A Global Phenom

Realtime Retail Payments (RTRP) systems are a global phenomenon. These systems exist or will soon in over 50 countries around the world. Some have been in operation for decades. The UK’s Faster Payments system, operated by Mastercard’s Vocalink unit, has been in operation for over ten years. Still others are still in the design stage.

These account-to-account systems (A2A) have gained in regulator popularity because:

• They are fast. The receiver has near instant availability
• They are push payment systems. Transactions don’t take place unless the sender has enough money to fund the transaction. In other words, authorization takes place before the transaction
• User authentication is up to the financial institution
• These systems operate year round, 24×7
• They are inexpensive. Transaction pricing is fixed, regardless of the value of the payment itself
• They have rich data carrying capability
• Some include a new message type called Request for Payment, essentially a digital invoice message that prompts the payer to send money and smooths account reconciliation.

Still New to the US

Most Americans still have no idea there’s a new national payment system in operation. Or that a similar one will begin operation in a few years. Wallets like Venmo and the Cash App abound. But an entirely new set of payment rails? That happens once in a generation.

Some of those Americans, on the other hand, may have experienced what a system like this can do. Zelle is a fast push payment system that moves money between banks accounts. But Zelle is more of a directory-enabled messaging layer. The money movement between banks relies on older payment rails like ACH and wires. New Age messaging and user experience; old fashioned settlement.

Key RTP Characteristics

Payments geeks, like Payments on Fire® listeners, know that the Real Time Payments Network takes a different approach. Operated by bank processor, The Clearing House, the RTP Network leaves management of the user experience and the use case up to the bank, the processor, or the provider serving a particular industry.

The RTP Network provides:

• The messaging between the sender and the receiver and each of their banks
• Nearly instant availability of the funds into the receiver’s account (by network rule)
• 24/7/365 operation (ACH and wires take a break after working hours)
• Instant settlement between the sending and receiving financial institutions

In short: the RTP Network provides the plumbing and pipes. What it looks like and how it’s used is up to another stakeholder.

Members of the network are financial institutions who either expose the RTP rails themselves or sponsor third party access so that those entities can make use of them. Nothing groundbreaking there.

An RTRP with RTGS

One of the impressive features of the RTP Network is that interbank settlement, the movement of funds between the sender and receiver banks, happens in realtime. The two banks settle their positions instantly. Settlement happens in realtime for every transaction. That’s what a realtime gross settlement (RTGS) does.

Contrast that with a system like Zelle that provides instant messaging among the stakeholders but typically leaves the final movement of monies between banks to an overnight batch process via ACH. And this is net, not gross, settlement. The amount includes all of the day’s transactions.

The RTP network achieves its RTGS capabilities using the following technique:

• RTP requires each member financial institution to pre-fund monies sufficient to handle its transactions. The money to operate the system has to be in place ahead of time. This eliminates settlement risk between the banks
• Each FI’s monies are pooled in a single pooled account, owned in common by the RTP Network’s member financial institutions. This pooled account is held at the the Federal Reserve
• The Clearing House maintains a ledger that tracks every transaction, that debits and credits FI pairs in realtime for each transaction
• Each Member FI is responsible for making sure it has enough funds to cover each of the transactions initiated by its accountholders. Each FI uses another open loop payment system, FedWire, to move monies into and out of its share of the pooled account as needed.

A Maturing System

That’s a lot of background to help US contrast this system against the other four mostly digital systems in the U.S. (If you’re not clear on that, join us for the best in payments education at a Glenbrook Payments Boot Camp®)

The RTP Network is in its fifth year of operation. In this Payments on Fire® episode, Steve Ledford updates us on:

• The growth in member financial institutions
• The growth in transaction volume
• The expanding set of use cases
• Who is using the RTP Network
• How COVID-19 accelerated usage in new use cases

So, take a listen.

Here’s Steve talking about those new COVID-driven use cases.

For a snapshot of how the faster payments phenomenon is growing in the U.S. here is the 2020 Faster Payments Barometer.

Read the episode transcript

Find more podcasts, visit Glenbrook’s Payments on Fire® site
Read expert payments industry commentary at Payments Views.
Read the latest at Payments News. Subscribe here.
Read our COVID-19 Payments Industry eBook

Continuing our payments in fintech series, we talk about one of the major changes in the payments industry over the last few years: the installment lending phenomenon. Companies like AfterPay, Klarna, and Affirm (that just IPO’d and saw its stock double in one day) are leaders in this buy now, pay later (BNPL) space and appeal to Millennial and Gen Z users as well as the merchants selling to them.

These firms offer a range of installment payment options: three, six, and 12 month payback periods are typical. The interest rate gets lower the shorter the payback period and, for the shortest period, that cost is eliminated. The merchant pays for it as promotional financing. These installment loan options generally increase the size of the sale and, because the BNPL provider may take on the risk and guarantee the sale, they remove a measure of risk from the merchant. In other words, for multiple merchant categories, they increase sales.

BNPL providers accept multiple methods of payment: credit and debit cards and, of course, they may encourage the use of ACH as a low cost funding source.

For younger demographics, a majority of them without credit cards and credit histories, these services enable them to transact.

Sezzle is a player in this arena with a unique, very short term product that charges no interest to the consumer because the purchase is paid back in six weeks. The costs are born by its merchant customers. Sezzle has particular appeal to sub-prime or young consumers who may not even have a credit score.

Take a listen as Sezzle’s Chris Bixby, VP of Growth, and Glenbrook’s George Peabody dissect the Sezzle proposition and discuss the changing face of Retail in the post-COVID era.

Watch Chris describe why his customers choose the Sezzle payment option:

Read the Transcript (more…)

Faster Payments: Fundamental Tech for Payments Innovation

Payments innovation comes in waves. And the wave that’s breaking on the U.S. – having swept over 50 countries around the world – is faster payments. Also referred to as Real-time Retail Payments (RTRP) these systems are fundamentally different from what’s come before:

• They are push payment systems
• They are new, systemically important domestic systems
• Risk and economic models are dramatically different than what’s come before
• They run 24/7 365 days a year. Go ahead, push money to and between accounts during your Sunday midnight snack
• Novel messaging and data formats open up new use cases and deep integration opportunities

Most important, these are “clean sheet of paper” payment systems built for the Digital Age.

Glenbrook has been working with these systems for over a decade. Our global experience gives us unique insight into how these systems are used and their real and potential impact on multiple stakeholders.

Why This Course is For You

If you are responsible for payment products and services in any way and you’re looking to differentiate your services, join Glenbrook’s Russ Jones and Yvette Bohanan on this deep dive examination of how faster payments is fundamentally altering payments industry dynamics.

Here are other reasons for you to join the workshop:

• Smart, expert workshop leaders to guide the group through the materials, make it interactive, and love QQ&A
• A crisp look at what these systems do, don’t do, and how overlay offerings in the UK, India, Australia, and Mexico extend their utility
• A deep dive into how The Clearing House’s Real Time Payment Network Request for Payment message operates and how the RTP Network settles (it’s a very new approach)
• Workshop attendees from across the industry bring unique questions and perspectives
• The workshop description has many more reasons. Check it out.

Take a quick listen to learn more about the workshop from one of its leaders, Russ Jones. George and Russ take a quick, fun tour through why this course is different.

Go here for the workshop detail, schedule, and registration.

The Fintech Phenomenon is rarely about doing something entirely new. It’s about doing things in a new way that better fits the needs of the target market. The fintech model also enables the provider to reach underserved market segments.

Lending is, of course, the core offering of banks. But between their legacy processes, underwriting requirements, compliance demands, and more, they simply aren’t nimble enough to serve new segments in our evolving economy.

And the banking crisis of 2008 left them even more risk averse.

That’s left small business lending wide open to fintechs.

Case in point: the online seller, that small business that makes a product or buys wholesale and sells direct to customers through their own website and, for most, through marketplaces like Amazon and Shopify.

Cash Flow is Everything

Here’s where success can kill a business. If their online store and what they’re selling catches on, they’ve got a tiger by the tail. They’ve already invested their own money to get the store off the ground. But they have to keep buying inventory in order to fulfill orders. Where’s the capital to pay for that inventory to come from in order to do that?

As the founder of multiple small businesses, I can tell you that cash flow management is a daily concern. It’s no different for these Amazon sellers because Amazon pays out every two weeks and it may take a month or more for the funds from some transactions to hit the seller’s bank account. With cash flow “everything” for the SMB, funding business growth is a major challenge. To keep up, you have to reinvest to feed the beast. You take all your earnings and put them into new inventory.

That’s where our guest for this episode comes in. Keith Smith is co-founder and CEO of Payability, a firm that has loaned over $2.5B since 2015 to Amazon and Shopify sellers.

Data Enables the Model

Payability, sitting between the seller and the marketplace, sees massive data sets that help it and its algorithms determine risk. Given the volume of data, the myriad sources of these signals, it’s impossible for humans to do the underwriting. Machine learning can examine far more signals than a human can ever handle. So, as Keith puts it, Payability’s staff “trains the robots” to help the company accurately price financing for those who would otherwise be locked out this kind of business.

The Money Supply Chain

In the business of selling money, you have to have access to it. You have to be part of the money supply chain.

Drastic changes in the finance ecosystem have taken place since 2008. With traditional banks stepping back from small business lending, fintechs have entered the money supply chain, as the new distributor of funds, enabled by their ML-based underwriting and risk models.

The fintech underwriting sophistication has been a boon to traditional sources of financing, both banks and institutional investors. They still sell money; they just do it through the new fintech channel.

The COVID Accelerator

As a funder of online businesses that have benefited from the COVID-driven shift to e-commerce, Payability has prospered in 2020. As Keith put it “we’ve seen four or five years of growth out of a single year.”

In Glenbrook’s payments consulting work, our discussions with merchants, billers, sellers, and their technology parters have included this common refrain. COVID has hurt many but others, able to respond to the challenges and opportunities of the digital shift, have prospered.

Find more podcasts and commentary at Glenbrook’s Payments on Fire® site, check out our blog Payments Views, and subscribe to the best payments industry news feed, Payments News. Read our COVID-19 Payments Industry eBook.

Click for transcript

In a crisp explanation of account takeover and authentication risks, George and Robert Capps, Vice President, Market Innovation, at NuData Security. They discuss the findings of a recent NuData report and its experience with the sophistication of online fraudsters. NuData’s techniques are all about foiling cybercriminals as they bang at the front door of financial institutions, merchants, streaming services, and more.

Payments on Fire® listeners know that we’ve been taking a steady look at fraud issues over the past few years. Fraudsters have been pouncing on every opportunity, taking advantage of pandemic relief payments as well as the shift from card present to card not present, remote commerce transactions. If this topic didn’t matter, we wouldn’t be talking about it.

Measuring and detecting what the fraudsters are up to and their impact is critical. To better understand what’s going on, we speak with Robert Capps, Vice President, Market Innovation, at NuData Security, a company that specializes in behavioral biometrics.

NuData published in Q3/2020 its e report on cybersecurity trends. And the findings are really interesting.

What They Found

The current scourge is account takeover. ATO is a concern for financial institutions, for retailers, streaming media companies, and more.

Attack method sophistication goes well beyond reuse of stolen user IDs and brute force password guessing.

It is an arms race of increasingly complex and sophisticated attack and detection techniques.

NuData and others have expertise in behavioral analytics, tools that detect, among other things, bots that are build to emulate human interactions at the account login page. The use of CAPTCHA is one technique to deter these attacks. But the fraudsters have responded, going so far as to establish call center-scale operations with staff endlessly filling in CAPTCHA forms to add the human touch and smarts in what are otherwise highly automated ATO attacks. This is human farming to get around CAPTCHA and other rudimentary defenses.

Financial institutions and retailers aren’t the only targets. In this age of stay at home orders, streaming services have become targets of opportunity. Parasitic use of streaming service accounts has risen as the fraudsters sell streaming service account credentials.

The Defender’s Balancing Act

There are dedicated professionals working on both sides. But the defenders have the harder job. Besides having to protect every door and window, they also have to keep it simple for good users to transact. Adding friction to a transaction flow increases the shopping cart abandonment rate. That’s bad for the ecommerce merchant and insults the customer. It’s a tough balancing act.

Part of that balance is handled by “step up” authentication based on the level of risk. A bank might let a session proceed to a balance inquiry without asking for further customer input. But if a new payee is added to the account, the bank might insist on sending a one time code to the customer via email or SMS.

Getting to Good ASAP

Providers of authentication services see activity from a lot of devices. Building profiles based on these devices and the many variables surrounding each transaction, they use the profiles to efficiently track the behavior of each in order to separate the known good profile from the questionable.

A technique to “get to good” faster is to pool that profiling information in anonymized form from across all of the clients who agree to participate.

COVID Impact

Robert discusses the shifts in fraud given the pandemic. As a percentage of transactions, fraud increased substantially in the travel segment. And for those retailers operating in the physical world the shift to e-commerce was sometimes overwhelming. That’s a story we’ve heard a lot at Glenbrook. Check out our COVID Series book.

Podcast transcript

Take a listen as George and Deluxe’s President and CEO Barry McCarthy discuss how the company continues to adapt to and prosper in the digital age. Barry talks about the journey the company has taken, in recent times shifting from a conglomerate model grown via acquisition to today’s streamlined and focused small business focused organization.

The Journey from Paper to Digital Services

In Glenbrook’s Payments Boot Camps® we make the point that fintechs rarely invent new functions out of whole cloth. What they do excel at is reimagining and reengineering the processes that incumbent players have been locked into for years.

It’s the incumbent’s inability to adapt that puts them at a competitive disadvantage.

As Charles Darwin put it:

“The species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.”

We make this point in our training. Incumbent firms, no matter what the industry, survive and succeed over decades only if they have the ability to adapt to change in their environment. You only have to glance at the moves Visa and Mastercard have made over the last five years – the acquisitions of Plaid and Vocalink (among many) come to mind – and it’s obvious adaptation is at the core of their respective strategies.

In this episode, we speak with a company that has over 100 years of adaptation behind it. Starting with the invention of the checkbook a century ago Deluxe Corporation has expanded and adapted its offerings to the digital needs of its customers.

Take a listen as George and Deluxe’s President and CEO Barry McCarthy discuss how the company continues to adapt to and prosper in the digital age. Barry talks about the journey the company has taken, in recent times shifting from a conglomerate model growing by acquisition to today’s more streamlined and focused organization.

Open banking. It’s a term we started to hear about at the end of 2016 and since 2019 interest has remained high. That’s according to Google Trends. Along with those searches, the related hot topics were PSD2 and APIs.

Regulation and technology is opening up access to bank accounts for payers, billers, and service providers. But the state of that openness varies by region and country with important consequences for billers, merchants, and their payment providers.

In this wide ranging discussion, George and Duncan Barrigan, Chief Product Officer at GoCardless, cover a range of topics, all through the lens of the company’s primary value proposition, the use of direct debit from bank accounts to enable recurring and one-off payments across 30 different countries.

As you’ll appreciate, stitching together a network capable of using the domestic low cost rails (think ACH and BACS) in 30 different countries to provide both domestic and cross-border recurring payments is no easy task.

Topics discussed include:

• The definition of open banking
• What the impact of open baking has been
• Where open banking is taking off, and where it isn’t
• Recurring payments defined and use cases
• APIs and integration
• How a biller or merchant can move customers from one payment method to another
• Cross-border direct debit
• And, of course, the GoCardless value proposition, something its financial backers believe in given its recent $95 million raise.

Financial inclusion for the poor is a global challenge. In this episode, we dive into the story of Mojaloop, a platform that enables interoperability and transaction routing between mobile money system operators, banks, and other providers. It’s a fascinating, and evolving, story. Take a listen.

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Individual Benefits, Nation Building Impact

Financial inclusion for the poor is a global challenge. Over two billion adults lack access to financial services. While that number is declining – and in no small part because of the work done by this episode’s guests – that level of digital disenfranchisement and cash dependence suppresses well being at multiple levels:

• Individuals must spend significant time to pay bills when they must travel to the biller or its agent, never mind travel to acquire cash. Carrying cash, of course, comes with its own set of risks
• Families suffer as time away from work and home reduces family income
• Entrepreneurs and small businesses face the same time penalty, high transaction costs, and uncertain credit access
• Entire countries experience diminished GDP because of productivity losses and transactional friction. Cash-based transactions also fuel the shadow economy, making audits and taxation very difficult

While Kenya’s M-Pesa is the most well known exemplar, there are hundreds of systems around the world offering digital payments, bill pay, savings accounts, microlending, and other services to their accountholders.

Not Without Concerns

Financial inclusion efforts are not without downsides as some credit extension services, riding the e-money rails laid down by the provider, charge usurious rates. Gambling services are similarly problematic.

With success, e-money systems become systemically important to a country and, therefore, pose a level of systemic risk should the operator go offline for technical or security reasons.

And as with every digital activity that touches money, there is the problem of fraud.

But these are not insurmountable challenges. Some are candidates for regulation-based cures. Others can be addressed by providers themselves.

The Network Effect Matters

Another challenge to the growth and health of mobile money systems is interoperability among those systems. In many countries, multiple e-money systems compete for accountholders but do not interoperate. A user on one system cannot send money to a user on another. That condition adds friction, reducing the e-money value proposition for all stakeholders.

The challenge becomes even more acute, and costs rise, when the sender and receiver are in different countries.

Ecosystem Enablement

A thriving digital ecosystem and economy requires the right conditions:

• Regulation that encourages innovation while also protecting the end user
• Low cost enabling infrastructure, and
• User-focused services that meet real needs

The Bill & Melinda Gates Foundation has taken on financial inclusion for the poor in multiple ways, through support of:

• Development of guiding principles for the delivery of financial inclusion through the Level One Project
• Creation of guidance for regulators to speed accountholder onboarding while limiting fraud and risks concerns
• Support for the development of open loop software designed to speed system interoperability. Called Mojaloop, this open source effort’s goals include the development of a reference platform

In this episode, we dive into the Mojaloop story with two leaders of the work:

• Paula Hunter, Executive Director, of the Mojaloop Foundation
• Kosta Peric, deputy director, Financial Services for the Poor at the Bill & Melinda Gates Foundation

It’s a fascinating, and evolving, story. Take a listen. And, if financial inclusion for the poor in developing markets is important to you, get involved with Mojaloop. It’s quite a team.

For a front row seat on payment innovation you have plenty of choices. Yes, Stripe and Square are based in the tech hotbed of the Bay Area and it’s tempting to stare at their success. But a look around the world reveals the evolutionary breadth of how payments are made, regulated, and brought to market. India and China alone reveal how remarkably different approaches can scale to enormous dimensions.

There’s no better guide to what’s happening in payments around the world than Glenbrook’s own Carol Coye Benson. In this episode, Carol and George discuss her new book Global Payments and the Fintech Innovations Changing the Industry.

Carol spent much of the last decade traveling throughout the world consulting to organizations on the impact of technology and business models on national payment infrastructure. The book is informed by the scores of discussions she’s had with tech executives, the leadership of development banks, government agencies, and fintech start-ups.

Take a listen to why she wrote the book, some of what she found, and her take on some of the big questions still to be answered.

VIDEO: here’s how Carol introduces the book:

Listen to the Payments on Fire® podcast:

2020 has been an active period for payments innovation. COVID-19 has been a forcing function for digital payments across multiple payment domains. “Touchless” and “contactless” payments are now common themes of retailer advertising.

And, of course, many other trends have accelerated this year. Fintechs, mobile wallets, the expansion of open banking initiatives, and point of sale lending are trends with impacts spreading across the market. 2020 has also seen the increased legitimacy of blockchain-based payments as demonstrated by central banks around the world consider and even pilot digital fiat currencies.

These are the topics Russ Jones and Yvette Bohanan will present in Glenbrook’s Innovation in Payments Insight Workshop coming up December 8th and 9th. If keeping up with the changes in our industry and developing real insight into the key trends is important, you won’t find better guides than Russ and Yvette.

Take a listen. Check out the agenda.