Writing in the Journal of Payments Strategy and Systems, Steve Ledford (Senior Vice President for Product and Strategy at The Clearing House) makes a very important point about the future of payment systems. Steve is commenting on the global transition to immediate payments infrastructure (such as the Faster Payments Service, FPS, in the UK) in the context of the US discussions in response to the Federal Reserve consultation on the topic which Consult Hyperion, amongst a great many others, responded to. The Federal reserve, as you will recall, called for “a safe, ubiquitous, faster payments capability” and The Clearing House is one of the organisations that has responded to this call by announcing that it will create a national real-time payment system. Surely, you might think, it can’t be that much effort to create a low-cost real-time payment and settlement service in an era of laser beams, transistors and the thingternet. Well, yes and no.
[Gene Neyer, SVP Fundtech says] “The marginal cost of making payments is low. Much of the cost [today] involves risk management, exception handling, and research.” Faster payments are actually cheaper, but this is not to say they are risk-free [From Faster Payments Could Help Speed Economic Recovery | Bank Innovation]
This a fair point. In the US, there are concerns about the impact on fraud of shifting to instant payments, particularly because the US favours evolving current infrastructure rather than building a new national infrastructure as was done in the UK.
Banks must therefore architect a solution to evolve ACH while the ship is moving. This is a much better approach than that taken by the UK of mandating faster payments… (one bank was losing 30M GBP a WEEK from fraud when launched).[From Call to Action – Submit Response to Fed | Finventures]
Steve makes a number of observations on the need for security in such an infrastructure. He makes a number of very practical suggestions to satisfy that need for better security and suggests that tokenisation, credit-only transactions, imposition of robust access security, real-time anti-fraud/anti-money laundering/sanctions screening and network activity management might be a key elements in constructing an infrastructure capable of meeting the goals for real-time (or near real time) settlement. I’m sure he is correct about all of these, and they are all topics that I’ll return to in the future.
He then goes on to make what I think is a crucial point about the next phase of evolution. He says that instant payments are particularly well-suited to provide value beyond fast money movement because of their fundamental feature of real-time communication between senders, receivers and the relevant institutions. In other words, a perspective that sees money as just another kind of messaging. I rather like this because the ability to send remittance advice, invoices and other related documents along with payments means more efficient systems can be built on top of those payment networks.
I can’t help thinking about the case study of Venmo in this context. One of the reasons why it gained traction was that it interacted with social networks in a way that appealed .Venmo shifted $1.6 billion last year and are growing at an amazing rate. In fabulously interesting and entertaining discussion about twenty-somethings use of Venmo in the US, I noticed a curmudgeonly intercession from someone a bit like me:
this is a particularly american affliction, since other countries’ banks actually have functioning online payment systems[From Read what happens when a bunch of over-30s find out how Millennials handle their money – Quartz]
This misses the point, and led me to wonder: why doesn’t Barclay’s create the bastard child of Venmo and PingIt and add the social networking capability to PingIt by using the hello-1965 alphanumeric remittance advice field to store a Snapchat-style pointer to a message posted by the sender, a message that will vanish in a day. Steve talks a little about this in his paper (using pointers to richer information – I seem to remember that FPS had a similar plan to develop some kind of data repository and then add pointers into that repository into payment message but I don’t know where that is now).
U.K. decision-makers chose to build a new system to achieve their objective of faster payments rather than speeding up existing payment systems. A decision to separate the settlement stage from the authorization and clearing stages of the payment process and to allow banks to continue to settle three times daily via the Bank of England made it possible to build and implement the U.K. FPS so cost effectively. With this simplification, the cost of constructing a new payment network did not differ very much from the cost of enhancing an existing system.[From Costs and Benefits of Building Faster Payment Systems: The U.K. Experience and Implications for the United States – Boston Fed]
This is an entirely accurate summary, but I would add that there was a slight downside to this very conservative approach: by building the system using existing technology, costs were minimised but the ability to add new services was limited. IIn retrospect, by the way, and with the wisdom of hindsight, I think we can safely say that this capability should have been built into FPS in the first place, as it will be eventually.
Discussions are underway to migrate to the ISO 20022 standard.[From UK Faster Payments]
Steve concludes by saying that moving money around in real time will be the baseline capability of the next generation of systems and that making the payment systems a platform for innovation spreads benefits beyond the participants, something that we at Consult Hyperion strongly agree with. As Steve says “payment systems should aspire to be adaptable enough to support the ever evolving needs of the future”. To my mind this is a recognition of the necessary “amazonisation” of payments, rebuilding around API-centric architectures. In Europe, the banks are being forced down this path by regulator: it’s a great time for them to start planning a response centred on seizing the opportunities!