Fast payments are “must haves” in most economies. Their key attributes make them superior to other bank-led, open-loop systems. The speed of money has caught up with the speed of our communications. As Glenbrook’s Elizabeth McQuerry puts it, “this is a convergence of ideas around the world, a commonality, around this single approach in payments.”
Note: “Fast payments” is the term of art that the world’s standardized on. These new systems have gone by multiple names: real-time payments, faster payments, immediate funds transfers, and more. Very recently, the World Bank and the Bank for International Settlement (BIS) settled on “fast payments” as the moniker for these systems.
In this Payments on Fire® episode, Elizabeth and ACI Worldwide’s Craig Ramsey discuss the evolution of fast payments, its global spread, and the wide variability of use cases seen around the world.
ACI Worldwide is a $1.3B provider of payments technology to financial institutions, billers, merchants, and other ecosystem participants. Operating 24/7 in some 14 countries and 18 systems, ACI is a major participant in the global fast payment phenomenon. Among ACI’s roles are connectivity of core banking systems (the ledgers) to domestic fast payment systems. ACI also brings fraud management and back office services.
Elizabeth and Craig discuss the impact of rules on use cases, the slow rollout of services that take advantage of ISO 20022 messaging, and the nuances of deployment from country-to-country.
Craig notes that fast payments do not replace existing systems. They provide banks, and their customers, with a broader range of payments choices. Banks can make decisions about which rail to use for a given transaction.
An essential success factor is ubiquity. National mandates are enormously influential. The explosive success of Brazil’s new PIX system is an example. But even in a market-driven economy like the US, the benefits of fast payment systems are very apparent,
Push Payments and Risk
From a payments network and financial institution point of view, push payments are less risky than pull payments. The principal reasons include:
- They are “known good funds” transactions that are only entered into the network if the funds are in the sending account.
- Unless there is an account takeover, they can only be initiated by the accountholder.
- The rules of fast payment systems make these irrevocable transactions. There are no chargebacks.
That said, those accountholders themselves can be victimized by fraudsters through social engineering.
Authorized Push Payment (APP) fraud occurs when the rightful accountholder has been convinced to send funds to the criminal. This fraud is troubling because the payment is initiated properly. The accountholder has logged into their financial institution and provided the correct credentials. They’ve simply sent the funds to a fraudster. This form of fraud is a concern for wire systems—high value, low volume system ($4.5M per transaction) and, as the UK has reported, it is a serious concern for the fast payment systems that are built for high volume, lower value transactions. In the UK, no systemic solution has been found.
Fast Payments Now, CDBC Later?
The build-out of a new open loop payment system and technique is a once in a generation event. We’re five years into the US’s fast payments evolution. The next five will see Zelle, the RTP Network, and FedNow in operation and serving a whole range of use cases, many unanticipated by their designers. How these rails evolve and how they connect to the fast payment systems in other countries are unknowns. Rule changes are as inevitable as those new use cases.
Because tech accelerates change in payments too we may see yet another method of payment emerge in the US, a “digital dollar” issued by the Federal Reserve. Fast payments is a stepping stone to CDBC which requires realtime, 24/7 processing.
Aimed at very different use cases, these central bank digital currencies (CDBCs) are a newer phenomenon we will discuss in upcoming podcasts and blog posts.
Questions for Stakeholders
- How should fintechs use fast payment rails, how should they gain access to them, and who should they parter with?
- What makes more sense? Should you work with a financial institution or a gateway provider? Should you become a financial institution?
- What is the best way to prevent APP fraud? How should the industry make accountholders whole after they have been defrauded? Or are the victims of APP fraud on their own since they authorized the transaction?
- How does the card industry respond to a new payment system that operates with very different economics where fee revenue is only based on the number of transactions and not their size?
- We are here to work with you to make your fast payments initiatives successful. Reach out to talk.
Read the Transcript