- Technology
Payments leaders talk about a U.S. catch-up, SMB expectations and what’s next
- Here’s how payments experts at The Clearing House, TD Bank and Temenos see 2025 shaping up.
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With 2025 looming, BAI checked in with thought leaders focused on the fast-evolving payments space. The opportunities and complications that come with payments growth in a vast and varied U.S. financial services marketplace relative to much of the rest of the world featured in our discussions. The past year also marked the one-year anniversary for FedNow and continued growth The Clearing House RTP payments rails.
For sure, financial institutions desire payments solutions, and their customers, including retail consumers but especially small and medium-sized businesses (SMB), want convenience without compromising safety. Even with U.S. market and regulatory differences, there are global examples of mature payments solutions that can inform the products crafted to be a better fit for the U.S. banking landscape. What’s more, payments linkages are meant to unite global transactions and equally help single-proprietor businesses buy and sell digitally within their own communities.
We talked with:
Prasanth Menon, head of merchant solutions product & operations at TD Bank.
Jim Colassano, SVP of product development at The Clearing House, the owner and operator of the RTP network.
And, Heman Daswani, principal consultant to Temenos, including payments solutions.
Here are some key takeaways from our conversations.
Temenos’ Heman Daswani: We know that roughly 60% of the participants in real-time payments are receive-only, and if majority of the participants are receiving only, there are not enough participants to do a wide range of transactions, which is a limiting factor. But I think the pace, especially after just one year-plus of FedNow, is an achievement. In the U.S., especially, there’s still a pretty long way to go as far as the wide adoption or ubiquity of the service is concerned.
Plus, in the U.S., unlike other global fast payments rail participants, there is no mandate to join, everything is driven by market forces. There is a lot of democracy among financial institutions in what they want to do with the rail, including if they want to sign up, period. There’s no kind of compulsion on them to adopt the service, which is both good and bad. No doubt, we are in early stages of instant payments in the United States, but the use cases are going to evolve.
Customers will become savvier, asking, If I can send a PayPal transaction in a matter of few seconds, why can’t I pay my electricity bill in a matter of seconds? Why do I have to send that money two or three days ahead of the due date? So, it’s evolving customer expectations that will shape this market, too.
The Clearing House’s Colassano: Payments is an extremely important space, and it’s been a challenging space for banks to support over the years. The fact of the matter is, in most of the product development that banks do, and I can say this from experience, you typically build for the upper end of your business portfolio, and then you down sell to smaller businesses and mid-sized businesses, so you typically get something that was probably engineered for a bigger organization, where you may only need small pieces of it for other users. That’s not how payments services are created.
As for drumming up two-sided (versus receive-only) participation in real-time payments transactions, there is precedent. There was the same kind of two-sided dilemma when ACH launched 50 years ago. Then, as now, the more banks join the network, the more originators will start sending more transactions, the more originators start sending more transactions, the more banks will want to get on board and be a part of the network. And I think now that both RTP and FedNow are in the market, bank leaders are starting to realize that this is something that’s got enough scale that they should start using more actively.
The other thing that we’re starting to see is we have over 250,000 businesses, large and small, who originate transactions on the RTP network every single month. And they started with one or two transactions a month, just to kind of test the waters, maybe they would send a transaction on the weekend. Now, this market is considered post early-adopter stage and while we haven’t quite gotten to mass adoption, we are clearly starting to see the turn in the demand curve.
The Clearing House’s Colassano: We have proven technically that you can interlink Instant payment systems globally and now we are now starting to do some work around the regulatory and business process framework.
But envision making a payment from your account in the U.S. to a beneficiary’s account in the EU with finality and transparency in 30 seconds. That’s the future of payments. I’ve always tended to call that the holy grail of payments: cross-border transactions. And ISO 20022 unifies technical barriers.
Temenos’ Heman Daswani: Wero’s use in Europe, a Zelle-like offering, is an interesting example for the U.S. Wero uses SEPA [single euro payments area] for underlying movement of money, and Zelle uses ACH and RTP for underlying movement of money. The only difference, from my perspective, is that Zelle is kind of restricted or at least focused more on P-to-P transactions, whereas Wero has a pretty robust roadmap to go beyond. P-to-P is their first step or first milestone, but then they want to become a wallet or a payment app for pretty much a lot of different types of payments, even in-store. They have a roadmap to launch a QR code based payments where I am purchasing something and I can simply pay by scanning a QR code. They also have roadmap for B-to-B transactions, so bill payments, for instance, where I can pay my bills using that wallet app further down in the future. But it’s essentially a similar kind of service, where a number of banks have joined forces to enable this either real instant transactions or instant-looking transactions. From the customer perspective, the only difference is the vision of the future.
The Clearing House’s Colassano: You do tend to see in the small business environment, there are still a lot of checks. We’ve made a lot of headway over the years in filtering checks out of the system and moving toward electronic payments. The one area where we really haven’t seen a lot of movement away from checks and toward electronic payments is in that small business space. So those are areas that still are very paper intensive, and they have all the issues that go along with managing paper, a lot of which relate to delays in clearing and settlement.
But when you look at the next generation of small business owners, they’re much more tech savvy, right? And they’re looking for services that they have gotten as consumers. So, banks are starting to focus on this particular area.
It’s nothing new for small businesses, but cash flow matters. So instant payments give you the ability to manage outflows and inflows with precision, you start to eliminate all of that non-interest-earning cash that’s trapped in collection, whether you’re using a check, whether you’re using an ACH, whatever it might happen to be, and you start to be able to migrate forward toward capabilities that allow you to really manage your cash flow.
A big issue for businesses big and small is merchant settlement, or being able to get an instant payment for your merchant capabilities after hours, on weekends, on holidays, when you can actually get paid for those receipts, and it’s critically important.
TD Bank’s Menon: According to a TD Bank survey of small and micro businesses, 62% count cash or money transfer apps (like Venmo or Zelle) as their primary method of payment. And just 21% said their biggest method of payment is physical credit or debit cards. That comes as 36% of those same small businesses say the fees related to software are their biggest hurdle, with another 33% saying they just don’t have the hardware to accept their customers’ favorite method of payment.
As more consumers appreciate shopping from small businesses to keep their dollars in the community, efficient and innovative payments methods become crucial for business owners. Consumers expect businesses and the financial services used by those businesses to evolve at the speed of their desires. Technology linkages, operational costs and security are then vital. Our “tap to pay iPhone” offering, for instance, which is an extension of other SMB digital pay capabilities and eliminates the need for additional POS hardware, has shown rapid adoption rates.
There are a lot of things that a small business, especially a startup, needs to be concerned with, starting up their operations, actually delivering on a product or service that they are planning to sell and monetize. And then they have to be concerned with technological changes as it comes to other payment acceptance, so we are trying to cut through that clutter.
Temenos’ Heman Daswani: SMB is a key segment because those customers need cash. They want to manage the cash as effectively as they can because they don’t have a lot of liquidity. They don’t want their money to be tied up in a float. They want to make the payment as late as possible, but still want to achieve the due date of the payment without incurring additional fees. And so, from liquidity management perspective, or cash management perspective, I think that is really the sweet spot.
Another trend that is emerging is early wage delivery via instant payment access, especially for the gig economy.
TD Bank’s Menon: Our survey data helps confirm what we’ve believed for some time, that payments services are driving customer and deposit stickiness for banks. Deposit accounts are where the funds reside, where you need those funds, but it is the payments that drive those funds. You must accept payments before you increase your balances. So, it’s about making that truly an operational account in that customers can leverage the payments features.
TD Bank’s Menon: When our tap to pay first rolled out earlier in 2024, a tipping feature was not included but now it is. New features can be brought on as the capability is in a much more agile mode, requiring less and less time between updates. That’s much different than in an earlier financial services tech era when banks might launch a fairly robust product and then the next version comes several years later.
The Clearing House’s Colassano: We do monitor fraud on the network, and our fraud numbers are in the hundreds of basis points, very, very small incidents of fraud that we’re actually seeing on the network. But broadly what we are seeing across the industry is that the vectors of fraud are changing. What we used to see in the old world is unauthorized fraud account takeover that kind of stuff, right? Now they are tricking somebody as they’re sending an authorized payment, and they’re starting to use some of these instant payment networks, which are fast and irrevocable, to perpetrate some of the fraud. So, we are seeing the vector change, but we are still seeing very, very low numbers on the network, and that’s primarily because there the network was built, not only for speed and transparency, but the network was built to be safe, as a credit push network. For the SMB audience, real time payments provide such an incredible improvement over the check processing that they probably have in place today.
TD’s Menon: We’ve not seen explicit concerns from our customers that fraud within payments capabilities is top of mind. Even going back again to that survey, for instance, fraud wasn’t one of the ones that jumped out at the small business entity that is responding to that survey. We see the continual move away from paper transactions. In the early days, one of the concerns was customer behavior, both consumer and small business behavior, in accepting contactless payments. And cost of implementation was a concern, but fraud concerns have not stopped advancements in payments.
Temenos’ Heman Daswani: In my view, there are a lot of elements in which fraud needs to be addressed. First is education and awareness, especially for customers. The second is technology. Banks need to up their game to identify and stop the fraud or at least delay potentially fraudulant transactions while they are still underway. The third element, which I think is where we are lagging, is collaboration. No one financial institution can have a full picture of any individual or any customer. There needs to be a lot of collaboration between financial institutions so that they can build a complete profile of a potential bad actor in the system, and then stop subsequent transactions. And the fourth element, in my view, is regulation or policy-making, which is also kind of lagging as far as fraud prevention is concerned. Statistically speaking, less than 10% of fraud that happens over Zelle network, for instance, nowadays gets paid out by the bank. It’s the end customer who is at loss right now. I think banks need to have a skin in the game then they will be compelled to improve their systems.
Rachel Koning Beals is Senior Editor with BAI.
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