We’ve now reached the third and final section of our three-part series on Real Time Payments (RTP). In Part I I laid out the deficiencies of today’s major payment networks, and followed up in Part II on how RTP surpasses them by nearly every measure and is gaining traction worldwide. Here in this essay we will at last dive into the meaning of it all - what will be RTP’s immediate and wide-ranging impact?
It is worth noting anything is possible. RTP is only in its early stages and its major effects will likely go unnoticed or be too difficult to ascertain for some time. While industry and press herald RTP’s arrival with great fanfare, their promises beyond the obvious (e.g. immediate transfers) are universally vague. Where others turn away, I’ll take the opportunity to lean in. This essay intends to provide a thoughtful perspective on RTP’s impact. I put forth my best educated guesses - nothing more.
To keep things focused we will review RTP’s potential impact on the payments industry, finance, and society in turn, further broken down by conjectured early-, mid-, and long-term impacts. These periods will be defined as RTP’s general maturity stages rather than any specific times in the future.
disrupting the payments industry
“The world hates change, yet it is the only thing that has brought progress.” - Charles Kettering
Those closest to RTP in the Payments Industry will be the last to embrace it. Payments has the most to gain from ubiquitous RTP but must tear itself down and rebuild to do so.
the payments industry in the near term
As discussed in Parts I and II, the Payments Industry is split between government and privately operated networks. Their business models could not be more different - whereas government networks (i.e. ACH) operate at cost, private ones (e.g. Card and Wire Networks) seek to maximize profit. Private networks are effective at doing so - which is why they reap billions in profit annually. For instance, over the past five years the major Card Networks have consistently achieved higher than 40% margins on tens of billions of annual revenue. In 2019 alone Visa earned USD $23 Billion in profit. Only in some countries are prices on private networks regulated. The net result over time are downward pressures on public rail fees and upward pressures on private rail fees as governments seek to expand public access and private providers look to maintain and expand revenues.
The shared technological origins and the ongoing interplay between these operational models has historically stymied payments innovation. As reviewed in Part I the major legacy networks all rely upon arcane digital infrastructure. Building upon these systems is subsequently limited - a startup can’t do much with a few bytes of data per transaction, hidden behind bank mainframes. Further, slow improvements to government networks have allowed incumbent private networks to resist change. Despite their success, the fundamental payment capabilities of Wire Transfer and Card Networks have remained fairly constant. Again, startups have little purchase to gain a foothold.
The only opportunity for new entrants has been limited to the confines of optimizing the capabilities of existing networks as opposed to building novel features or services. Consider the major ‘fintech’ darlings of the past few decades including Stripe, PayPal, and Square. While their accomplishments are praiseworthy, they have done little other than streamline legacy payments. For instance, Stripe’s premise is basically allowing for easier card acceptance. Entrants hoping to build upon private networks are especially limited given the already high costs give customers little appetite for additional fees. No recent, major fintech entrants have introduced truly groundbreaking innovations to the payments field as they have been bound to the constraints of legacy networks.
All this context is to showcase how little an impact RTP will make upon the payments industry in the near-term. The entire for-profit side to the payments ecosystem is fundamentally at odds with RTP’s promise for modern technology paired with extremely low costs. Network providers, banks, processors, the aforementioned ‘fintechs’, and more all heavily depend upon the relatively higher margins of the private networks, while providing access to government-powered rails as their lower margin business. RTP promises to demolish those margins with a superior product.
I predict RTP implementations will continue to be rapidly deployed worldwide, yet see little traction in the near future thanks to an industry which is at first wary of, then actively counter to the new network. With nearly one trillion in aggregate annual revenue perceived at stake, the for-profit payments ecosystem will make participants’ access to RTP cumbersome and difficult, attempt to impose ‘service’ and other extraneous fees on RTP’s use, and leverage its significant political clout to stunt RTP usage.
Banks will prove the deciding factor. As the gatekeepers to all the payments networks, Banks will determine when RTP ultimately gains mainstream adoption. Fortunately, the parallel rise of ‘Open Banking’ - infrastructure enabling the bi-directional flow of financial data between financial institutions and vendors through APIs - promises to exert an increasing amount of pressure on banks to offer at least minimal RTP access. (See here for my take on Open Banking). Further, regulations may force banks to enable RTP access with minimal additional cost. Regardless, banks will resist RTP as long as possible given how much it threatens traditional revenues without providing an obvious form of replacement income.
The trouble for banks though is that once a critical mass of financial institutions make the switch and begin undercutting their rivals, all others will be forced to switch as well. This point will mark the end of the near term.
the payments industry in the mid-term
Success of any payment platform lies in the scale of the network. Only a few payment originators means few recipients, and vice versa. The mid-term of RTP maturity will be reached once most consumer and commercial participants in a given market can use the service. As mentioned above, this will likely take place quickly once a few major banks in a given market open up RTP for use with their customers. This is when RTP’s true disruption will begin to be felt.
First and foremost, RTP will destroy the economics of the privately-operated networks (excepting some Alternative Payment Networks, to which payments are not the core service and are offered below cost à la the Chinese service Alipay). Consumer-facing merchants will push as hard as possible to transition card payments to RTP. And why shouldn’t they? The payment data will be richer, and the costs orders of magnitude lower. The risks involved in losing the governance and safety of the Card Networks (e.g. chargebacks) will likely pose lower costs than the gains of eliminated card fees. Business-to-business (B2B) transactions meanwhile will transition to RTP as firms pursue richer data and reduced back-office costs.
The pressure will severely reduce the fat margins private networks currently enjoy. The Wire Transfer business will likely cease to exist during the mid-term as its primary differentiator - near-instant payment - is commoditized. Card Network providers and their accompanying service providers (e.g. processors, card manufacturers, payment facilitators, etc.) will face a massive restructuring as firms either pivot to value-added services or fold. Consolidation amongst these providers is likely as they scramble to wrest as much of a compressed margin as possible.
Reduced margins in the mid-term will likely cause a steep drop in the benefits participants enjoy from the Card Networks. Points, miles, cash back and the like all derive from the fees imposed on merchants. To remain competitive with RTP and maximize remaining margin banks and Card Networks alike will pare back or even eliminate these perks altogether.
Meanwhile, public ACH networks will see dramatically reduced usage as payment participants shift to RTP. It is fair to assume governments will begin drafting plans for downsizing, and ultimately transitioning the services to the RTP Networks. Backwards compatibility with ACH may present some mid-term hurdles for banking infrastructures, but will likely be solved by dedicated software ‘translation’ layers between the legacy and more modern systems.
Turmoil may grip the established payments industry, but a newly opened expanse of opportunity will welcome new entrants. Together with Open Banking, RTP will allow nearly anyone to build a value-added payments service atop a technologically modern and low-cost payment rail, provided standard regulations are met. Further, the open standards and data access provided through open banking will set an unprecedentedly low ceiling on the base cost of RTP usage, offering new entrants the promise of margins and growth.
New value-added services built atop RTP will look similar at first as investors seek familiar solutions and copycats quickly emerge (e.g. consumer money management), but will quickly diversify as firms grow comfortable with the technology. Pivotally, the industry - new and old players alike - will internalize the essential offering of payment rails has, is, and always will be a secure messaging network. In the past and present this is focused on the obvious payment value itself. Looking forwards it is clear other elements are just as, well, valuable. Major players are already tangentially looking into the obvious applications around identity validation. This is just the beginning of what can be transmitted through RTP rails. For instance, contracts, taxes, and more all can be integrated into RTP messages and passed along with or without value. Out of the ashes of an industry built around value transmittal will emerge one encompassing a far broader scope.
the payments industry in the long-term
The Payments Industry will look far different once RTP reaches ubiquity. Whereas today multiple payment rails exist to facilitate different market needs, in the future all payments will likely flow through national RTP systems, themselves connected by some type of international network. Utterly obsolete, the legacy payment rails will find themselves irrelevant.
That’s not say current players in the payments industry - from the Network Operators themselves to the banks - will no longer exist. Rather, providers will evolve to suit new needs as payments themselves will no longer be worthy of commission, only the services on top of them. Unshackled from prior technological constraints and freed from the luxury of stagnancy, players will be forced to innovate or fail. I predict this revitalized competition, paired with the emerging business and regulatory trends towards interoperability, will drive the Payments Industry towards a state of perpetual fragmentation. The Payments Industry will finally be completely services-based (as opposed to product based) where customers will flock to the greatest provided value built atop RTP Networks.
What will these services be? As mentioned earlier, the Payments Industry will likely expand to include all types of secure messaging. To start, all types of legal-esque communications (e.g. signatures, approvals, insurances, etc.) will begin to appear on the Network. Use cases will naturally expand into less specialized areas as the industry grows more comfortable with the technology. Formal identity management and verification may migrate to RTP rails for items like credit checks, or even passport control. While specific applications here are mere conjecture, innovators will undoubtedly leverage this opporunity to build upon a ubiquitous RTP platform.
This pivot by for-profit providers will be timely, as the importance of RTP grows increasingly apparent to regulators. Once RTP is clearly the dominant, underlying payment rail for all payments pressure will mount to regulate it like a utility. Privately operated RTP Networks will be compelled to sell to governments or provide services at government mandated pricing.
Governments will also eagerly pursue RTP Networks’ data and subsequent battles over privacy will become a flash point. A centralized communications service will prove too tempting for governments not to eavesdrop. The rewards are tantalizing - a country could:
- greatly reduce money laundering and general financial crime;
- automatically deduct / calculate taxes;
- spy on people or businesses of interest;
- wantonly freeze or send payments to targeted people or businesses;
- and more…
This will invariably lead to legal battles over privacy in almost all (free) countries where implemented. I hypothesize an outcome similar to contemporary controversies like advertising tracking today, wherein third party providers will emerge with privacy solutions to those privacy conscious participants willing to pay for them.
RTP Networks’ data and capabilities will also prove tempting to malicious independent and state-sponsored actors. While long-practiced methods of financial crime will be eradicated, an entirely new form of criminal behavior will emerge. For instance, it is likely criminals will find means to exploit the instant nature of payments to instantly drain victim’s funds and launder them through dozens of intermediary accounts within seconds. Payments firms will bear the brunt of pre-empting, detecting, and remediating these threats.
The potential for harm will further drive governments to obtain control of the RTP Networks in order to safeguard their operation. Cyber-security will remain a constant concern for RTP, and the arms race between defenders and attackers will lead to ongoing innovation in this area.
It is worth noting amongst all these industry changes, payments themselves will be stretched. As payments grow faster and smaller, true micro-transactions will realize. Ultimately payments will transition from discreet chunks to continuous flows. As discussed in another Currencci article this phase change will unlock further innovation. A likely use case will be designing conditional payment flows to minimize payment risk.
One of the most exciting aspects of RTP is its capacity to evolve over time to meet changing market needs. It is very likely a successor to RTP will not be a totally new platform, but rather a version 2.0.
Finance is less concerned with the transfer of value than with how the value itself is used. Though RTP will be treated as a novelty at first, the broader financial industry will quickly realize RTP completely redefines how value can be deployed, opening up new business models and destroying old ones.
finance in the near-term
As in the Payments Industry, RTP’s early stage in the Finance Industry will begin with general ambivalence and end with rapid uptake. Financial technology as a whole has experienced a frenzy of attention from the Venture Capital / ‘Tech’ scene since picking up the popular ‘fintech’ moniker in the 2010’s. Like nearly everything the Silicon Valley bubble touches, the industry has seen a wave of new entrants promising massive innovation followed by a mixture of moderate to disappointing results. After witnessing the underwhelming performances of blockchain, AI, and more financial professionals seem to consider RTP yet another buzzword-hyped technology. The trouble for Finance is that RTP is truly different.
Even those in Finance paying attention aren’t rushing to embrace RTP. As discussed above, RTP is a very real threat to the massive revenue generated by the legacy payment networks, particularly the Card Network and Wire industries. Managers will protect this profit for as long as possible - slowing RTP accessibility and subsequent adoption seems like one of their few means of doing so. This is no armchair theory - just recently the United States Department of Justice halted the Card Network Visa’s acquisition of the Open Banking provider Plaid. Why? It seems the Justice Department was concerned Visa may be buying Plaid’s capabilities to stall adoption of RTP and protect its card volumes. Obviously this is an evolving scenario, but it clearly demonstrates the industry’s uncertainty and massive stakes at play.
Unlike the Payments Industry however, RTP Networks have powerful counters to a potential lack of banker enthusiasm. First, as RTP Networks are operated by governments in most countries, Financial Institutions will face immense pressure to provide RTP Network access to their business and consumer customers. To avoid compliance as well as general regulatory issues banks will likely do their utmost to provide at least basic RTP services within a reasonable timeframe after it is released by regulators. Second, banks will be enticed to transition business-to-business (B2B) payments from ACH rails to to RTP ones in order to capture the slightly higher revenues of the latter. This easy adoption path for business payment participants will provide a ‘trojan-horse’ offering RTP Networks a foothold within banks and the broader market. From there the stage will be set for RTP to quickly make inroads into business-to-consumer (B2C), consumer-to-business (C2B) and person-to-person (P2P) transactions.
All the strategic business pressures for and against RTP integration at banks mean little relative to the practical implementation hurdles. The largest factor slowing RTP uptake is the sheer inertia of the Financial Industry’s technological infrastructure. The core banking systems of nearly every major global and national bank are decades old, and RTP Networks are anathema to them. Banks have two options: update core banking systems outright or build translation layers atop them. Neither approach is easy.
As incumbents struggle with approaching RTP, startup banks - known in industry as ‘neo-banks’ - built using the latest technology will be able to leapfrog straight to deploying RTP. Neo-banks’ agility combined with relatively higher risk-tolerance will allow them to quickly deploy RTP to the market, develop working business models, and innovate new value added services. They will work desperately to capture share before incumbents bring their massive scale to bear with their own RTP offerings.
Other areas of Finance such as processors, accounting software providers, and the like will likewise take half-steps towards integrating RTP support into their offerings. Pressure will be low without mass uptake but competitive dynamics will push providers towards implementing minimum levels of RTP interpretability to avoid being left behind. The general impact will be low, aside from educating the general industry to RTP terms and functionalities.
The near-term of RTP in Finance will end once enough of the Financial Industry supports RTP so that any two random participants can generally make an RTP transaction between one another. Looking into the mid-term, most - if not all - legacy banks will successfully transition their business to RTP, but only after ceding some share to a few successful newcomers.
finance in the mid-term
RTP will make its decisive mark on Finance in the mid-term. At this point, mass uptake will be underway and business and consumer payment participants will have recognized RTP’s value. Participants will be converting to the new payment rails and providers will be quickly releasing new services and business models atop the platform to see what sticks.
This stage will come quickly. Up to this point, most providers will have avoided enabling general RTP payments out of general uncertainty or fear of cannibalized profits. The catalyst for change will come from either a push or a pull. In a push, regulators will demand providers open direct RTP payments to end-users. In a pull scenario, a few providers offering unfettered RTP access will motivate their peers to quickly to catch up.
Most of this early innovation will consist of stretching existing solutions to their limit with RTP. As explored in an earlier essay generally accepted payment truths (e.g. the faster a payment, the higher the risk) remain constant even when payment attributes are pushed to their extremes - for instance, making a payment instant. This will reflect a rush for the ‘easy pickings’ of the most obvious use cases, as well as a reflection on the industry still gaining familiarity with the technology.
The most consequential of these mid-term innovations will be the aggregation of banking services and the consequential commoditization of banking. RTP combined with Open Banking will allow for value to be moved instantly at minimal cost. Assuming current trends hold, switching costs between banks will subsequently fall to near zero. Aggregation providers will enable customers to optimize their assets between banks, brokers, and more based on real-time interest rates and other relevant variables. Why would anyone hold a savings account with a lower-than-market rate? Going one step further, imagine allowing a software to use RTP to rebalance your asset mix every time you made a credit card purchase.
Rates competition will grow cutthroat, and banks will turn to analytics for an edge. No longer will financial institutions provide general savings and loan rates. Instead, analytics on past payments and other behaviors (e.g. browsing history!) would be used to calculate unique targeted rates. Similar to the battles of high-frequency trading, banks will enter an arms race on hoarding data sets and building algorithms to provide the most profitable yet appealing rates.
Banks will also be forced to better differentiate based on their customer experience and brand. With the products themselves commoditized, consumers may turn to branding and user interfaces to select banking providers. Rightly concerned with losing the customer relationship to emerging aggregators, Banks will likely quickly move to acquire nimbler more savvy startups or build their own homegrown aggregation services.
As Financial Institutions and bankers struggle to re-invent themselves, digital players will move quickly to capture share. Already nearly all the major FAANG digital players - Facebook, Amazon, Apple, Netflix, and Google - have experimented with enhancing online purchases, financing, and more to protect their own core businesses. If running a bank only requires modern analytics and high grade cybersecurity, why shouldn’t the FAANGs build their own? The business case not to will only shrink as banking providers continue layering high margin fees on service providers in already competitive marketplaces.
Into this turbid environment will flow another source of confusion - finance startups. Industry press and consultants will spark a pandemonium of attention on the opportunity presented by RTP’s disruption to the payments industry. Like time and again, ‘dumb money’ will swiftly follow early, informed investments in the space. The result will be familiar. Many of these ventures will quickly perish as they fail to offer differentiated or even worthwhile services, while others will last slightly longer but too, fail. Some will flourish, and a tiny few will capture massive opportunity by identifying and serving as of yet unmet needs. Regardless of the limited triumph, investors, firms, and earnest professionals will need to beware these transient firms.
As mentioned in the above Payments Industry section, margins on payments for the broader Finance industry will be nearly eliminated. While the payments revenues are ancillary to banks, their disappearance will reverberate throughout the industry. A likely casualty will be Finance’s many lucrative loyalty programs. Today, banks funnel much of their Card Network revenue (i.e. interchange) into their rewards programs to attract and retain cardholders. How do you think the 2% cashback reward on your credit card is paid for? Essentially the merchants have been footing the bill. As Card Network margins compress, banks will proportionally scale back loyalty programs.
To escape razor-thin margins on previously profitable business lines, financial services providers will look to diversify their revenue streams. Fortunately, RTP provides an excellent platform for innovating and building new services. As the mid-term progresses, banks will begin using the data-transmission capabilities of RTP to provide a variety of solutions. Initial use cases will be centered on more obvious and easier to implement value-saving services, such as reducing back office paperwork and associated processes. As time goes on, banks will begin offering value-generating services powered by RTP.
finance in the long-term
RTP’s capabilities will stretch Finance’s scope. The ability to send secure, complex messages with and without value instantly will allow financial firms to provide services beyond the traditional realm of banking and into areas such as law, advertising, and more. These ideas will begin closer to Finance, then drift towards new industries.
An early application will likely be evolving Correspondent Banking (for more on correspondent banking, please see the earlier essay Saving Correspondent Banking. Correspondent Banking essentially allows for international bank account transfers. While technically easy, the major hurdle Correspondent Banking faces is in maintaining minimum standards of regulatory compliance worldwide. For instance, a French bank must adhere to different regulatory standards than a Bangladeshi bank. When the French and Bangladeshi banks facilitate transfers between their customers, each must ensure the other adheres to their respective local regulations. Today, the information transfer is inherently difficult due to conflicting standards and limited information transmitted. With RTP however, data transfer is standardized and easy, albeit in its current form is constrained to domestic transfers only.
In the long term it is inevitable that an international “network of networks” arise to facilitate communications between various domestic RTP Networks. Private firms will likely fill this need in the short term and extract a substantial margin for doing so - mainly through ‘currency conversion’ and ‘mitigating any international risk’. In the longer term however, advanced international relations combined with the general technical interoperability of most RTP systems will enable government-run RTP systems to simply interact directly with one another. Like many of the basic problems of the Financial Industry today, RTP offers to bypass purely bureaucratic bottlenecks.
RTP’s data capabilities will expand towards the corporate back-office. Starting with large corporates, businesses will begin relying upon the RTP rails to send - both externally and internally - secure business messages unrelated to the literal transfer of value. For instance, an RTP payment using ISO20022 could send another business a formalized contract validation, or an instruction to commence operation of a pre-agreed Statement of Work. As the use of these messages expands, the concurrent rise of Robotic Programmatic Automation (RPA) to automate back-office tasks will lead to a consolidation in the back offices of many companies. Why incur labor expenses when the work can be performed autonomously? Operational non-revenue generating costs will ultimately shrink as a result of RTP, as business systems increasingly communicate and solve problems amongst one another rather than human proxies.
It is certain the opportunity to provide differentiated data-backed services will cause an explosion of ‘fintech’ providers. More variable however is whether this will lead to the utter fragmentation of the Financial industry as we know it, or the consolidation of the industry to a small number of ‘mega-providers’ (legacy or otherwise). The determining factor between these scenarios will be the regulatory environment. Will governments push through open standards and easily integrated technological environments, or will they be comfortable with private firms wielding outsized influence on Finance? Unless regulators intervene, current trends suggest consolidation will take hold. As mentioned above, already major legacy players like Visa are moving to position themselves as goliaths of the post-RTP world through massive acquisition sprees. This is no mere conjecture - the rate of large mergers and acquisitions in financial technology are increasing each year. Intriguingly, this may soon be put to a halt. As mentioned above, only recently did the Department of Justice halt Visa’s recent acquisition of the banking interoperability provider Plaid. Plaid enables banks to easily communicate digitally, and could theoretically provide the groundwork for retailers and banks to easily connect to RTP Networks - thereby bypassing the Card Network rails, most notably for Debit Cards. Unfortunately for Visa, their CEO was ‘caught’ referencing the deal as an ‘insurance policy to neutralize a threat to their online debit presence’. Of course RTP wasn’t explicitly mentioned, but it would be silly to think the Visa CEO is blind to the technology. Mastercard too, is pursing acquisition of a similar provider called Finicity though it appears the U.S. Department of Justice has approved this acquisition. Whether these deals are able to succeed will surely set the tone for how consolidation of the RTP industry will proceed into the longer-term.
As the services enabled by RTP proliferate margins will again grow for the overall financial industry. Innovative and new services will grow essential and merit fees. For instance, anti-fraud insurances, or financial health tracking. While fees will be kept relatively low by fierce competition, first-mover innovators and best-in-class providers will earn higher commissions and create their own markets. In this way the total market of the Financial Industry will grow over time through an ongoing cycle of innovation followed by commoditization and back again.
All together, these changes will result in the the industry growing more consumer friendly. Forced to compete based on monetary value, as opposed to physical branch footprint and high switching costs, successful financial service providers will provide superior services than their competitors. In other words, the winning providers will truly ‘earn’ their market share through quality and value rather than incumbency and scale.
Regardless of the specifics, RTP will undoubtedly force Finance into a new and modern age of competition and customer accountability. How far this can go will primarily depend upon the actions of regulators who will either open the Financial ecosystem to innovation or defend it against change and new entrants. Everyone can agree a strong Financial Industry underlies a strong economy, but the optimal makeup of that industry is open to interpretation.
Payments and finance warrant attention less for their own sake and more on how they influence society as a whole. Payments is a medium of human expression, and Finance its language. RTP offers a whole new syntax to commercial interaction and its widespread adoption will reverberate throughout the economy and touch nearly every human being on the planet.
society in the near-term
Though its long-term implications are immense, RTP’s immediate impact is insignificant on the world as a whole. RTP Networks’ current adoption is minuscule compared to the major payments networks. Despite the hype RTP doesn’t elicit much use from its end users.
This slow adoption is expected. A causal glance indicates the benign reason - scale. Like any payments platform, RTP is only useful once enough originators and recipients join the network. Building an ecosystem of participants simply takes time. But adoption could also be taking longer than it should - it could be that industry is slow-pedaling RTP roll-out. As gatekeepers, traditional players are incentivized to keep end-users on legacy frameworks with higher fees for as long as possible. Even well-intentioned managers find it difficult to justify cannibalizing revenue for an uncertain reward. Slow opening of RTP to end-users could also be attributed to technical challenges, but this is doubtful given how quickly other relevant technologies have quickly flourished in finance, such as e-deposits and high frequency trading. Regardless of why, RTP systems are live in dozens of countries yet end-users find it difficult to gain access to them.
This current state is untenable. Either government intervention or competitive pressures will force the industry to promote and open access to the payment channel. When this will occur is unclear, but it will likely be within the next 3-4 years and to occur quickly worldwide. Like a set of dominoes, the world’s major economies are inextricably chained to one another. If ISO20022 payments become standard and adopted en masse by one major economy, others will soon be forced to follow as international businesses and foreign trading partners update their financial technology in enabled jurisdictions. Having acquired a taste for RTP’s value, these international ‘ambassadors’ will spark RTP adoption within their home markets.
Regardless, once RTP becomes generally accessible the initial major use case will be business-to-business (B2B) payments. Middle managers at large and medium sized companies will drive adoption, as they recognize the opportunity to dramatically cut operational costs. Tens if not hundreds of thousands of employee-hours will be freed from manually completing, tracking and chasing payments. Newly available human resources will be freed to concentrate on other priorities, and eventually excess capacity will be downsized. It is likely many companies, eager to maximize cost savings, will look to leverage third party providers to further alleviate the drudgery of B2B bookkeeping.
It is during this initial period that the capability of ISO20022 will become better appreciated by the back-offices of the business community. These professionals will quickly realize the standard’s power and will learn how to interpret and manipulate it. Early learnings amongst information technology professionals will power later innovations, and those gaining familiarity at this stage will be in high demand as adoption advances.
During this early period select providers will also apply RTP towards specific payment use-cases. Key scenarios may include payment-on-delivery (e.g. a truck driver collecting payment upon successful delivery), disbursements (e.g. an insurance provider paying out) and person-to-person (P2P) payments (e.g. like the popular app Venmo). One particular use-case gaining traction is ‘Earned Wage Access,’ or EWA. EWA allows an employee to receive their wages at the end of a day worked instead of at the end of a typical pay period (for a fee). The value to individuals is similar to that of businesses - expanding ‘working capital’ and greater liquidity. Current implementations use debit Card rails to function, but will likely switch to RTP once more widely available. Beyond supplying valuable implementation lessons to providers, these early applications will provide the at least some of the general public their first, albeit minor, taste of RTP.
Ultimately RTP’s near-term period on impacting society as a whole will end once businesses realize they can leverage RTP not only for cost saving measures in their back-office commercial operations, but also for consumer facing ones. Further, businesses will likely concurrently realize RTP can be used for value generating activities as well.
society in the mid-term
RTP’s mid-term societal impacts will reverberate throughout the economy. At this point RTP will be generally accessible and increasingly common. Its effects will be noticeable and overwhelmingly welcome as consumers and businesses alike enjoy greater financial choice, freedom, and utility. The public’s newfound interest in payment and financial services will in turn motivate further engagement and innovation atop RTP technology.
RTP’s cheap cost, immediacy, and data-rich capabilities will quickly garner user attention. Businesses and consumers alike will quickly appreciate its value and advantage over legacy payment methods and convert the most applicable payment types to these new payment rails. The mass transition will start with replacing traditional bank transfers - notably checks and ACH transactions. Businesses will encourage this adoption to maximize data collected as well as minimize costs. Bill payments will likely be the first RTP payments for most consumers. With this RTP will become a household term and will root in the general public consciousness. Like any good product or service, RTP will quickly prove itself to a mass audience as something they can’t imagine themselves living without.
This perception will only be reinforced as provider competition intensifies to capture share of the rapidly growing RTP market. Users will experience a dizzying array of promotions, offers, and marketing as providers rush to differentiate themselves and their (at least initially) commoditized services. Venture capitalists and legacy players alike will sink hundreds of millions of dollars in promotional blitzes aimed at maximizing their share. As seen in other industries, the most competent first movers will likely succeed - all while enjoying the free publicity from wannabe rivals.
Increased public attention will also drive innovation. Talented designers, bankers, marketers, engineers, students, and more will all be drawn towards the excitement of RTP as it becomes mainstream. Many will be encouraged to join the industry, or incorporate it into their own work - for instance, RTP at checkout. More still - intentionally or not - will be inspired to apply RTP concepts into their respective industries. These innovations will likely start with translating RTPs emerging business model and data transmittal capabilities across industries and applications. As discussed above, new entrants will swarm to the financial services industry, driving down end-user costs while simultaneously expanding the scope of services provided.
Of all the mid-term change, the largest impact by far will be on general retail. Initially one bold financial service provider, mega-merchant, or merchant association is going seize the opportunity to massively undercut the large payment providers by offering direct payments between consumers and general retail merchants. This will likely be accompanied by an enticing incentive for the end-consumer, paid for by the savings from avoiding legacy payment channels. Adoption will be fast and copycat payment providers will quickly follow. Like the emperor with no clothes, the payments industry will face a reckoning on its high margins. Merchants and financial services providers will invest billions towards convincing consumers to adopt their payment mechanisms, all while consumers benefit and bear little to no switching costs. Market efficiency will work its magic.
Finance’s underlying business model will shift - like so many others - from relying on fees to data. Businesses will pay premiums to know exactly who is buying what, when, and where. As RTP grows mainstream, business models built on sharing this data will proliferate. End-users and regulators alike will need to reckon with their comfort on sharing their private payment information for fee-free or incentives backed purchasing (e.g. 2% discount on all purchases). Concurrently, loyalty programs offered through card products will face readjustment as the razor-thin margins on RTP no longer justify lavish consumer incentives. Providers will either slash these offers, or tweak their business models to sell consumer purchase data to third parties in order to recoup lost revenue.
A noteworthy side consequence of RTP’s mid-term rise will be the adoption of standardized payment aliases, and ultimately formalized digital identities. RTP Networks will utilize defined and simplified addresses as endpoints for completing transactions to ensure the proper parties engage in a transaction. Disparate conventions will force adoption of a common standard - likely one pushed by one or several major governments. Regardless of the standard chosen, a mad scramble will ensue to obtain the most simple and popular endpoints, similar to that for domain names and email addresses (though it is just as likely the final standard will allow for semi-fair assignment by a centralized body). Given their use with government-run RTP systems, these RTP addresses will likely serve as a catalyst for governments to unify citizen identities into modern, digital formats.
RTP will also drive financial inclusion, or access to the financial system for those currently outside of it. Its effect on lowering costs in financial services will lower the barriers of entry to conduct digital payments. A government focus on the payment channel will also encourage disbursements, raising channel awareness. Combined with the likely pairing of RTP with advancements in digital identity, it is hard to imagine a future where every individual in developed nations interacts directly with their domestic RTP Network.
Regulators will be slow to react in real-time to RTP’s evolution, but will undoubtedly follow close behind as unfair practices, loopholes, and general issues emerge. In the mid-term, regulators will likely focus on any particularly egregious criminal activities enabled through RTP, as well as forcing any hold-out financial service providers to offer RTP. Retrospective legal action may face those providers seen as deliberately slow-peddling their roll-outs for anti-competitive reasons (i.e. to preserve legacy cash flows).
This mid-term period will end once its usage is ubiquitous and normalized among both consumers and business. At this point its influence will have begun percolating beyond Finance, and the magnitude of its disruption will begin to be appreciated throughout society as a whole. Like with any welcome new standard, consumers will come to expect more from their payments, and the convenience of the rich data transmittal between merchants and their financial institutions.
society in the long-term
Once RTP reaches full ubiquity, both end-users and operators alike will have fully internalized that RTP represents a system of securely transmitting data in addition to payments. When used everywhere by everyone the resulting system will facilitate most consequential behaviors of most individuals.
Starting in RTP’s immediate sphere of Finance, this may mark the end of financial crime as we know it. Fraud, money laundering, embezzlement, tax avoidance, and more will grow impossible once it becomes trivial for regulators to track the entrance, path, and exit of every dollar spent in the digital economy. Though loopholes in early-to-mid term systems will invariably allow some bad behavior, later-stage RTP systems will be near impervious to criminal activity. White collar crime will grow far more difficult and likely entice fewer participants. Remaining financial crime will flow to unregulated and less reputable channels, like the current flood of criminal activity on so-called ‘crypto-currencies’ like bitcoin. (It is worth noting I strongly believe most if not all of these currencies will be exposed as shams, impossible to use for legitimate purposes and ultimately rendered valueless - full discussion here).
The increased transparency in overall payments will also force better general financial behavior throughout society. If the data exists, it will come to light. Journalists, investors, and the general public will all push litigators to enable auditing and / or public review of financial activity of firms and key public figures. In this way, corruption will likely decrease and governance will likely improve as croneyism and ‘pay-to-play’ grow increasingly risky to exposure.
Governments will gain tremendous influence over their national economies by controlling their society’s main payment (and commercial communication) rail. Bureaucratic savings will be immense as erroneous disbursements are eliminated and paper check mailings discontinued. Tax revenues will likewise increase and simplify as collections are made automatically in real-time. For instance, charitable deductions for an individual can be automatically catalogued by the government and deducted against subsequent purchases. As tax codes are translated to machine-readable formats, they will likely become simplified and streamlined to work better in concert.
Government influence will also extend to fiscal policy and regulation. Oversight agencies will be able to immediately apply all manner of financial policies across entire markets by adding levies or disbursements across specific segments or business interactions. Politicians and regulators will also gain a powerful cudgel through RTP. Once nearly all payments are processed by federally operated RTP systems, sanctions will grow further effective at blocking commercial interaction with individuals, groups, and even nations. Greater interwoveness between international economies will force regulators from various countries to collaborate with one another, and push governments to ultimately invest in building an international regulatory agency to police and monitor cross-border interactions. Likewise, privacy implications will be immense and must be resolved through rigorous public discourse.
International cooperation in operating Real Time Payments is inevitable. Growing interconnectedness between various national RTP Networks will culminate in global standards around all aspects of payments, from data transmission formats to identity authentication to more. The rich data transmittal will extend to use cases beyond pure payments, and commercial cross-border interactions will grow smoother and more fruitful for all parties. An international payments rail will thus serve as the foundation to a “network of networks” for specialized communications similar to how the internet provides a platform for general communication.
International government alignment on financial regulation will lead to stronger cross-border ties and interdependence. Similar to how the shared goals of running the successful orbital program improved relations between post-Soviet Russia and the United States throughout the 1990’s and 2000’s, countries contributing towards a shared objective of a secure financial system may bring peoples together. Further chances to instill shared objectives will lie in fighting potential financial crime on a shared financial network. Such cooperation could provide a starting point for further alignment and partnership.
Over time RTP will expand the concept of ownership as advances in internet connected devices (e.g. the Internet Of Things, or IOT) and RTP intersect. Current trends towards subscription and pay-as-you-go models will gain further practicality when immediate payment per-use or even -second is possible. Imagine an e-book charging per page read, or a car per mile driven. The ideal payment will be one made without hindrance and perfectly reflecting end-user intent. As payments move to the background commercial interactions will grow much more seamless, akin to how the ride-hailing service Uber pioneered frictionless transactions. All sorts of lessors will appear, offering creative methods for consumers and businesses to optimize their purchasing to value derived from outright ownership. Lessees will correspondingly enjoy greater flexibility and savings, provided solutions are fair (unlike the current BNPL schemes, explored here).
RTP will stretch the concept of identity into the long-term. As payments grow faster and more complex end-users will delegate them to machines, inextricably tangling intent, purchasing, and computers. End-users will create hundreds if not thousands of aliases to conduct payments on their behalf, protect their main identity, and organize their commercial activity. The result will extend identity and raise legal questions. How far can such delegation go? When does a payment occur if a consumer has agreed to pay-per-use, but a ‘use’ is aborted partway through? If an HVAC system charges by degrees cooled in a ‘smart-house’, who pays - the home owner or the individual being cooled? When does a minor pay per use versus their parent, what are the sources of funds used, and how is that payment behavior tracked? Societies will invent frameworks to navigate such situations and define the extent of the individual.
RTP’s hypothetical impact is limitless to the creative mind. The functionality it provides is leaps and bounds beyond what is available today and will force disruption in a traditional staid industry. Though the changes themselves are unknowable, it is certain society will be quick to welcome the efficiencies they herald. RTP’s faster, richer, universal communication will undoubtedly do much to bring the world and her peoples closer together.
Technology can be thought of as tools to shorten the gap between conception and actualization. A shovel reduces time to dig a hole as a computer shortens time to calculate. In this way RTP nears this limit by accelerating payments to the speed of human thought. Human creativity will now serve as the chief limitation to developing financial arrangements.
One of the most exciting aspects of Payments Science is that it simultaneously reflects both the permanence of human nature and the constant changes of technological progress. Unrefined and poorly thought-out RTP applications will be vulnerable to exploitation and inevitably lead to various unintended consequences. Like any endeavor however, the system will gain lessons from past mistakes, iterate, and grow stronger. This refinement will in turn grow beyond our base limitations and into something more.
I now conclude this three part series on Real Time Payments. Thank you for taking the time to explore the topic through first reviewing payments systems today, what makes RTP special, and how it may impact the Payments Industry, Finance, and Society as a whole. Lengthy as it is, this series has only scratched the surface on RTP.
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