Payments on Fire

Episode 81 – Real-Time Payments Network Update – Steve Ledford, TCH

For those of you who didn’t make it to Money20/20 and want to hear the latest on The Clearing House’s Real-Time Payments Network (RTP), take a listen to this update conversation with Steve Ledford, SVP at The Clearing House for the RTP Network.
A year ago, The Clearing House got out of the gate with its Real-Time Payments Network, a wholly new payments system based on the push payment model.
A lot has changed – more banks have integrated into the system and many more are in process. By the end of June 2019, over 3,000 FIs are expected to connect to RTP, most via their bank processor. B2B payments are taking place over RTP between known parties.

RTP Characteristics

Not All Things

TCH is not attempting to provide everything necessary for a ubiquitous push payment system. It relies on its FI participants and their processors to expose RTP capabilities to their customers. RTP hopesto have bank-friendly fintech partners use its rails through the traditional model that gives the new provider access to bank rails via a sponsor bank.
Thus far, TCH has also steered clear of a native directory service, a necessary feature for broad use in P2P and C2B payments. Given the partial ownership overlap with Zelle’s Early Warning Services parent banks and The Clearing House, no one will be shocked if Zelle becomes RTP’s lead P2P directory provider. For that matter, few will be surprised when Zelle shifts to RTP for settlement. Of course, at least one business-facing directories will be needed for bill payments to take off.

It’s Taking a Lot of Work

Connecting up a financial institution to the RTP Network requires deep integration into the FI’s core system, the software responsible for managing debits and credits. Connecting bank ledgers to any payment system is non-trivial, a fact that impacts how fast banks implement new payment rails like RTP.

Tell Me All About the Payment

A feature of the RTP network that holds enormous promise is its native use of the ISO 20022 messaging format. The standard’s flexible and structured qualities–not an oxymoron–provide a major leap in data carrying capability. By representing the payment meta data, for example, ISO 20022 can support invoice information, letters of credit, and other business documents. Accounts receivable and accounts payable systems from multiple vendors will be able to communicate directly, reducing manual data input and data entry errors.

The RTP Push

In the U.S., we are accustomed to pull payment systems. We think nothing of giving our bank account information when we hand over a check or our card data when we hand our card to a merchant. We’re telling the payees where to go get their money so it can be pulled into their account.
RTP and Zelle are both push payment systems. Such systems are characterized by near instant funds availability to the recipient, messaging to send and receiver, and irrevocable payments. That last is very different from the chargeback protections U.S. cardholders, in particular, enjoy. While Reg E applies to the sender’s transaction account, accountholder protections will also be prescribed by the FI.
To emulate some push payment attributes, RTP and most other immediate funds transfer systems offer a Request for Payment message type that essentially sends an instant invoice to the payer. The customer may press a Pay Now button that uses the Request for Payment Message on her screen. She then uses bank account credentials to authorize the payment. There may even be a redirect to the bank site. It’s a flexible solution applicable to multiple use cases and payment initiation methods like embedded links and QR codes.

Instant Clearing and Settlement

The RTP switch runs software built by Mastercard’s Vocalink unit, builder of the now 10 year old Faster Payments system in the U.K. The RTP code base, however, is a new version, with native ISO 20022 messaging and an instant clearing and settlement system. That system uses a single, pre-funded account at the Federal Reserve common to all participating financial institutions. A separate ledger operated by TCH is the single source of truth, keeping track of the transfer of ownership of those pre-funded monies. Separate accounts, for each FI at the settlement bank, aren’t necessary. So, instant clearing, no batch-based settlement. Lower risk, simpler management.

Competition?

If you’ve attended a Glenbrook Payments Boot Camp in the last couple of years, you know RTP and Zelle have some overlapping capabilities. Zelle, however, is targeted at P2P and C2B uses cases. RTP is a set of payment rails open to whatever use cases come along. In the short term, think B2B and payroll but there’s no inherent limit to where it can go. Just don’t expect it to take over POS payments any time soon. The U.K.’s Faster Payments rails have operated for a decade and have barely touched merchant POS payments.
Another fact Payments Boot Camp attendees know is that there are two ACH operators in the U.S.: The Clearing House and the Fed. The Fed is now floating the idea of operating an RTP analog of its own. Smaller Fish may be glad to see the Fed operate an alternate system. We’ll touch on that more later but the Fed will have a lot of selling to do because, at the very least, adding a new set of rails requires a lot of integration effort by financial institutions and their processors.
And I thought the U.S. payments landscape was settling down. Hah!