Historically, banks and other financial institutions made payments in the mortgage process mainly with wire transfers and paper checks. Wire transfers must be sent during banking hours and can be delayed until the next day or even over the weekend. Checks can take days to close. Both are at risk for fraud or human error.
KeyBank recently teamed up with cash management platform EMTransfer to make instant payments, or real-time payments, in real estate transactions using The Clearing House’s RTP network. The Clearing House (TCH) is a quasi-banking utility founded in 1853 and owned by some of the world’s biggest banks to move funds between financial institutions.
“Imagine an environment where the movement of the money can happen instantaneously.”
The Clearing House developed the RTP network in 2017 and has gradually increased the dollar limit to $1 million per transaction. (The Federal Reserve is creating its own version called FedNow.) Jim Colassano, senior vice president of product development and strategy at The Clearing House, spoke to Scotsman Guide about these instant payments and how requests for payments and other document transfers made over the network can be used in the mortgage industry.
Can you explain how this works?
The way that payments and money move today are one of three ways: You can move it by wire transfer. You can move it by ACH (an electronic funds-transfer system) and you can move it by check. If you think about it in a very simplistic way, the wire transfer system is how large-value payments are typically moved in the U.S. The ACH network is typically for lower-value payments. Then the third mechanism has been around forever, which is basically checks.
The RTP network is actually the first new payments infrastructure to be introduced in the U.S. in the last 50 years. TCH launched it in 2017 and it was designed to be a network to support banking in the 21st century.
How does this affect the mortgage industry?
Part of the problem with payments today is that there’s an exchange of value on one side and then there’s a payment on the other side. Those happen pretty much at the same time, but the money doesn’t always move at the same pace. It may move a day later; it may move a couple of days later.
In the mortgage industry, that’s particularly critical because you’re handing over a house and everybody needs to be paid at that moment. And you use intermediary agents today who hold the money in an escrow account for payment thereafter.
How could real-time payments change that process?
So, imagine an environment where the movement of the money can happen instantaneously, at the same time of closing, whatever time of day and for whatever dollar amount. What the RTP network does is, it closes that gap and allows these monies to move instantaneously 24 hours a day.
Why haven’t other banks done this at scale?
What you’ll see is that each individual bank on the network has to develop the products for the market to enable these capabilities. They’ve got to provide the application programming interface; they’ve got to open up their channels. They’ve actually got to work with companies like EMTransfer to make it available to the mortgage community. We do see other banks doing the same thing, but they’re all going to do this at their own pace. I’ve been in product management for a really long time. Good ideas don’t remain the sole domain of one industry for long.
Is this being used only for residential real estate or commercial properties too?
When we started out, we had some pretty restrictive dollar limits, which really did limit the types of uses that banks could deploy in the market. We raised it to $1 million last year. We’re going to be looking to raise it to $5 million to $10 million next year. As we do that, it opens up use cases to residential mortgages or larger individual mortgages.
Is there anything you’d like to add?
One area that’s only getting into market this year that really is going to provide an incredible amount of value, especially to the mortgage industry, is this request for payment (RfP) capability. Most of the products that the banks are deploying, and what we’ve seen the industry using, are really speeding up payments 24 hours a day. The RfP is going to add a whole new dimension of capability and control. Every time we go to another mortgage conference and talk about this, the interest level is sky high. ●
