Why digital payments are exploding in popularity

In a short time, the ways customers make payments have changed alongside technology. But what are digital payments, exactly? And why is the U.S. digital payments market set for huge growth over the next few years?

By Colleen Morrison

By 2023, the value of the U.S. digital payments market will be an estimated $1.3 trillion. With an industry of this size on the horizon, digital payments represent huge new opportunities for community banks.

But what is a digital payment, exactly, and what’s propelling this market explosion? At the highest level, a digital payment results when a transaction is fully electronic, initiated by a mobile device or computer, and where the funding mechanism does not have to be presented in a physical setting. These transactions can include online payments, Automated Clearing House (ACH) or Same Day ACH, digital currency or cryptocurrency, virtual cards and real-time payments. Where these kinds of payment technologies intersected with the ubiquity of connected devices, it resulted in a rise in the use of payment wallets and apps. With this technology, the funding mechanism may be a physical credit or debit card, but that card is stored in a digital environment.

“Wallets are a key phylum of digital payments,” remarks Cary Whaley, ICBA’s first vice president of payments and technology policy. “[These store] conventional card numbers and account information electronically in a digital and virtual wallet. You’re taking a traditional payment and giving it a digital presence.”

This digital footprint lends itself to industry change, and digital wallets and apps provide the lion’s share of market growth. In fact, consulting firm McKinsey & Company predicts that in-person use of digital wallets will increase at a 45% compound annual growth rate to reach nearly $400 billion in annual flows in the U.S. by 2022.

Speeding up the settlement rails

As digital payments continue to soar, the expectation of immediate funds climbs along with them. P2P payment apps like Venmo and Zelle put control in the hands of the consumer, and with that control comes demand for immediacy. Customers ask, “If my transaction can be initiated in seconds on my phone, why can’t my money move just as quickly?”

Quick stat

$1.3 trillion

worth of digital payments the U.S. is estimated to see annually by 2023.

Source: Research & Markets

These sentiments are backed by data. ACI Worldwide reports indicate that 30% of U.S. consumers will consider switching banks for the offer of real-time payments (RTP), and 65% of small and medium businesses indicate it would encourage them to switch as well. In addition, these audiences are already embracing existing faster payments. There were nearly 178 million Same Day ACH payments in 2018, a 137% increase from the previous year.

So, it’s no surprise that these shifts in behavior are driving change in the payments industry. Banks are responding to demand for digital payments by improving the settlement rails on which payments ride. From Same Day ACH enhancements that increase options and benefits (see sidebar on page 23) to RTP getting up and running, and hybrid real-time payment programs that utilize the card network, faster settlement is fueling digital payment advancements. And the rate of change is alarmingly fast.

“Real-time payments will be prioritized within existing payment stacks and become ubiquitous to both businesses and consumers,” predicts Robert Conery, chief operating officer and executive vice president at $1.6 billion-asset Avidia Bank in Hudson, Mass. “RTP will become the expectation, and customers will no longer need to select a payment method, nor will they care how the payment was processed. They will simply make a payment.”

Moving payments faster across a digital realm opens up new use cases. Beyond the example of P2P payments, community banks can deepen engagement with their retail customers by enhancing their mobile app offerings. For example, with Same Day ACH or RTP, community banks can allow customers to pay bills on their due date straight from their bank’s mobile app.

“You have to look at your mobile banking app as a given. That should be your starting point, not your ending point,” Whaley advises. “You have to find ways to integrate that app with anything your customers do financially. It has to support them using outside apps, but in a safe, banking-based digital environment.”

“This integration is critical for business customers as well. While small business owners want the same experience in their work setting as they have in their personal life, large companies and municipal governments want the ability to move money and manage the cash position in real time.

“Community banks need to ensure their business customers can receive money in real time,” Whaley says. “All banks should have a plan for digital payments that includes large and small businesses alike. This means evaluating real-time payments now so that you can ensure that your business customers can accept those payments.”

“All banks should have a plan for digital payments that includes small and large businesses alike.”

—Cary Whaley, ICBA

Having a strategy in place is key to digital payments success—and increased revenue opportunities. McKinsey & Company predicts that by 2022, there will be $1 trillion in global new net payments revenue up for grabs, a significant boon for the banks embracing digital payments. This potential for growth demonstrates that as banks embrace digital payments to provide in-demand products and services to their customers, they’ll be increasing their bottom line in the process. What results is a win-win scenario for all involved.

Supercharge your payments strategy

With all of this potential, how do community banks determine where to start? New resources can help guide that decision-making process. For example, the ICBA Bancard Digital Payments Strategy Tool and Guide provides a tool to help a bank evaluate where it falls in digital payments maturity and offers insights into steps to take to grow its payments business. Access the tool at strategy.icbabancard.com

Coming enhancements to Same Day ACH

Same Day ACH, an existing type of digital payment that offers a way to speed up Automated Clearing House (ACH) transactions, is getting an upgrade. Under rules passed in September 2018, Same Day ACH will:

  • Enable faster availability of funds for customers, as of Sept. 20, 2019.
  • Raise the per-transaction maximum to $100,000, as of March 20, 2020.
  • Extend same-day transaction submission times by two hours every business day, as of March 19, 2021.

To learn how to prepare for and take advantage of these advancements as a receiving or originating bank, go to bit.ly/samedayACH to explore Nacha’s online Same Day ACH Resource Center.

Colleen Morrison is a writer in Virginia.