Faster Payments in the US
Sending money in real-time is a capability that is growing around the world. “All bank” systems in the UK and Mexico are thriving. Mobile money services like M-Pesa are changing economies and individual lives in developing countries. But in the US, “things are complicated.” We have a crowded landscape in the US without, as in many global markets, a clear mandate from a regulator. In this Payments on Fire podcast, Glenbrook’s Carol Coye Benson and Dwolla’s Jordan Lampe join George Peabody for a discussion on the evolution of Faster Payments in the US, directories, bill pay, and the challenges of interoperability. And best wishes for a relaxing and happy Thanksgiving!
Payments on Fire 29
George: Welcome to another Payments on Fire podcast. I’m George Peabody with Glenbrook and glad to have you here. Today it’s my pleasure to actually introduce one of the founding partners of Glenbrook – Carol Coye Benson. Hi, Carol.
Carol: Hi, George.
George: Glad to have you here. It’s also my pleasure to introduce Jordan Lampe, who is director of communications and policy for Dwolla, and also a member of the Federal Reserve’s Faster Payments Task Force Steering Committee, a long title. Jordan, welcome.
Jordan: Hi, George. Thank you.
George: It’s a pleasure to have you both here, and the reason we’re talking to you today, is that we’re talking about faster payments in the US, the ability to essentially settle in real time and move money between bank accounts, and get money moving quicker here in the US. It’s a phenomenon that’s taking place around the world in a number of different countries. Here in the US, we’re exploring a number of paths. Carol, there has been quite a bit of news in the last month about what’s happening here in the states. I’m wondering if you could get us up to speed.
Carol: Sure, I’d be glad to, George. First, I just wanted to put it a little bit more of context of what’s happening in the rest of the world, because there are two things that are going on that are relevant. One is, a number of countries with relatively high rates of bank populations, so lots of people with bank accounts, are forming real time payment systems, as you mentioned. So, you have the UK, Australia, Singapore, you also have countries like Mexico that are doing it. By enlarge, these countries are putting in place, what I like to think of as, all bank systems, and by that I mean, basically, all of the bank in a country agree to participate, and once this system is up and running, anybody can send a real time payment to anyone else; which is good. Interestingly, there’s another thing going on, which is in the emerging economies where you have very high percentages of unbanked people and you’re seeing a lot of mobile wallet products aimed at those people – I think there’s like 250 of these products in various countries around the world – they’re being put in place, the first use case is for person to person domestic remittances – so from an urban worker to mom in a village. What do you know? Those are also real time payments. So, you’re seeing this happen two ways around the world.
George: An example of the second one, Carol, might be, M-Pesa in Kenya.
Carol: Exactly. By the way, even though their start is closed loop systems, they’re sort of in a haltingly going forward into interoperating with each other. In the United States, of course, things are complicated. We have a very, very large and unconcentrated banking environment, and really nobody with the authority to tell the banks what to do. But, as you said, there have been announcements recently and there’s focus really, on I think two major things that there’s been focus on for the last year is the Clearing Houses’ plans to build, and in fact, they’re in the process of building a real time payment system, which will be open to all banks to join. They recently announced the selection of a technology to support that. The other thing, which Jordan can tell us a little more about, is the concurrently operating Fed task forces, trying to get the industry to come together to talk about the requirements for the system. Let’s just take a moment to note that that’s a little odd, that you’re building at the same time you’re writing requirements, but you know, like I said, the United States is complicated. Last thing I’ll say, just as a stage set, is that it is not at all obvious that we’re going to end up in the all bank scenario that other developed markets have, because even though the Clearing House is building a system, there are many, many other players. There’s the ClearXChange, recently acquired by Early Warning Services, there’s the core processors all have systems, Visa / MasterCard all have systems, Square Cash / Google, and they go on and on and on. It’s a very crowded landscape with rumors that Apple is jumping in at any moment.
George: Sounds like an opportunity for Gateways yet again.
Carol: It certainly is complicated. I don’t know, that would be my take. Jordan, what about you?
Jordan: Oh man, that’s quite the hand off to introduce. I think you summed it up. It’s a complex, complicated landscape that doesn’t have a clear mandate like all the other countries with faster payment systems. What you’re going to have, is really a market led initiative, and that’s what we’ve seen, not only through the Federal Reserve’s task force, but also through these new interests that you discussed – Dwolla being one, having been live, an existing real time system, obviously gives us a benefit, but we also get a benefit off of all this momentum that’s moving forward. When Same Day failed a couple years ago, really, the rest of the industry got their act together. We rewrote some stuff, made it a little more tangible, digestible, we have up and coming competitors in the non-bank space that also motivated some of the financial institutions. You also have the government, the Federal Reserve stepping up and saying “Hey, we need to figure something out here. We’re essentially getting lapped. We had the best payment technology, but that was four years ago. Now what are we going to do to design a system?” But, again, without that clear mandate, it’s a lot of market led or market driven initiatives that are going on. I actually think, for a roundabout way to answer your question, I think the Federal Reserve’s faster payments task force does a really great job at corralling and actually adding some focus and preventing some of the fragmentation that could hurt us in the long run.
Carol: Can I react to that, George?
George: Yeah, please.
Carol: This is in all good humor, I have to say that I think the term market led sounds really good, it sounds like something one would want, but I’m really worried that we’re going to end up with a real time payments environment that looks like the bill pay environment in the United States, which frankly, is a complete mess. There’s no universal way to make payments to billers, because everyone’s got their own little directories, there’s these little islands of capabilities, and you could call that market led, but I think the market has led us down a dark path.
Jordan: Nobody has any grand illusions that a mandate would not only accelerate the process, but add more focus and move us in a faster way. I think we all sit back on the task force and think it would be a lot easier if the Federal Reserve just said do it and do it this way, but that’s just not the current reality of the situation. I think what we’re dealing with is the best of what we can. We’re getting stakeholder buy-in, we’re getting people at the table that wouldn’t normally be at the table, we’re getting innovators in here, we’re getting user groups in here, we’re really trying to bring together what could be considered a large focus group for how our unique market space in the United States needs to design or think about a faster payment system. I think that’s what’s really exciting. You talk about word definition, like market led or some of these other things, and directory, and who’s going to agree to this, who’s going to agree to that. We’ve never really had this platform before like we do at the faster payments task force, and there’s been a lot of really great production coming out of these conversations that we have.
Carol: Well, that’s encouraging. At least you’re building up a community of people who are talking about the same subject.
Jordan: 100%. When else in the last 40 or 50 years would a company like Dwolla with its own real time system, headquartered in Iowa be invited to the Federal Reserve to talk about our ideas around a faster payment system? When we can sit across the table from the Clearing House and we can compare notes, and when we listen to other market forces or market players say “this is what we need to have in order to back this”. It’s adding a lot of transparency to the process.
Carol: Let’s move to that. What is the solution to all these islands? If every bank belonged to 2 or 3 networks, how do I send you money?
Jordan: It’s going to be interoperability, and it’s going to be some systems that, quite frankly, we haven’t really had before in the past. You had mentioned directories for one, the remittance coalition has been doing some amazing work, I believe that’s a Fed chartered initiative to really bring together a “Supra Directory of Directories”, to really allow any system to plug in and create that ubiquity that’s going to be needed for a faster payment system.
George: Directories, certainly like that, is certainly an encouraging and a necessary element if we are going to have all of these systems that don’t talk to each other, we’re going to have more of this network fantasy failures that we’ve seen in the past. Having that directory right above it, having a way to rationalize it and make it useful seems like a requirement at this point.
Jordan: Yeah, I would agree. Especially when you start getting into some of the system flows for payments, that’s on a much more technical level, but we really do need different levels of interoperability, not just for identification and routing purposes, but also interoperability in the form of governance and legal. How does one payment network handle exceptions versus how another payment network handles exceptions? With the faster payments task force, what it’s basically doing is providing the platform to have some of these discussions, to get us really rallied around what we’re calling criteria, and you can actually go to fedpaymentsapprovement.org and actually take a look at draft 3, we’re a draft beyond that now, but this is a huge deal. This is a piece of a living document that we hope to ratify that basically says this is the acceptance criteria – this is how we’re going to think or judge or measure a potential solution.
Carol: Who’s to say that anybody needs to follow any of that?
Jordan: I think market forces have made it pretty obvious, right? We had just mentioned Apple Pay, for example, jumping into this. I think that there’s a lot of change going on in the industry right now. There’s going to be a lot of disintermediation disruption, a lot more attrition. There’s uncertain regulatory climates. I think people are, especially the entrenched stakeholders, are really looking for ways to continue to be relevant, and they know that faster payments is something that consumers do want, and I think there’s going to be that intrinsic move towards a system in order to continue to be relevant to consumers, to businesses.
Carol: I agree with that. I just do worry that at the end of the day a network is going to want to control its own rules.
Jordan: That’s fair. There’s going to be some understanding that needs to happen, but unfortunately, as being part of the steering committee for the task force, it’s my job to be optimistic. I went into this, a lot of industry experts, I talk to a lot of just basically academics and all these things, there were like “Don’t have your hopes up, it’s going to be a failure, it won’t last longer than 6 weeks let alone 6 months.” I think we’re really blowing a lot of the expectations away.
Carol: That’s great.
Jordan: Don’t get me wrong, it’s still a lot of hard work to do first.
George: Jordan, I just want to be clear. I think I heard you say that it’s your impression that the incumbents themselves are interested in participating in interoperability so they can stay in front of their consumers, their customers.
Jordan: Absolutely. I think that’s going to be key. I think what we’ve seen over just the last few months, let alone years, are banks trying to figure out and trying to identify what’s the opportunity that we need to get out in front of, so that way we don’t suffer a loss of business or what is the next market that we need to move to in order to continue to stay relevant but also make money. I think what you’ve now seen, especially as real time systems come up at financial institutions, like ours with BBVA Compass, is that they’re like, “Ooh, this isn’t just faster payments, there’s an application layer here. We can create new products that are faster, we can create value for our consumers, our business, and we can charge for that value.” I think people are slowly coming to terms with once you stop worrying about having to worry, you can actually start being pretty optimistic in creating some pretty interesting concepts.
George: One of the things that’s attractive to me is that fact that most of these faster payment systems are credit push systems – reduces risk, makes life simpler all the way across that value exchange. Are you finding that the incumbents who live in a debit pull world, how are they approaching this very different model?
Jordan: Well, actually, correct me if I’m wrong, I think you and I may have talked about this before. I think every single payment system, globally, that has a real time payment system, is based off of credit push. I think what we’re having and what we’re understanding is we want all the benefits that credit push provides, and we want none of the systemic risks that debit pull can bring. I don’t think that that is necessarily a point of contention. I think what we look at and what we sometimes do as an industry with so many complicated systems and so many different words we use to describe those systems, we can conflate two different ideas. I think what’s kind of happening right now is we’re wanting something where authorization is being kept at the bank, where origination is being kept at the bank. That really requires a credit push system, but there’s also a debit pull function that we currently use in our economy for things like preauthorization at a gas station or utilities or rent, that we want that functionality, but I think that the current debit pull models prevents individuals from understanding how that might work in a credit push system. Does that make sense?
George: Yeah. Could you maybe step us through how is actually could work in a credit push system?
Jordan: Yeah, absolutely. Just taking a look at how Dwolla operates, I think to understand a credit push system, you really have to break it down into 2 parts. There’s the authorization part and then there’s the origination part. The authorization can happen in a couple of places, but where it’s really important, that I think the current system doesn’t have in a debit pull, is to allow authorization to happen at the financial institution of the sending customer. Really, what we’ve done and said is let’s give authorization to that sending financial institution, but let’s also give it the ability to originate. The system is created in a way that the credit push authorization and origination happens with the sending financial institution.
Carol: But I didn’t mean that that’s the way that all of these credit push systems work, right?
Jordan: Yes. Then getting to where you would want a debit pull functionality. Carol, let’s say I made an arrangement with you to take out $400 for rent every single month from my bank account, and instead of having a system flow where you, as the ACH provider, can say, “Hey, Jordan’s bank, you should debit yours and I’m going to credit mine”, and based on that assumption we’re going to move money. That’s just not a viable system in a real time environment. So what you do is you really lean on some of these existing technologies that we have. We talk about a universal directory, we talk about authentication protocols, and that would allow you to capture not only the permissions but the conditional parameters around which you…
Carol: I think that the way that’s going to evolve, you talked about opportunities for banks to build products, I think it’s actually going to be pretty simple. I think that a biller, in an example like that, will evolve basically a request for payment method, and there’s plenty of systems that have that in place today. You take the request for payment, and then there’s no reason why my bank can’t build something that says “Carol, are you willing to pre-authorize me to originate a push on your behalf every month to this payer as long as it’s not bigger than $500?” or something like that. I think there will be opportunities for consumer banks to create attractive products for their consumers, but at the end of the day they’ll be credit push transactions.
Jordan: Yes, and I think that’s what we’re trying to get to the core of, and I think that’s finally seeing inside of the effectiveness criteria. What can we do to create that environment without putting constraints and calling it a credit push or a debit pull? There’s that underlying functionality that you just described that is just as effective if not more effective than any debit pull functionality. The question / challenge becomes, back to George’s earlier question, what do we call that?
Carol: You call it a credit push because that’s what it is. I don’t think you need to get involved in a lot of complicated stuff, it’s pretty straightforward.
Jordan: Do you call that a credit push request at that point?
Carol: There’s a lot of systems that are starting to use the term request for payment, which is pretty straightforward.
Jordan: Yeah, request for payment. If that’s what we as an industry want to agree on, sign me up, I’m totally ok with that, but I think what happens is we start talking about debit. Like, “Hey, why can’t we have debit pull as part of this criteria?” You can have debit pull, you can have that functionality that you’re looking for, it’s just going to be credit push. I think that’s the struggle that sometimes people have. They conflate the two. I think what we’ve done now is actually come up with a pretty clever solution that infers a credit push system with a criteria that’s being written. It’s been really interesting to see socialized throughout the market, even internally, because you do need names to help communicate what it is that you’re building.
George: We’re where we started the call with how definitions are challenging in this industry. We’ve got just a couple of minutes left. What are the milestones that we should be watching for over the next 3 to 6 months?
Jordan: We have a vote on the criteria that we’ve drafted coming up in early December. That criteria will become public it sounds like, assuming we get a yes vote, in January. Then, what we really have is this, we have that criteria now, now it’s upon the system provider, the stakeholders to really start to come together and create proposals. There’ll be capability showcases for people to show their wares, there’ll be platforms for people to kind of mix and match, and then hopefully by the 2nd quarter of next year we’ll be submitting some of these proposals. It’s a really exciting time.
George: Great. One last question. Is there a natural leader for around a national directory of any kind?
Jordan: I have not done as good of a job in tracking that as I would have liked, but at the Federal Reserve Payment Symposium, Carol, I believe you were there, we talked about some of this stuff. The remittance coalition seems like they’re really on a solid track; I think they’re doing some pretty innovative stuff. I think they’re charter is about 300 different individuals from different organizations. It’s fairly large and I think it has a lot of momentum going for it.
George: Great. Any last comments from either of you?
Carol: No. I guess I would say it is encouraging to see so much activity in the marketplace. Hopefully, even with our very complicated banking and payments marketplace, we’ll end up having something at least as good as the other countries, but who knows? Maybe even better.
Jordan: I guess my last thing there is as we move through this process, the proposals get submitted and then evaluated and that sort of thing, at the end of this, we’ll be putting out those proposals to the public and to the market, and really it will be on them to start to determine where those gaps are and maybe how those systems work together and that sort of thing. The Fed has said very clearly that after this proposal, they’ll be in a much better position to assess the environment here, and then take more active steps to figure out what it is they need to do to make it come to light. I think regardless of how the faster payments task force rolls out, we’re going to be in a better position than we were yesterday.
George: Thank you both for a very interesting conversation and an optimistic one as well.
Carol: Ok, thank you. Thanks, Jordan. Talk to you later.
Jordan: Thanks, George. Thanks, Carol.