{"id":35098,"date":"2023-11-16T16:40:50","date_gmt":"2023-11-16T16:40:50","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/banking\/banks-revenue-opportunity-from-fednow-instant-payments\/"},"modified":"2023-11-16T16:40:51","modified_gmt":"2023-11-16T16:40:51","slug":"banks-revenue-opportunity-from-fednow-instant-payments","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=35098","title":{"rendered":"Banks\u2019 Revenue Opportunity From FedNow Instant Payments"},"content":{"rendered":"
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OBSERVATIONS FROM THE FINTECH SNARK TANK<\/h2>\n

It\u2019s a funny paradox. The Federal Reserve Bank\u2019s launch of FedNow in July 2023 promised that consumers and businesses would be able to pay for groceries, pay their suppliers, and pay each other \u201cinstantly\u201d with full and immediate access to funds.<\/p>\n

But banks are moving slowly down the path to \u201cfaster\u201d or \u201cinstant\u201d payments.<\/p>\n

The need to integrate systems, deploy new fraud prevention and management mechanisms, and create new operational procedures are critical to any real-time payments offering\u2014and are slowing the rollout of the new payment capabilities.<\/p>\n

There’s a missing ingredient in the instant payments equation that many banks are overlooking, however, that could help accelerate the roll out and<\/em> adoption of instant payments, particularly among businesses. The missing ingredient? Marketing.<\/p>\n

The Revenue Opportunity From Faster Payments<\/h2>\n

Research from Accenture found that more than half of banks are losing wallet share\u2014and revenue\u2014to Big Tech and fintech competitors. In an article titled The Payments Blindspot That Could Cost Banks Billions<\/em>, Accenture\u2019s Michael Abbott wrote:<\/p>\n

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\u201cCommercial payments have been the sleepy backwater of payments. Most banks see commercial payments as a cost center rather than a source of growth. Now that interest rates have linked deposits with revenue again, banks should see commercial payments as tremendously valuable.\u201d<\/p>\n

The Accenture study estimates that, globally, commercial payments providers have a $371 billion revenue opportunity from providing value-added services (of which real-time payments is one type of service) over the next five years.<\/p>\n

Far from seeing instant payments as a revenue generator, many banks are concerned that real-time payments will result in a loss<\/em> of revenue by cannibalizing their wire business, according to Tony Hayes, founder of the Banking & Payments Group.<\/p>\n

This concern is misplaced. Hayes points out that:<\/p>\n

\u201cBusinesses report a willingness to pay for speed, with ~$2.50 being seen as a fair price for sending $1,000, while nearly $100 is seen as reasonable fee for both sending and receiving $100,000 more quickly. Far from cannibalizing wire income, if priced correctly, real-time payments could boost forward-thinking banks\u2019 income.\u201d<\/p>\n

\u201cIf Priced Correctly\u201d Is A Big Assumption<\/h2>\n

\u201cIf priced correctly\u201d is a big if, however. Pricing\u2014particularly for fee-based services\u2014is hardly a strong point for many financial institutions.<\/p>\n

Hayes\u2019 comment \u201cif priced correctly\u201d begs the question: What, exactly, needs to be priced correctly?<\/p>\n

At a recent payments conference, a number of bankers referred to FedNow as a “solution.” This is a misconception. Better to think of FedNow as a “capability.”<\/p>\n

You don’t price\u2014and sell\u2014capabilities. You package capabilities into a solution\u2014a “product” or \u201cservice offering\u201d\u2014then determine what pricing options are most attractive to your target market and market the solution to them.<\/p>\n

Commercial banking clients\u2014small businesses, in particular\u2014don’t simply want “faster payments.” They want better cash management, simplified payments processing, automating invoicing, less cumbersome accounting processes, etc.<\/p>\n

Matt Brown, an investor at Matrix Partners, captured this idea in a recent blog post where he wrote:<\/p>\n

\u201cB2B payments aren\u2019t payments, they\u2019re workflows. If you view B2B payments not just as a payment problem, but one at the end of a string of workflows, it creates more surface area to actually create a 10x solution by improving the preceding workflows rather than being limited to the payment itself.\u201d<\/p>\n

This is what banks should be offering (that is, selling). From what I’ve seen and heard, however, there isn’t a lot of thought going into how to create and price a faster payments solution.<\/p>\n

Capitalizing On The Faster Payments Revenue Opportunity<\/h2>\n

Bankers should be worried about this.<\/p>\n

Bank marketing departments aren’t (typically) pricing experts because banking is the only industry on the planet where pricing is done by the finance department, not the marketing department. To capitalize on the instant payments revenue opportunity, bank marketers will need to:<\/p>\n