By Patti Murphy
JPMorgan Chase may be the largest acquirer of credit and debit card payments in the United States, but that hasn't stopped the mega-bank from investing in initiatives that could displace credit and debit card payments. And it is not alone.
"We're talking with multiple banks right out of the gate," said Ron Herman, founder and CEO of Sionic. Based in Atlanta, Sionic has built a real-time, omnichannel, pay-by-bank service that it's preparing to pilot with U.S. Bank, parent of Elavon, in different verticals beginning in the first quarter of 2023.
Sionic offers an app merchants can use with existing POS systems and selecting cash as the tender during checkout. In-store customers scan QR codes generated by a mobile app to initiate payments, or the "pay by bank" option when using touch screen POS devices and on ecommerce sites. Payments process over RTP, the real-time network operated by The Clearing House (TCH), and get deposited to the merchant accounts nearly instantaneously.
Sionic is part of a growing army of financial institutions and financial technology companies offering pay-by-bank services, and more can be expected once the Federal Reserve's FedNow real-time payments infrastructure goes live next summer. "There's going to be a lot of pressure on financial institutions to offer real time payments," said Rusiru Gunasena, senior vice president at TCH and point man for RTP.
JPMorgan Chase has its own spin on pay-by-bank; it is working with Mastercard to roll out a pay-by-bank service that leverages the ACH network. ACH payments are faster than card and check payments; sometimes they can be completed on a same-day basis, but they are not instant. ACH payments, like credit card payments, are settled in batches.
In a true real-time, or instant payments environment, a payee's account is credited within seconds of the payer's account being debited, as settlement is near instantaneous.
When news of Chase's plans broke there was copious speculation that it could signal the end of the bank's card business. The bank reported processing 31 billion card payments with a combined value of $1.7 trillion in 2021, making it the largest U.S. acquirer. "How JPMorgan's plan to kill credit cards split the bank," read one headline. "Chase plans to end their $5 billion credit card business," read another.
Not so, a Chase spokesman told The Green Sheet. He provided a press release that described pay-by-bank as another option for bill payments—one that frees billers from having to retain and secure consumer banking information.
"Billers and consumers both get greater payment choice," Chiro Aikat, executive vice president, merchants and acceptance for Mastercard North America, said in the press release.
Prakash Natarajan, managing director for payments strategy at the consultancy Strategic Resource Management, said the Chase-Mastercard solution should have little impact on card payments. "Real-time payments addresses a different set of use cases," he said.
Keith Riddle, CEO at BankiFi, a business banking technology firm, agreed. "I don't anticipate an immediate impact on card volume," he said. "However, I do think that you will see banks start to work with billers and merchants to advance frictionless payments." Once those ramp up, there could be an impact, he suggested.
Mastercard is no newcomer to the real-time payments discussion. In 2017 it purchased Vocalink, the UK company whose technology undergirds that country's real-time payments network as well as the RTP network here in the United States.
Mastercard and Visa also support push-to-card payments, known as Mastercard Send and Visa Direct. These are faster payment services that use the card network rails to move funds from a payer's bank/mobile money account to the payee's debit card account, not quite in real time but close.
Visa recently partnered with Thunes, a business-to-business payments company headquartered in Singapore, to support payments to underbanked consumers and businesses in developing economies. They are using Visa Direct, which has a global reach of nearly 7 billion endpoints, Visa noted, including more than 3 billion cards, over 2 billion accounts and 1.5 billion digital wallets.
Recent studies and reports illustrate consumer and business demand for faster payments is strong. "Instant payments is on a consistent growth trajectory. Both businesses and consumers are driving this growth," Wells Ulrike Guigui, head of enterprise payments strategy at Wells Fargo Bank, and Sumit Arora, marketplace leader for enterprise payments strategy, wrote in a recent report.
In addition, the Fed surveyed consumers in 2021 and found interest in faster payments extends well beyond the person-to-person applications popularized by mobile apps like Venmo and Zelle. Nearly 80 percent of those surveyed expressed interest in using faster payments services to pay businesses. The most popular consumer-to-business applications included bill payments, online shopping and in-person retail purchases, in that order, the Fed reported.
Separately, a Fed survey of businesses found nine out of 10 respondents expect to be ready to make and support faster payments, 24/7/365, within the next three years. The most popular use cases will include payroll, recurring bill payments, internal transfers and routine payments. A survey by ACI Worldwide found better than half of U.S. retailers (52 percent) accept or plan to accept real-time payments in the next three years, typically via mobile P2P apps.
Real-time payments can be open loop or closed loop. In a closed loop scenario, senders and receivers must be registered with the same network for payments to be truly in real time. Apps like Venmo and CashApp are closed-loop payment networks. Funds are made available in real time but only to accounts on the network. When a recipient wants to access their cash outside the app, another payment rail, typically the ACH is needed to complete the transfer.
RTP is the only open loop, real-time payment network operating at present in the United States. In November TCH reported that RTP's reach extends to 62 percent of demand deposit accounts at 285 banks and credit unions in the United States. Payment volumes have been rising by at least 10 percent per quarter, dating back to 2018, TCH said. In the second quarter of 2022, RTP processed 45 million transactions valued at $19.7 billion.
"The number-one use case we're seeing is account-to-account transfers, like Venmo and PayPal," said Gunasena. He noted several fintechs are also trying to build consumer-to-business use cases, including remittances and potentially POS applications, but added it will take time for those to evolve.
TCH is a 170-year-old banking association and payments company owned by 20 of the nation's largest banks. Many of these same banks also own Early Warning Services, which operates the Zelle P2P payment network. Zelle reported it has handled over 5 billion payments totaling nearly $1.5 trillion since its founding in 2017. Last year it was used for 1.8 billion payments worth over $490 billion. Nearly 1,700 banks and credit unions are now on Zelle.
Many smaller banks and credit unions connect to networks like RTP through back-office technology providers, like Fiserv and Jack Henry. Both companies recently launched initiatives that leverage RTP to support new payment solutions. Earlier this year Fiserv integrated its NOW Gateway and RTP. Fiserv also said it has seen "consistent double-digit year-over-year growth" in real-time payments processed on behalf of client FIs.
In October, Jack Henry launched a standalone, real-time P2P payments service that leverages Payrailz, a digital payments platform it acquired earlier this year. The company described its new Payrailz P2P solution as the only open-loop, real-time P2P solution that is financial institution-centric, useful to FIs that want to offer customers multiple P2P options.
"Our experience supporting more than 400 financial institutions that are already live on the Zelle and RTP networks, with another 156 in various stages of implementation, has demonstrated that many banks and credit unions are offering access to multiple faster payment networks," said Tede Forman, president of payment solutions at Jack Henry.
Some experts expect RTP and FedNow to evolve as two separate but equal networks. "It will be similar to Visa and Mastercard, with two brands supporting similar use cases and with message compatibility," Riddle said. Natarajan sees a "convergence" that can support businesses' different needs. "Now there can be some options," he said.
There will not be any interoperability between RTP and FedNow, at least initially, Herman stated. He likened the situation to the early years of mobile phones, when there was no "master directory" that linked different providers, and hence subscribers.
Herman noted the big banks that own Early Warning are "posturing" to get FIs (those using RTP as well as FedNow) to "license" the directory it has created. "The Fed isn't going to want to use a private company. It's going to want its own directory," Herman predicted.
Faster and real-time payments are seen as riskier than credit card payments. After all, there are no chargeback provisions. Once a payment is sent it is final and irrevocable. This has become especially apparent in recent months amid reports of growing fraud on Zelle, and an unwillingness on the part of FIs to reimburse consumers who are duped into sending money to fraudsters via the network.
Javelin Strategy & Research reported that one in five consumers scammed this year reported sending P2P payments to scammers.
"The big banks that own Zelle market the product by telling their customers that the platform is safe and secure," a report issued last month by Senator Elizabeth Warren stated. Yet fraud and outright thefts are "rampant" and show no signs of abating. Most fraud cases involve consumers who are duped, not unauthorized transactions. Federal consumer protections cover only unauthorized payments, so most banks choose not to reimburse consumers who are duped into sending money through confidence schemes—a trend Sen. Warren described as "deeply troubling."
The Consumer Financial Protection Bureau has been pushing for a broader interpretation of Regulation E, the federal rule set governing EFT transactions. Reg E among other things caps consumer liability for fraudulent debit transactions. The consumer watchdog agency suggested the rules be extended to cover "fraudulently-induced" EFT transactions, like money sent to scammers via P2P platforms.
EWS has countered that fraud isn't a big problem on Zelle. "Tens of millions of consumers safely use Zelle every day with more than 99.9 percent of payments sent without any reports or scams," the company said in a statement. It further stated it "continuously" alerts consumers to only use the network to engage with others they know and trust, and that members are continuously "evolving and adapting consumer protection measures to address the dynamic nature of deceptive activities."
Gunasena said RTP's owners take security and fraud prevention seriously. He described three tiers of fraud prevention that RTP leverages: containment of entry points through technologies like authentication and biometrics, fraud monitoring and data analysis, and customer education. "We all have a responsibility to educate users," he said, adding that fraud on the network is "very low compared to other systems."
Chase and Mastercard, in announcing their pay-by-bank solution, said the underlying technology "reduces the likelihood of unauthorized transactions," by freeing billers from having to store consumer banking information. It also uses machine learning and Mastercard decisioning tools to analyze best times for initiating payments based on a payer's historical transaction data and risk patterns, which protects both consumers and merchants, Mastercard said.
Jack Henry, in announcing its new P2P service said "fraud mitigation is optimized with a multi-layered approach" that includes one-time passwords and a real-time scoring system. 
Patti Murphy is senior editor at The Green Sheet and co-host of the Merchant Sales Podcast.
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