-peer (P2P) payment platforms like Zelle and Venmo. These platforms have drawn criticism because if one of their customers is manipulated into sending money to a criminal, there is no recourse to be reimbursed. This has caused many P2P users to become prime targets for cybercriminals.
ACH, the most common pay-by-bank method in the United States, comes with payment delays but has a dispute mechanism built in. If a consumer notifies their bank of a fraudulent transaction, the bank can reverse it.
“That functionality doesn’t exist on RTP and FedNow,” Apgar said. “So, when we talk about use cases, it’s the sender knows the receiver, and the sender and the receiver agree on the amount. The sender agrees that there’s no dispute, and he’s got no claim to the money once it leaves his account. It’s done, and he has zero recourse.”
Send and Request Issues
Perhaps the main reason RTP and FedNow aren’t quite ready for merchant applications is they only allow users to send money.
“There’s no function where you can request money,” Apgar said. “If you walk into my store and tap your debit card, I’m sending a request and saying, ‘Take money out of his account and put it in my account.’ But there’s no way for me to do that. You have to initiate the payment.”
Additionally, in a card-based transaction, when the customer taps their card at the terminal, the merchant receives an approval code. If there is not enough credit or enough money in the account to cover the transaction, it won’t go through. This aspect doesn’t exist with real-time payments, so the merchant won’t know whether the transaction was approved.
“The way to check that you got the money is to look in your bank account,” Apgar said. “But if you’ve got thousands of point-of-sale stations, how do you do that? You would have to have some kind of AI bot scanning your bank account to see if there was a deposit for $16.33, when it was deposited, and that it wasn’t some other $16.33 purchase made by somebody else in another store.”
The Leapfrog Effect
These issues counter the narrative that real-time payments are sweeping the globe, and the United States is next in line. The first half of this assertion is true; in countries like Brazil and India, real-time payments systems like Pix and UPI have gained significant traction in a short time.
However, these countries are far different environments because their governments mandated Pix and UPI adoption. This regulatory-first approach was successful because a firmly established payment infrastructure was not in place.
“There is that leapfrog effect, and it’s the same thing with card payment technology,” Apgar said. “The infrastructure was not as developed in a lot of these countries as early as it was in the U.S., so card payments weren’t ubiquitous. Now that everybody’s got cellular capability in all these little towns, they can validate card transactions. It’s easy for the government to jump in and say, ‘We don’t need a debit card, we can just do pay-by-bank and tie it all in.’”
However, the debit card infrastructure is so entrenched in the United States that it doesn’t make sense for the Federal Reserve to mandate real-time payments to displace debit cards.
“From the consumers’ perspective, when you use your debit card, you’re already paying by bank,” Apgar said. “The merchant may avoid debit card interchange fees. but now that most debit cards are regulated under Durbin, the price is low. Unless the government is going to subsidize it to make the price even lower—like they do in Brazil and India—you kind of scratch your head looking for the business case.”
Searching for a Catalyst
Though more use cases for real-time payments are no doubt coming, there aren’t any new solutions on the horizon that could be the catalyst for more instant payments at retailers.
“This is fairly typical of the payments industry,” Apgar said. “As soon as something comes out, it’s plastered all over the media. ‘This is the next big thing—everybody jump on this bandwagon because the train is leaving the station.’ Everybody’s desperate to have something new to talk to their merchant customers about, and it is fun to talk about.
“FedNow and RTP are fantastic tools that will do a lot for money movement in the country,” he said. “But one of the things that they’re not built for is for consumers to buy stuff from merchants.”
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