10 November 2015
Instant Payments are coming to the U.S
Way back in 2013, the Federal Reserve invited public consultation on “payment system improvement” in America. One of the areas that they were particularly interested to explore was the idea of introducing some kind of instant payment system into the US, similar to the Faster Payments Service (FPS) that we are used to here in the UK. When the results of the Fed consultation were published last year, they were (I’m paraphrasing greatly) that the incumbent banks were happy with the way things were whereas everyone else wanted an instant payments solution and since the Federal reserve has no mandate to force banks to do anything, many observers (myself included) thought it would be some time before any such service would emerge in the US.
Many people (myself included) thought that the US needed the new infrastructure reasonably urgently. I said at the time that the best way forward would be to stop tinkering with the old “disco-era” US payment infrastructure and build a new instant payment network. As the Federal Reserve Bank of Boston pointed out in their report on the topic, in the UK the decision to separate the settlement stage from the authorisation and clearing stages of the payment process and to allow banks to continue to settle several times daily via the Bank of England made it possible to build and implement the new system cost effectively. The US could do the same, but using newer technology (in particular, using more modern messaging so that more sophisticated data could be exchanged along with payments), but it might take several years for anything to happen
A great many people (myself included) were therefore surprised when at this year’s Money 2020 in Las Vegas, the The Clearing House (TCH) announced that it had signed a letter of intent with VocaLink to help build and deliver core elements of TCH’s new instant payment system for the US in months rather than years. This was big news. TCH is the only private-sector ACH Operator in the US and it handles half of all commercial ACH volume there, so their decision has major implications for the direction of payment systems in the US.
Why? Well, writing in a recent issue the Journal of Payments Strategy and Systems, Steve Ledford, who is the Senior Vice President for Product and Strategy at TCH made a very important point about the future of payment systems that, I think, shows us where they are heading. He pointed out 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 view, 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.
He concluded 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 many people (myself included) 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 the regulator (and it’s a great time for them to start planning a response centred on seizing the opportunities) so it is interesting to see that in the US, TCH will offer some of the same opportunities to commercial banks, credit unions, savings banks and savings and loans institutions.
It’s Steve’s point about instant payments as a platform, rather than a product, that is key to the future though. The ability to integrate instant “push” payments between accounts, accompanied by the appropriate identification and authentication infrastructure of course, transforms the nature of many services. Many people (myself included) argue that such push payments are the natural way to implement electronic payments and that “pull" payments are a relic from the bygone past when consumers did not have devices and there was no network to connect them to.
Think about a case that many people (myself not included) are familiar with: gym membership. Right now, we use payment cards to pay our memberships. If you’ve ever tried to stop someone from taking money from your account once you’ve given them your card details, you’ll know what a hassle it can be. People often find that the only way to do it is to cancel their card!
Now consider the instant payments alternative. You are walking down the street and a message pops up on your phone: it’s your Barclays app telling you that the gym have requested their monthly tenner. You put your thumb on your iPhone fingerprint reader to OK the transaction and go about your day. Meanwhile in the background there is an instant transfer to the gym account and about one second later they have their money. Now, you probably wouldn’t want to be bothered with this kind of payment trivia all day long, so I you would set your Barclays app to auto-OK future payments to the gym within certain bounds. Now, when you want to cancel your gym membership, you just tell your Barclays app to auto-decline instead. Sorted. Better for the customer, and better for the bank too.
This might be a weapon for banks to intermediate payments and gain valuable data while simultaneously improving service to customers by given them more control over payments. It’s only one example, but I’ll be fascinated to see what TCH comes up with by building on VocaLink’s global experiences in delivering instant payment solutions to deliver their own vision of a platform. Not only as instant payments are coming to the US sooner than many of us thought by they are coming in a more sophisticated and enabling structure that will open up significant innovation over there.