The ability to transfer funds instantly from one account to another has changed the way people move money. Dozens of apps today offer real-time payment options between bank accounts or digital wallets—if you’re a consumer.
But the speed of large business-to-business (B2B) payments continues to lag. Indeed, old-fashioned paper checks, wire transfers, and the Automated Clearing House (ACH) transfers remain the rails that most corporate payments move on.
That is rapidly changing. With efforts by the financial services industry, FinTech startups, and even federal regulators involvement, a new generation of rapid payments for corporates is being readied. And though most of the focus in recent years has been on domestic transactions here in the U.S., the arrival of global, real-time B2B payments is not too far off.
“As recently as a few years ago in the U.S., we did not even have a true real-time payments system,” said Shreya Singh, Vice President, who manages faster payments at Bank of the West. “Now there are multiple solutions in the fray, some fully developed, and more being planned. And in two or three years, we are likely to have an international framework available as well.”
There are currently several methods in the U.S. to transfer funds among banks, including:
|Payment Method||What Is It?||How Fast?|
|Checks||Paper document||At least one business day|
|ACH||Automated Clearing House electronic payment network||At least one business day|
|Same Day ACH||Expedited ACH transfer available for an additional fee||End of same business day|
|Debit/Credit Card||Network owned by card associations||Less than an hour (using card network)|
|Wire Transfers||Bank-initiated transfer using a fee-based network, such as SWIFT or Fedwire||Between a few minutes and several business days|
|Zelle||Real-Time Payments through Zelle, digital payment network owned by banks||Within minutes (using card network)|
|TCH RTP||Real-Time Payments through The Clearing House||Immediate|
|GPI||Global Payments Innovation Initiative, operated by SWIFT (Society for Worldwide Interbank Financial Telecommunications)||Less than a day|
Europe Leads the Way
For now, the U.S. remains far behind in real-time payment capabilities compared to other countries, especially compared with the European countries. There, regulators have pushed through a series of mandates, starting with the first Payment Services Directive more than a decade ago. More recently, European Union (EU) directives have led to a number of new systems for instant credit transfers and payment settlements.
That sort of regulatory pressure has not been seen in the U.S., where payments are more market-driven, Singh said. For its part, Bank of the West has just joined The Clearing House (TCH) Real-Time Payment (RTP) network, and in the next five or six months, will launch a comprehensive product suite covering payments to accounts and emails or mobile numbers.
“Since there hasn’t been a regulatory mandate in the U.S. on real-time payments, a real-time payment system is not as ubiquitous as it could have been,” Singh said. “And since it’s not as ubiquitous, it’s not that valuable for the corporates to sign up.” For most U.S. corporates, cross-border payments remain viable only using checks, wire transfers, and transactions over the SWIFT network.
The U.S. Federal Reserve Takes a Stand
This mostly hands-off approach does not mean that the need for real-time payments has gone unnoticed by U.S. regulators. After years of study, the U.S. Federal Reserve (the Fed) finally announced in August 2019 that it was directing its member banks to build a new program called FedNow to support faster payments in the U.S.
While welcomed generally by the banking industry, this new system could take up to five years to launch. The announcement cut both ways in terms of pushing the industry forward, said Singh. On the one hand, it highlighted the importance of real-time payments in the industry. And it was seen as a boon for smaller banks, many of which are not part of The Clearing House network (which is owned by 25 large banks).
On the other hand, Singh said, the Fed announcement was likely to result in further delays, as banks wait to see which solution might dominate. “If they’re still on the fences, they will probably stay on the fence for one or two more years until they see how the market plays out,” she said.
Finding a Corporate Need
Regardless of which business model or network succeeds, though, the biggest hurdle at this point is convincing corporate clients of the need for a new system.
The issue is primarily information, not speed. With the use of checks, payments can be made with limited information about the recipient, and acceptance is universal. Perhaps most important, checks provide a reliable trail of paper information that exists for both issuer and recipient.
Today, customers who make electronic payments must send related transaction information separately, either through email, a separate channel, or an ACH addendum. Reconciling the payment with the transaction data is then left to the receiving party.
Solutions on the Way
One solution, Singh said, might come with the Global Payments Innovation Initiative (GPI), offered by the SWIFT network that processes cross-border transactions worldwide. More than half of SWIFT’s cross-border payments are now sent using GPI, which adds a layer of information to make the transaction traceable and transparent. Eventually, GPI could integrate existing domestic fund transfers with its international transfer component.
Other more complex transactions could benefit from the use of distributed ledger technology, or blockchain. But, Singh said, for now, this may not be a viable solution for most cross-border payments. Because blockchain is a closed-loop system that can carry information, which goes well beyond a simple funds transfer, it might be more applicable to trade finance, title company validation, or other broader transactions.
So, for now, Singh is working to advance the bank’s capabilities with the available domestic solutions, such as Zelle, RTP, and ACH. Looking forward, the priority is on finding solutions that go beyond speed to address the broader spectrum of corporate needs.
“If speed and cost were the only goals, then you wouldn’t see the level of check payments today,” Singh said. “Once these transactions are transparent, traceable, and efficient, with cost savings for the bank and the customer, only then will it be a win-win situation.”