Part 1 is here.
We can’t think of any business in the world that wouldn’t want instant, digital payments from consumers that didn’t cost an arm and a leg.
As proof, look at the adoption curves of UPI and PIX, two instant money movement services in India and Brazil respectively:
Now, what has held these programs back from even faster growth has been credit infrastructure: in order to send money via UPI or PIX the user needs to have the funds available in their bank.
Clearly not everyone has cash on hand, especially for larger purchases. The average (median) American has $8,000 in their bank account (though interestingly Javelin Strategy’s 2023 North American Payments Insights study found that 65% of digital wallet users fund with debit cards).
Credit rails are now being created by the banks on UPI and PIX, but regardless, look how much credit card volume these two services ate.
You know what catalyzed consumers to move away from cards?
Fees for card payments (or discounts for using PIX/UPI, same thing).
In Brazil, merchants have been legally allowed to charge different prices based on the payment method since 2017 (Federal Law No. 13.476).
Rather than adding a fee to cards, Brazilian merchants overwhelmingly chose to offer discounts for PIX. It is now standard across Brazilian e-commerce and retail to see 10% off if you pay via PIX.
In many informal sectors (street vendors, small cafes), merchants simply stopped accepting cards altogether or set high minimums for card use, marketing “PIX only” to avoid card fees.
In India, the government implemented a “Zero MDR” policy in January 2020, meaning merchants pay $0 in fees for UPI transactions. To protect their margins, merchants push consumers to use UPI with some version of dual pricing.
Hell, the Indian government is even exploring offering tax incentives or direct cashbacks to consumers who choose UPI over cards, further widening the price gap between the two methods.
Everyone with a brain recognizes that card costs are a massive, punitive tax on society.
If you need credit, then f*cking pay for your credit.
Don’t force every non-participant to underwrite your cost of living.
With all that out of the way, let’s list the available options for US businesses to accept faster, cheaper digital payments:
_____
Miss it?
Here it is again:
_______
Exactly.
There’s nothing.
Even if a US merchant wanted to use the newer, instant B2B rails the banks don’t make it possible.
Why?
Follow the money.
Banks earn free money on interchange.
$187B of it.
If you’re thinking that American consumers should be able to use FedNow or RTP like denizens of other countries use PIX and UPI then you’re just too logical.
US banks make it impossible.
From Pratt,
RTP and Fednow are really only good for pushing money, but that’s if you’re a business. If you’re a consumer, good luck finding an interface in your bank that allows you to use real time money movement.
And he’s right.
It’s been absurdly hard for us to find a bank that allows us to do this as consumers.
Try it yourself: log into your banking app and try to find how to send someone money with RTP or FedNow.
You can’t.
You might find Zelle or Bill Pay, but nothing about instant payments.
We emailed multiple parties at The Clearing House, who oversee RTP, and none of them replied (because 99.9% of people do the bare minimum to not get fired).
Okay, so banks don’t actually want consumers to use real time payments.
What if you built a consumer app to enable it?
Can’t.
You would need a sponsor deposit institution, KYC, AML, and a bunch of other nonsense to get access to direct connectivity. It’s ~2 years of bullshit, probably a fiscal quarter of actual development work, but a lot of sitting around and waiting (it’s why Stripe bought Orum, BTW).
Only US Bank has an API of sorts: it’s technically an interface in their consumer app that allows the customer to pay instantly over RTP.
The only player that has offered a scaled bank API for faster payments is Dwolla, who seems to have undertaken work the banks refuse to do.
Dwolla is the backend for a lot of the services you see marketed for real time payment APIs. Routable, for instance, is just a skin on Dwolla. Dwolla has their own bank and as such has been able to build API as an insider. Dwolla knows the pain of building this infrastructure when facing bank opposition so their model is to license their relationships to fintechs.
But still, even to use a Dwolla-backed API, the consumer has to load money into Dwolla’s bank via ACH, which as we stated in the prior article is just painfully slow.
The biggest use case for RTP/FedNow from a consumer perspective today is cashing out from a digital wallet. The pulling mechanisms are non-existent, and there is no consumer experience that makes this seamless.
Which is why Pratt built Fingrid, a cheaper, faster bank-to-bank payment tool that offers a seamless consumer experience.
“Figrid becomes a quasi-bank account,” says Pratt.
RTP is a push-only payment network. Today, when a consumer uses a card, the merchant pulls the funding from the customer’s account.
With RTP, the merchant can only send a request for payment (RFP), which means the user needs to see that request, and agree to push their funds to the merchant.
Let’s show you how clunky the existing flow is.
These examples come from App Brilliance, a company somewhat similar to that of Fingrid.
Anyone who wants to pay with RTP today has to load money into a custody account outside their bank. This becomes layer that sits on top of your bank account since you have to push money with RTP.
The experience is kludgey.
In this case the layer is Robinhood. Here you have a user who wants to RTP $20.
They log into Robinhood, then use Plaid to pull money from their bank account (Chase in this example) into Robinhood.
Now the money is in their Robinhood account and they can push it with RTP.
A better flow is the retailer requesting a payment and the consumer easily closing that loop with a payment.
That flow can look like this today.
Retailer has a terminal, the customer inputs their information, and then agents automate some of the friction that Robinhood’s flow requires
A further improvement would be tokenizing the customer’s credentials in NFC so it’s a simple and quick tap to pay. Otherwise the speed of logging into and then paying from your bank would limit the payment method to low volume industries where payment speeds don’t matter.
RTP and FedNow need pulling mechanisms to make real-time payments REAL.
And banks need to enable customers to use these real-time rails.
Until that happens, there are halfway houses that aim to fix what the banks refuse to enable, but it’s not perfect.
The Neobanks are in the best position to solve this problem.
They control the UI.
They don’t need to feast on interchange fees because they’re embracing modern stores of value like stablecoins.
We ultimately need to do away with restrictive banking laws that prevent innovation and protect the incumbent banks who earn hundreds of billions to do very little.
There is no reason the US should be behind Brazil, India, and other countries with far smaller GDPs.
The solution cannot be more obvious:
If you need credit, pay a higher cost of goods and services.
Find a financial backer and pay them for underwriting.
Asking merchants (and by extension other consumers via increased merchant prices) to pay for your credit is bullshit.
Everyone who doesn’t need credit can pay a lower, non-inflated price.
Make that exchange instant and digital so you don’t create a loss prevention cost center with physical cash.
But the US loves protectionism masquerading as a free market.
We’re all just stuck paying for it.
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