Payment Innovation Moves to the Core
When we conduct our Glenbrook Payments Boot Camp, our first graphic illustrates the three essential steps in every transaction – initiation, funding, and completion. When looked at through the lens of of the past decade most innovation has been in initiation. Consider: Apple Pay, Google Pay, Venmo, QR codes. The list is long of ways to kick off a transaction.
Funding is all about where the money comes from. Usually a bank account, often a wallet holding money. Some innovation there but not a great deal. There are only so many ways to store funds.
Completion, the last step, is the most important to many participants as it’s when the transaction completes with the final movement of money.
Five years ago, in those boot camps, I said that completion, also called settlement, is the innovation-resistant phase of a transaction. Today, everything has changed.
In the U.S., we have new services such as Zelle and Venmo that appear to the end parties to deliver instant settlement. They may use card rails or bank rails like ACH to complete the transaction.
Two Forms of Settlement
In this discussion with Glenbrook’s Carol Coye Benson, we look at two forms of settlement: end party settlement – for example, an employer paying an employee – and then Carol focuses on the nuanced world of interbank settlement.
If you’ve heard the terms net settlement, gross settlement, or RTGS and wondered what they mean, take a listen.
Faster Payments and Settlement
We also talk about the phenomenon of faster payments and the settlement techniques these systems employ. 40 countries around the world are in one stage or another of deploying faster payment systems that push money from bank account to bank account. It’s already in the US via the Real Time Payments Network from The Clearing House and, perhaps, a competing service from the Federal Reserve. (To get an update on the Real Time Payment Network, listen to Episode 81 of Payments on Fire).
These faster payment systems vary in their capabilities. Speed and data carrying capacity are just two variables. But we have seen that when a new payment system enters a market innovative offerings can flourish, provided access to that system is encouraged by rule, regulation, or both. However, that level of openness is not guaranteed. As Glenbrook have seen in our work around the world, some systems are essentially closed by market power or operating rules. These constraints limit the network effect’s benefits of ubiquity, convenience and, often, cost.
This is an ongoing challenge. In this age of fintech, banks are under pressure to innovate. As owners or participants in new systems, some may choose to limit access to their fancy new rails in an attempt to forestall competitive market entrants. Others will be “encouraged” by regulators to open up. Of course, end party choices will play a big role, provided there’s a choice available.
The New Game
Settlement has traditionally been led by major commercial banks or the central bank of each country. That model still holds. In some markets, including the U.S., we expect a push and pull for control between those two entities. Christine Lagarde, Managing Director of the International Monetary Fund, suggests such tensions may justify the issuance by a nation’s central bank of a fiat digital currency as a counterweight to the alternative control over payments by a concentrated set of banks and processors.
Settlement innovation has created a competitive environment that did not exist before. It will be the interplay of rules, regulations, technical capabilities, end party value proposition, and market power that will determine the evolution of each country’s settlement platform. In some, regulators will shape the outcome. In others, system access for fintechs and the “open banking” model will be a determinant. For all, cost effective access for end parties is critical.
So much for thoughts of a static payments ecosystem.
If you think of yourself as a payments geek or just want to get under the hood of how money really moves, Carol is a terrific guide.