This is the year that banks that have tried real-time payments in receive-only mode will take the next big step — sending payments.
That’s the prediction by John Byl, SVP and product development manager at Mercantile Bank of Michigan, one of the largest Michigan-based banks with assets of approximately $6.0 billion.
“I would say 2025 is going to be a year where you’re going to see some people actually jumping into the pond,” Byl said. Mercantile Bank, which can receive both TCH and FedNow payments, will start originating payments on both networks early this year, he said.
The first real-time payments system was launched by The Clearing House (TCH) about seven years ago. It recently announced that it had processed a total of more than one billion payments by Jan 31, 2024. It also set a new single-day record for payments volume (1,592,419 transactions) and value ($1.44 billion).
TCH says it covers more than 70% of the demand deposits in the U.S. Because of the country’s history of local regional, state and national banks, the U.S. has probably the largest number of financial institutions (FIs) of any country in the world, somewhere between 10,000 and 11,000 when you count all types of FIs, said Erika Baumann, director of the commercial banking & payments practice at Datos Insights, a financial tech consultancy.
But the volume, both number of transactions and value, is concentrated at the largest banks – the top five banks by number of accounts hold more than 246 million accounts, according to the Federal Reserve.
The two services have very different maximum transaction limits.
“RTP increased, the limit up to $10 million, a huge step, which will cover a lot of wire transactions,” said Baumann.
TCH increased the limit on Feb. 9 and on Feb.10 BNY sent a $10 million payment to Bank of America on behalf of Computershare, the leading global transfer agent.
FedNow has a default credit transfer limit of $100,000 and a maximum of $500,000.
“There are more banks connected to FedNow than to RTP,” Baumann added. “That does not equal to reach though, that’s just the number of banks.”
She expects payment software providers will offer solutions that work for both RTP and FedNow.
The Fed launched its own real-time payments network, FedNow, a year ago and has signed up over 1,000 financial institutions and is adding new participants at a good clip, said Debbie Smart, senior product marketer at Q2, a financial technology consultancy working with Mercantile Bank.
After FedNow launched not only did banks sign up for the Federal real-time payment system, but the number of banks signing up on the TCH RealTime Payment (RTP) network also increased.
“This [FedNow] additional faster payments was launched successfully — it works,” Baumann said. “The volumes I think are much lower than some folks anticipated. But I think those of us who who have been following faster payments all along are not surprised — the volumes are where we anticipated.”
Baumann, who covers commercial banking, said RTP had a five- or six-year head start and The Clearing House counts the largest banks in the country as its members.
“The largest banks and the largest senders of those transactions are not going to move from RTP to FedNow,” she said.
Many banks have approached real-time payments cautiously, starting with receiving payments, which is low risk.
“Everybody’s chosen to receive and now they‘re taking a wait and see approach to the origination side of things and are watching to see what others are doing,” said Byl.
Smart, who works with many banks across the country, said banks that participate in real-time payments typically don’t differentiate between TCH and Fed networks, they just talk about their real-time capability. “I recommend they join both, because if I want to send you money, I can’t if we are on different networks.”
Q2’s Payments Manager works with both RTP and FedNow.
The fintech gateway providers all link to both, she said. A TCH spokesman said the network charges only for transactions, it does not charge to connect.
Sending payments runs the risk of getting the recipient or the amount wrong, and since the payment is real-time it is difficult, or impossible, to recover misdirected funds.
Byl thinks demand for sending real-time payments will grow substantially.
Customers are going to ask their banks why they don’t offer real-time payments when the bank down the street has it, he said.
“You’re going to have to play catch-up very quickly.”
Smart agrees. At conferences when a speaker ask who plans to be able to send payments in 2025 more than half the hands go up, she said.
“I expect to see a sharp uptake as users start to demand it and technical advances with software partners enable banks to support it.”
Banks and credit unions that sign up for real-time payments are sometimes surprised at the results. Smart said one of her clients got its first transaction 30 seconds after turning on FedNow — a Grub Hub driver.
“Until recently Grub Hub had a place where it said if you want to get paid today and your bank doesn’t offer real-time, click here for a place that does. We have a credit union that had 3,400 incoming transactions the first month with no advertising — they just turned it on. Now they get 40-50,000 transactions per month posting to member accounts.”
The biggest challenge in sending real-time payments is the risk of fraud, Byl said.
“How do we prevent fraud from taking place, because instant payments is also instant fraud, if you don’t have the appropriate pieces in place. So we’re we’re working hard on that to make sure we have the appropriate systems in place to manage this process more systematically than what we may have done historically.”
