Instant payments and blockchain for your banking: PwC

In today's fast-paced digital world, the demand for instant payments is rapidly increasing. The adoption of instant payments offers numerous benefits, including:

increased transaction speed
improved efficiency
effective cash flow management for businesses

As technology continues to advance, consumers and businesses alike are seeking faster, more efficient and secure ways of transferring funds and completing transactions. The launch of the Federal Reserve's FedNow Service in July 2023 has seen more than 900 financial institutions¹ offering the service during its first year of operation. The embrace of FedNow not only signifies trust and effectiveness, but it also serves as a promising signal for corporates to adopt it.

Blockchain solutions are rising alongside FedNow and the Real Time Payments platform and are being built by the US’s leading financial institutions (as an example of what’s possible, see the digital assets white paper produced jointly by Citigroup and PwC). Blockchains offer many benefits, ranging from traceability and leading-edge security based on cryptography, to the use of tokens to eliminate intermediaries that slow payment processing. Blockchain-based, real-time payment solutions are in use today in shipping, cross-border money movement and collateral for trading. The growing use cases demonstrate that blockchains can bring together all the ingredients needed to help meet clients’ and regulators’ multifaceted requirements.

From enhanced customer satisfaction and improved cash flow management to increased operational efficiency and reduced transaction costs, instant payments offer a compelling proposition for financial institutions and businesses looking to stay ahead in a competitive landscape.

Three pillars of instant payment adoption

There are many forces at play driving instant payments adoption in the US – new solutions are entering the market and banks are developing integrations, commercializing products and developing private blockchains. Meanwhile, consumer demand is drawing more retail traffic to instant payment rails. To align your bank and corporate partners on an instant payment rail or blockchain that can add value for your customers and business model, consider three pillars to guide adoption:

Highlight the enhanced customer experience: Instant payments provide customers with the convenience of real-time transactions; greatly reducing delays often improves overall satisfaction.

Example: Earned wage access enhances employee satisfaction by reducing their financial stress, it streamlines payroll processes helping corporates retain cash longer which boosts working capital and enhances the bank’s competitive position in the market.

Emphasize the competitive advantage: Adopting instant payments can augment brand differentiation for banks and corporates, which can help grow the business by attracting and retaining customers.

Example: Offering instant payments gives existing customers immediate access to funds and that can be a draw for new customers as businesses realize improvements in financial management and cash flow and reduce operational delays.

Showcase the potential for increasing revenue: Instant payments can enable new business models and revenue streams, such as offering value-added services or leveraging real-time data for personalized offerings.

Example: Retailers could provide instant payment options combined with features like personalized recommendations, loyalty rewards or exclusive discounts. These value-added services can help drive customer engagement and could increase average transaction value which boosts revenue.

Streamlined processes: Modernizing and automating the systems that touch an instant payment (KYC, fraud detention, identity authorization) greatly reduces, if not eliminates, the need for manual processing. Reducing those administrative burdens can result in greater operational efficiency and consistency.

Cost reduction: By replacing traditional payment methods with instant payments, banks and corporates can save costs associated with manual reconciliation, paper-based processes and transaction fees.

Improved cash flow management: Real-time settlement allows for better cash flow visibility and management, enabling more consistent financial forecasting and decision-making for both corporates and banks.

Market demand and customer expectations: Instant payments are becoming increasingly popular, driven by customer demand for faster and more convenient payment options and a corporate desire to be in step while also benefiting from better management of receivables and payables. Banks and corporates need to be aligned on how to go to market to meet expectations and remain competitive.

Futureproofing the business: Instant payments are expected to become the norm in the not-too-distant future. By adopting them now, banks and corporates can begin to futureproof their operations and stay ahead of changing consumer tastes, new regulatory requirements and rising competitive threats.

Security and fraud prevention: Instant payments often come with advanced security measures which can help FIs combat the rising tide of fraud and attempted account access. Many cloud and blockchain-based instant payments systems workflows are built with advanced security measures and AML protections. Offering such heightened security can both build trust in your institution and safeguard brand reputation. It can also be positioned as an advantage over competitors that are not yet employing today’s most-advanced risk controls.

A map of market forces impacting instant payments and blockchain adoption

Push and pull market forces impact the urgency of adoption of instant payments and/or blockchain. The push forces — the need for operational efficiency, cost reduction and the potential for new revenue streams — attract banks and corporates towards embracing instant payments. Additionally, the emergence of new instant payment infrastructure, like blockchain, creates a viable alternative to traditional rails. All the while, regulatory initiatives around security, financial system soundness and safety and consumer equity are prompting the drive for instant payments solutions. The desire for enhanced cash flow management and improved supplier relationships is driven by pull forces, including customer demand and interest from business clients and suppliers.

Instant payments are a table-stakes offering for corporate clients

Corporations are likely to remain laser-focused on efficiency gains and cashflow management. Instant payments can play an important role in controlling expenses, yet their speed, transparency and security may also open new business opportunities. Consumer demand, meanwhile, is expected to grow for faster, more streamlined payment options. As these market forces collide, we expect to see greater appetite for instant payment adoption by corporates. The banks that can win in the long run for US instant payment services will be those that can figure out how to articulate the benefit of their instant payment offering today and deliver great experiences to corporate clients to prove out the value.

Still not convinced? What banks need to do today to be winners in the instant payments race

Banks will need to leverage a commercialization framework to identify and convey value to their corporate clients. The framework presented in this section is designed to aid banks in identifying the payments use cases that will deliver the nearest ROI for their clients. Business use-case development has been an obstacle for corporate adoption thus far; the good news is that banks are well-positioned to identify value on their behalf and present opportunities in real-time. Commercial client transaction data is an untapped resource that can be leveraged to identify patterns of value. Some payment use cases lend themselves better to instant payment rails than others. Banks can create a competitive advantage by leveraging their data to identify which rail is best suited for each payment use case.

Value drivers for instant payments

This framework helps financial institutions uncover which transactions could most immediately benefit from leveraging instant payments – regardless of which rail is implemented. The value drivers cover three areas that are important to financial institutions and their customers.

Expense considerations include transaction, operational and vendor costs associated with corporates processing payments. Instant payment rails enhance bank control over payment visibility, especially for ad hoc payments with varying intervals, time codes and associated benefits or deductions (e.g., terminated employee payroll).

Bank insights:

Banks have visibility into what type of payments are being received and sent and can understand the volume of payments which inevitably will impact savings and transaction, operational and vendor costs.

Corporate insights:

Corporates have insight into the manual process and the associated operational costs to execute payments, transaction costs, liquidity costs and all other associated fees.

Non-instant payment options make the process of reconciliation highly expensive, manual, unreliable and time-consuming. Instant payments automate and streamline the process of matching and verifying payment data, leading to improved consistency, efficiency and timely financial reporting.

Bank insights:

Banks have visibility into payments which frequently require correction or result in failure, payment types for which clients demand greater/more real-time data visibility and knowledge of industry reporting requirements.

Corporate insights:

Corporates have visibility into how to manage their internal payment processes, reconciling invoices, tracking cash flows and confirming that payments align with their financial records and business objectives.

Leveraging instant payments to mitigate fraud involves real-time detection and prevention of malicious transactions, safeguarding funds, securing customer data and upholding trust and reputation.

Bank insights:

Banks have visibility into implementing advanced fraud detection and prevention measures such as real-time transaction monitoring and AI-powered analytics. By following secure authentication protocols, confirming the security of customer funds and mitigating risks, banks safeguard their reputation as a trusted financial institution.

Corporate insights:

Corporates have insight into fraud detection and prevention in real-time, reducing financial losses, safeguarding customer data and maintaining trust and reputation.

Instant payments options

Leveraging your bank and corporate's individual insights on the benefits of instant payments implementation is crucial — allowing you to tailor the adoption strategy to your specific needs and objectives, improving both the value and the impact of the implementation. By combining the unique perspectives and experiences of both entities, you can develop a holistic understanding of how instant payments can drive customer satisfaction, operational efficiency and overall business growth. FedNow, RTP and blockchain solutions are designed to facilitate faster, more convenient and secure payment experiences for individuals, businesses and financial institutions. These instant payment solutions aim to modernize the payment landscape and meet the evolving needs of customers in today's digital economy.

Dimensions	FedNow	RTP	Blockchain
Scope / definition	Real-time payment rail infrastructure developed by the Federal Reserve	Real-time payment service developed by The Clearing House	Real-time network to transfer all types of value (cash, securities, collateral, etc.)
Availability	Available now to only U.S. banks	Available now to only U.S. banks	Available now to anyone
Adoption (by Banks)	More than 900 Financial Institutions	370+ Banks and Credit Unions	Top 10 banks using blockchain solutions for cross border payments, liquidity management, trade solutions, and other payment types
Transaction volume	The Fed has not disclosed transaction amounts	74 million transactions	$175 million is currently on-ramped into blockchain based stablecoins as of April 2024
Best used for	Real-time 24/7/365 payments between financial institutions and their customers	Real-time 24/7/365 payments for various use cases including P2P, B2B, and C2B	Real-time 24/7/365 payments from any participant to another including B2B, B2C, bank to bank
Settlement time	Real-time (settles within seconds)	Real-time (settles within seconds)	Typically, within seconds but depends on network type (permissionless, private, etc.) and consensus mechanism (Proof of Work, Proof of Stake, etc.)
Transaction cost to customer (Cost per payment)	Customer Credit Transfer: $0.045 per item	Customer Credit Transfer Sent: $0.045	Dependent on network type (permissionless, private, etc.) and consensus mechanism (Proof of Work, Proof of Stake, etc.) Can range from free to $50+ per transaction depending on the above factors
Key benefits	Instant settlement between businesses avoids settlement issues and late fees/late deposits; managed by the Federal Reserve. Enhanced speed and accessibility of payments, 24/7 availability, secure transactions	Instant settlement between businesses avoids settlement issues and late fees/late deposits; managed by The Clearing House. Real-time fund transfers, improved cash flow management, operational efficiency	Near-instant settlement of any type of value between any set of parties which can be automated and/or programmed (i.e., smart contracts) without need of any intermediaries
Key risks / limitations	Irreversible instant payments, International Payments are not yet available, and potential fraud risks. Payment services are limited to a $500,000 transaction	Reliance on participating financial institutions, potential for transaction limits or fees set by individual banks. Payment services are limited to a $1,000,000 transaction	New set of technological capabilities are needed to implement blockchain technology and new cybersecurity risks (private key management) need to be mitigated. Regulatory ambiguity is limiting entry to the blockchain space

Looking forward

Banks should act as implementation advisors, including helping corporates to choose the right instant payment rails and blockchains for each use case. The growing consumer demand for faster and more convenient payment methods creates a compelling case for corporates to embrace instant payment solutions to meet customer expectations and stay competitive. And given the regulatory and stakeholder demand for dealing only with trusted actors in the financial system, blockchains offer a level of openness and immutability of record that was heretofore unachievable.

By embracing adaptability and a forward-thinking approach, banks and corporates can successfully navigate these dynamics and unlock the benefits of instant payment rails.