The Clearing House’s RTP real-time network faces U.S. competition for the first time now that the Federal Reserve launched FedNow this month. The rivalry is spooling up, but the battle of titans will play out in coming months.
Just days after FedNow went live on July 20, RTP put out a press release touting a 500 million payments milestone reached this month. It also bragged that 150,000 U.S. businesses have used RTP and that three million consumers use RTP on a monthly basis via other channels.
The competition between RTP and FedNow could spur more adoption of instant payments in the U.S., a country that has lagged other nations in rolling out the speedier option for conducting commerce. While the privately-held RTP, which is owned by a pack of the world’s biggest banks through The Clearing House, has been in operation since November 2017, real-time payments account for only about one percent of U.S. transactions. The Fed is counting on FedNow to boost usage, particularly by smaller banks and credit unions.
In an interview this month, Rusiru Gunasena, who is senior vice president of products and strategy for RTP at The Clearing House, emphasized RTP’s first-mover advantage. RTP has developed its “safety and soundness” through experience over the past nearly six years, and now operates a system with a solid track record of handling issues that can crop up, such as fraud and abuse, he said. RTP’s governance and rules have also gained credibility over that period, he explained.
Gunasena noted that 353 banks and credit unions already use RTP and that they include 50 of the biggest payments originators in the country. RTP also works with 20 technology provider partners to deliver services, TCH said in the release. Overall, RTP reaches 70% of U.S. financial institution accounts, and that makes it the “turn-key” option in the real-time race, Gunasena contended.
The Clearing House executive took a shot at FedNow by noting that it had fewer banks, credit unions, providers and other organizations on board when it launched this month than it originally projected.
Will FedNow and RTP be interoperable?
In differentiating RTP from FedNow, Gunasena also stressed that FedNow had taken a different approach in the message coding that accompanies its transactions than had RTP and also with respect to disclosures about its technology choices, such as in coding and cloud services.
The Clearing House was “disappointed that the (FedNow) messaging specs were not more closely aligned” with those of RTP, TCH spokesperson Greg MacSweeney said during the interview. The other major difference between the systems is that RTP settles its payments through the New York Federal Reserve bank while FedNow settles them through the Fed’s master accounts with banks.
That disappointment stems from the fact that such differences will make it more difficult for RTP and FedNow to be interoperable in the future, said Gunasena, who estimated that possibility is 10, or more, years away. “There’s a lot of work both networks will need to do if they have to talk to each other,” he explained.
Such interoperability should be an objective for fostering U.S. real-time payments, said Georgetown University Professor Jim Angel, who previously served on the Faster Payments Task Force that weighed such issues. Instead, Angel suspects the U.S. will have two real-time rails for the foreseeable future, he said in an interview last week.
Despite RTP’s stated gains, real-time payments nationwide only accounted for 1.2% of all payments in the U.S. last year, according to a worldwide report this year from service provider ACI Worldwide. That usage falls short of other countries such as India and Brazil, some of which have mandated use of real-time systems. In any case, FedNow offers an opportunity for the U.S. to play catch-up, perhaps with the benefit of two competing options.
FedNow, like RTP, is a payment rail for banks, and those financial institutions and their fintech partners, in turn, create ways in which services for businesses and consumers can be built on top of the rails.
So far, one of the biggest use cases playing out on RTP is the faster payment of workers via earned wage access providers, such as DailyPay. That on-demand pay provider, which offers workers an opportunity to be paid before the end of a typical pay cycle, has signed up multiple banks for such services on RTP’s rails.
How the real-time rails differ
The Fed has said that FedNow payments will be completed in less than 20 seconds, compared to some payments transactions taking days on other types of rails. RTP’s system promises settlement within ten seconds, normally, MacSweeney said.
The Federal Reserve has outlined fees for FedNow services that are similar to those of the RTP Network. The biggest difference between the two systems is that FedNow services are available only for payments up to $500,000 for now, while RTP can handle payments of twice that amount, up to $1 million.
The Fed said last year that it would initially waive customer credit transfer fees and participation fees for FedNow services, giving participants a few months to try out the service at a heavily discounted rate. That information came in a notice in the Federal Register regarding the pricing, noting banks will ultimately charge customer credit transfer and customer credit transfer return fees of $0.045 per-item and a participation fee of $25 per routing transit number per month. That pricing largely echoes RTP’s rates.
Angel doubts there will be significant competition between FedNow and RTP on pricing, because the Fed has long shied away from competing too aggressively with banks, he said. “Instead, you have this tacit collusion where you both keep your prices nice and high and you have this gentile co-opetition,” he said.
Nonetheless, the competition could show up in other forms, Angel said. In particular, there may ultimately be volume benefits offered by banks on behalf of RTP or FedNow for shifting more payments volume to one system or the other, he said.
Another front on which they could compete might be pushing the development of more apps that offer ways in which consumers and companies can make use of the high-speed rails. Such services must be created to draw users, Angel said. To that end, marketing may be another area where the two systems show their rivalry, he added.
Still, the lack of competition on pricing could backfire for both systems because jousting there is a more sure-fire way to lure users, Angel said. “That’s really something that’s going to slow down adoption,” he said.