The payments landscape is undergoing a drastic transformation, as emerging payment technologies are driving innovation. Consumers benefit from the convenience, speed, and security of these emerging payment technologies. While much of the industry focus has been on these payments technologies, it is important to note that traditional payment methods are still widely used by consumers. In Part 1 of our series, we discussed the products and technologies reshaping payments. To build on that, two new payment frameworks will have a major impact on the payments space. Real time payments will finally provide consumers with the speed of payment they have desired. Cryptocurrencies (yes, we are going to go there) and Central Bank Digital Currency (CBDC) will offer alternative funding sources used for payments. And cryptocurrency can be used in conjunction with digital wallets (discussed in our last blog), conveniently offering an additional payment source. Real time payments and cryptocurrencies have been highly discussed in industry trade publications with the prediction that they will alter the payments landscape. Forever.
Real-Time Payments. The New Benchmark for Speed and Convenience.
Real time payments offer benefits to both consumers and businesses. For consumers, real time payments enable a consumer to hold onto their funds longer since they do not have to worry about scheduling a payment in advance of when an obligation is due. For example, with traditional and mailed electronic bill payments (using the good funds model) consumers have to account for and send a payment several days before the actual payment is due. This method can create consumer tension for multiple reasons: (1) mail delays can cause the payment to be delivered late, (2) the inability to track when the payment was received makes it difficult to dispute late payment fees, (3) potential manual processing delays by the payee (especially when the payment is mailed to a lockbox), and (4) the potential situation where the payment cannot be delivered due to a payee’s change of address (homeowner associations are notorious culprits in this situation). And with no idea when the payment will be processed, funds may not be available in the account, resulting in returned check or NSF fees.
Since real time payments are processed the day the payment is due and delivered to a verified payee’s account, the issues mentioned above are eliminated. The debit from the account holder’s account is made the day the payment is submitted. The account holder knows the funds are available and will be deducted the same day. There are no potential mail delays for the payment to be received, eliminating potential late fees. Finally, the account holder has instantaneous verification that the payment has been made and received, providing greater peace of mind.
Real time payments offer several benefits for businesses as well. Managing cash flow is one of the major payments concerns for businesses. Businesses rely on payments received (accounts receivable) to make payments (accounts payable). When payment receivables are late, and the businesses have processed their accounts payable, negative cash flow can occur. If this scenario happens multiple times, suppliers may require businesses to secure a line of credit or hold the business’s orders until payment is received, causing potential loss of business and a negative reputation with suppliers. Real-time payments enable businesses to immediately account for received payments and then instantaneously send payments, creating better cash flow. Finally, many businesses can benefit from reduced costs since automated payments can reduce the number of human resource hours necessary to send and process physical payments.
Digital Currency is Not Science Fiction
If you are a science fiction fan, you have undoubtedly seen or read (good for you) an example of a digital currency transaction. “Air dollars” is a term used in the H.G. Wells story The Shape of Things to Come. What makes this example impressive is the fact that the story was published in 1934! Cryptocurrency is an alternative currency to traditional dollars. From a payments perspective, two major factors pushing cryptocurrency into the mainstream are the ability to add it as a payment source in digital wallets, and the ability for it to be an accepted form of payment by merchants.
Since cryptocurrency is an alternative currency, it is difficult for the government to account for current and future impacts/risks to traditional currency such as the dollar. And it also affects the ability of the Federal Reserve to monitor consumer spending patterns (i.e., The Beige Book). These factors, and others, have caused the government to consider a Centralized Digital Banking Currency (CDBC). At any rate, there is always the government litmus test: if it can be taxed, it needs to be taxed. A Centralized Digital Banking Currency solves that problem as well.
Traditional Payments Are Here to Stay
Despite the emergence of these new payment technologies, traditional payment methods such as cash, checks, and credit cards are still widely used. In fact, 56% of Americans
like to have cash with them, based on a 2022 Gallup Poll. But, the total digital payments transaction value in the US is projected to reach $2,041 billion in 2023
! With these payment services, consumers can conveniently and confidently make payments and manage their accounts in real time. Forget the checkbook register (and if you don’t know what a checkbook register is, don’t worry about it). It is important to note that the Gen X demographic continues to use traditional payment methods (although digital wallet usage is on the rise). Since this group represents large-balance savers, keeping them happy is of paramount importance. Offering both traditional and emerging payments technologies is quickly becoming table stakes to compete in the financial institution space.
Build It and They Will Come
In the 1989 film Field of Dreams, the protagonist plows part of the family’s cornfield to build a baseball diamond at the risk of financial hardship. The film launched the infamous saying: “If you build it, they will come.” In other words, there may be greater financial risk from inaction. As the payments landscape continues to evolve, financial institution executives need to closely monitor emerging payments trends and develop a strategic payments roadmap. This requires a deep understanding of their current and future account holder needs, behaviors, and expectations. An in-depth knowledge of emerging technologies, payment frameworks, and PayTech
is an essential part of their strategic positioning. Financial institutions which successfully navigate this complex landscape will create long-term value for their existing account holders and position themselves to attract new ones.