In the Digital Economy, Faster Payments Are the New Normal: What Banks and Credit Unions Need to Know
As digital banking continues to boom across the United States, financial institutions (FIs) that offer faster payments are gaining competitive advantage.
From Generation Z to baby boomers, consumers of all ages have become accustomed to convenient digital experiences. Indeed, technological advances, such as third-party mobile payment apps, have made fast, easy transaction experiences the norm. And consumers expect the same level of speed and convenience from their FIs.
The social and economic disruptions associated with the COVID-19 pandemic added urgency to the demand for digital payments—shortening the timeline for FIs to get on board. Since the onset of the pandemic, for example:
- One-third of community banks and credit unions reported that consumers wanted faster payments1, according to a 2020 survey by Aite Group.
- Two-thirds of consumers were most likely to use digital person-to-person (P2P) payment services to provide monetary assistance to friends and family, according to a Zelle®Consumer Payment Behaviors Survey.
In a recent , American Banker hosted panelists from Early Warning, Aite Group, and Fiserv for a roundtable discussion on the importance of faster payments. This post provides a summary of the conversation, including analysis of Aite Group’s research, the opportunities and risks associated with faster payments, and concrete advice on how to plan a successful faster payments strategy.
We’ve reached the tipping point for digital payments.
Faster payments are becoming the preferred payment method among consumers. As a result, FI-initiated offerings, like Zelle® and same-day ACH, are becoming increasingly commonplace.
Sixty percent of community banks and credit unions have already implemented faster payments1. And a full 90% plan to implement at least one faster payments network (or rail) going forward.
The rapid growth in market demand for Zelle® supports Aite Group’s findings. The Zelle Network®, for example, closed 2020 with 1.2 billion transactions, totaling $307 billion sent—an increase of 58% and 62% year-over-year, respectively. Additionally, 457 new financial institutions joined the Zelle Network® in 2020. And more than 140 million consumers now have access to Zelle® through their mobile banking app or the Zelle® app.
Looking ahead, FIs that don’t have a faster payments offering in place may see their customers or members (along with their deposits and fee revenue) migrate to competitors that do.
Competitive advantage is still within reach.
For FIs that are not yet offering faster payments, it’s not too late to get in the game. But time is of the essence.
Aite Group’s survey, it found that 7 in 10 consumers are asking for Zelle® (making it the most in demand payments solution)—yet only 13% of community banks and credit unions have implemented it1.
- Among the community banks and credit unions that have not implemented Zelle®, 41% said they planned to do so within the next 12 months.
- More than 1,490 FIs are signed up with Zelle®, and 850 are live on the network.
Early Warning and The Clearing House, recently announced that Zelle® transactions can now be cleared and settled over the RTP® network. That means FIs can enable instant settlement and simpler back-office processing—improving efficiency and reducing costs.
These Zelle® statistics and activities point to good news for FIs: Those that get started now on a faster payments strategy have the opportunity to compete effectively in the long term.
The business case for faster payments centers on digital engagement.
Financial executives that need to build a case for implementing faster payments should focus on the proven benefits of increased digital engagement: Faster payments drive up digital engagement, which in turn leads to better profitability and market share.
A digital banking study conducted by Fiserv and Bank of the West highlights two key benefits of digital engagement: more transaction activity and less customer attrition.
The study found that customers who engage in digital banking transact at both a higher volume and a higher dollar value—with average monthly increases of nearly 13%. And they are 35% less likely to leave their bank than non-digital consumers.
Because Zelle® is built directly into the banking experience, it provides consumers with an added level of trust and security. And regardless of the solution, when FIs offer faster payments, customers transact and stay engaged with the institution (rather than going to a third-party app).
While it’s evident that both solutions are experiencing tremendous growth as a result of the pandemic, the fact that Zelle® is doubling Venmo's numbers demonstrates the opportunity FIs have to engage their customers with digital payment solutions.
Branding also gets a boost when FIs have a faster payments offering. When a customer uses an institution’s mobile app multiple times per week, that brand will be at the top of their mind when future banking needs arise.
P2P transactions are only the beginning.
The initial use case for faster payments centers on P2P transactions. Now, a growing number of FIs are offering digital payment services for transactions between businesses and consumers. And they are seeing measurable value as a result.
Many small businesses are using Zelle® to accept payments, and FIs are seeing nearly triple the monthly transaction volume compared to the P2P side. Small businesses are recognizing the value of bill pay use cases (i.e. they receive payments in real time and save money on fees from accepting credit cards) and are using it heavily.
Another use case gaining momentum is corporate-to-consumer disbursements. An insurance company, for example, may use faster payments to send claim money to a customer in real time.
FIs that offer these types of faster payments services are providing more value for customers and strengthening their brand—while adding bottom-line revenue back to the institution.
Do faster payments increase the risk of fraud?
Understandably, many FIs are concerned that digital payment initiatives will open the door to more fraud. But research shows that's not the case. In fact, just 1 in 10 financial institutions have experienced fraud as a result of their faster payments implementation1.
Still, fraud is a fact of life in the banking industry, and FIs need to be diligent about mitigating risk. In the American Banker webinar, the panelists talked about how FIs can reduce fraud risk when implementing faster payments. Before summarizing the best practices they shared, it will be helpful to understand the distinction between scams and fraud:
- Scams typically result in authorized The consumer, for example, is knowingly involved in the transaction and authorizes a payment to be sent—but then doesn’t receive what they were promised. A few common types of scams involve purchasing tickets, buying puppies and financial scams that promise easy money, like cash flips.
Best practices for mitigating risk start with consumer education.
The most common type of fraud event associated with faster payments is account takeover. The webinar panelists stressed that reducing that type of risk must be a collaborative effort between the FI, the consumer and the core solution provider.
The key to preventing scams is educating consumers. FIs should start by informing consumers about common scam tactics and how to avoid them. Consumers should be instructed not to respond to unprofessional emails or sender email addresses that are not the correct company name; urgent requests for funds or requests appealing to emotions; and any requests (whether by email, text or phone) for sensitive information that are not user initiated.
It’s also important to make sure consumers know that just like cash, faster payments are irreversible. Zelle®, for example, has warning messages that remind people to only send money to people they know and trust.
Prior to deploying a faster payments offering, FIs should review their “forgot password” reset processes for weaknesses. And explicitly warn consumers not to read or share their one-time passcode with anyone.
If consumers don't use faster payments as instructed, the institution should point them back to the terms and conditions provided before they started using the product.
Education alone, however, is not enough.
Because financial fraud is on the rise and criminals are always one step ahead, it’s important to have the best fraud prevention tools. To keep faster payments safe, Zelle® relies on Early Warning's advanced authentication and real-time fraud detection features.
Getting started with faster payments is easier than you may think.
Implementing faster payments may seem like a daunting undertaking, but it doesn't have to be. In 2020, 60% of the FIs that onboarded Zelle® were up and running in under 20 days.
The panelists in the American Banker webinar share best practices and step-by-step guidance for planning a faster payments strategy. They also examine current and emerging faster payments rails, discuss criteria for evaluating the various types of systems, and answer tactical questions in an audience Q&A.
Watch the American Banker webinar on demand: Why digital banking and faster payments are more important than ever.
1”Faster Payments for Community Banks and Credit Unions: Priorities for Growth,” Aite Group, Oct. 2020.