In part seven of our payments Q&A, we discuss the evolution of faster payments and real-time money movement. As the demand to move funds outside of traditional “banking hours” increases, more precise solutions for faster payments are needed. In the U.S., the Federal Reserve’s Faster Payments Task Force has been working to identify and assess different ways that faster payments capabilities can be implemented.
We spoke with David Jackson, Managing Director at Marketcy and participant in the Faster Payments Task Force. David is a consultant in financial services with a focus on global payments processing, blockchain, fintech startups, and real-time payments and fraud detection analytics. His focus is through his company, Marketcy, which delivers on projects that identify new markets, execute product introductions, and commercialize innovation in payments. He brings this experience from IBM, Oracle, Marketcy and several fintech incubators, accelerator programs and investments.
Ashley Poynter: First, can you summarize for us what the Faster Payments Task Force is as well as your role in it?
David Jackson: From 2015 through 2017, the Federal Reserve’s Faster Payments Task Force engaged a diverse array of stakeholders to advance the work outlined in the January 2015 Strategies for Improving the U.S. Payment System (PDF). The mission of the Faster Payments Task Force was to identify and assess alternative approaches for implementing safe, ubiquitous, faster payments capabilities in the United States. The task force anchored their work around three objectives; and, in two years’ time, made significant progress in meeting them.
- Represent views on future needs for a safe, ubiquitous faster payments solution.
- Address other issues deemed important to the successful development of effective approaches.
- Assess alternative approach(es) for faster payment capabilities.
My role was one of the 300 participants who aided in the planning and writing of the documentation, reports, and use cases. Originally, I joined as the representative of Oracle but completed my work as an industry consultant under my company, Marketcy. These tools were used by market participants to be evaluated against the success criteria. A subset of the task force read through each of more than a dozen proposals and make critical evaluation of the submission. In addition, my role was to aid in the preparation of the reports through meetings and group engagement.
Ashley: The payments landscape has radically shifted over the past few years, thanks to advancements in technology that includes mobile wallets, APIs, IoT, distributed ledger technology and more. How are these trends impacting faster payments and what is on the horizon for faster payments in 2020.
David: Fundamentally, banking traditionally occurs in a batch-oriented, banking hours, daily cycle. The goal of faster payments is to have access to payments processing and clearing immediately. Many solutions have been tried, with varying degrees of success, to move funds more quickly and get to faster availability. Some of these include the list you have in the question but none could really get around the concept of a “banking hours” – times when the banks are open. The off-hours, weekends and holidays create an issue of risk when a payment is started during a “banking hours” but not completed until after the close of banking business. Sometimes the payments just sit and wait for the opening the next bank day. What all the solutions that succeeded, and those that failed, taught the industry is that there is demand to move funds outside of usual “banking hours”.
The value of faster payments is profound on how we think about the consumption of money movement services. Most people think of faster payments as a way to make a payment right now. But consider that the ability to move funds in real-time also means that there no longer is the concept of banking hours. Payments can move on each calendar day regardless of weekends or holidays. And payments can move during each hour regardless of timezones or the banking industry being “open”. These two forces make a fundamental change to the way we think of paying and being paid. We could have our payroll payday … any day of the week. We could have that payday be everyday we work. We can pay bills anytime to support blockchain real-time solutions without having to use cryptocurrencies. We can have liquidity at a continuously finer degree of precision as we approach continuous liquidity management and not just on a daily cycle. This applies for business and personal needs as well. The Faster Payments Task Force did a great job defining many high level use cases where real-time money movement creates business value. And now we are seeing the everyday use cases in those categories coming to the real world. This will continue to accelerate in the economy of 2020 and beyond. My partners and I have already generated fee revenue for banks through the use of faster payments as a feature in business solutions included ecommerce, B2B, B2C, G2C and other use case categories.
Ashley: Describe why faster payments are beneficial. Obviously, faster authorization, clearing, settlement, and/or availability of funds sounds like an overwhelmingly positive thing, but are there other benefits to the ecosystem that may not be as obvious?
David: I used this logic when briefing many clients. The not-so-obvious benefits of faster payments is that the banking system becomes every single calendar day without weekends and holidays. Then the day becomes 24 hours of business transactions not just when the banks can move money in the more traditional batch “closing hours” way. And the real-time movement of funds enables just-in-time delivery of products and services. Imagine in business and your personal life, when the goods arrive is when the money moves. This eliminates delay to the provider and helps the consumer of products and services pay, or dispute, immediately. Take that just a small step forward … real-time payments enables the ability to pay something at a date and time certain. This doesn’t necessarily mean “now” or immediately. I can pay something at 15.00 PST Sunday in fulfillment of an obligation for delivery of parts on my continuous manufacturing floor. Or I can make a deal with customers that if they pay at a certain date and time, I can offer incentives knowing that I have payment for my own business due just moments after I get the customer to pay. Liquidity management and accounting changes immensely! All of this supports the blockchain enabled world of continuous view to that status of the business. And many cryptocurrency solutions can be deprecated in preference for the ability to move fiat currency in real-time. The use cases here are beyond the words we can write. Personally, we have been through over 50 where the movement of funds at non-traditional banking days/hours can enable entire new sources of business value, customer satisfaction, and employee retention. The most non-obvious benefit we will discuss in the future — reduction of the underbanked and reduction of the “payday-to-payday” nature of over 50% of US households. We are already attacking this issue directly with success.
Ashley: What about the downsides? Are there any? Can you explain?
David: The downsides of real-time payments are those common with the use of cash in society. Once the payment is out of my account, I can only get it back at the goodwill of the receiver and the contracts we have in place. Certainly we could try to write law to try to mitigate that, but the law is a clumsy way to correct lack of controls. We will need to have a higher discipline in our accounting and payments systems to avoid errors. And our contracts will need to be reflective of the fact that, when using real-time payments, we need to think of how we would use cash.
Ashley: What are some of the main challenges on the way to faster payments in the U.S.?
David: The main challenges to faster payment is ubiquity, ubiquity, ubiquity, to borrow from the paraphrased real estate mantra. Without the money movement systems of the US (and then the world) being able to participate in, and use, faster payments, we will continue to maintain the many systems we have today. This will work out as we march forward, but will leave the transition period with integrations, cross-over systems, and routes that will vary by type, day, and other variables. The good news is that we have just such interim systems that exist and can co-exist with the direction we are already heading.
The other main challenge I see is the general penchant of banks to view faster payments as a “product”. And then to confuse the situation with systems that are not real-time but are made to feel like real-time because of agreed funds availability schemes. These are generally P2P payments with which we are all familiar but still run in batch-oriented environments. And generally these systems are thought of as “free” to the consumer. This is a massive challenge since it is a great idea to enable solutions to business needs that INCLUDE faster payments but where faster payments is not the solution itself. This nuance leads to the need of the banking industry to understand how to solution-sell. Mostly, the industry does not. Once we create a solution, then selling against the need as a solution offering works. We are proving it more and more each day. But never, do we approach a client and provide them with information on faster payments. We solve a problem or offering a new solution … that has a value and therefore a fee structure clients are willing to pay. Inside of that … faster payments are generating fees and deposits for the banks. Until the financial industry understands this issue and redesigns many of their sales operations, non-bank providers will continue to drain deposits and fees away from the banks themselves.
Ashley: Can you summarize what the next steps are for the Task Force as we move into 2020?
David: I think the Federal Reserve, as facilitator of the Faster Payments work, has said it best. The Faster Payments Task Force believed that an industry-led framework for cross-solution collaboration and decision making is needed to support achievement of a faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient payment system. Specifically, a body such as the U.S. Faster Payments Council could facilitate successful pursuit of the task force goal of ubiquitous receipt – where multiple payment service providers are capable of receiving faster payments and of making those funds available to their end-user customers in real time. A coordinated, industry-wide and inclusive body will be more effective in facilitating adoption, enhancing security, and increasing user awareness than if the parties were to act separately.
Going into 2020 we have the structure of an industry-lead, Federal Reserve facilitated, organization which will help with issues of the transition to a faster payments economy. These are the next steps and the industry needs to create business value using this and other tools. Then we will see great strides in changing how we all interact with “money”.
Ashley: What are some interesting use cases you’ve seen for faster payments in B2C, B2B, or B2G?
David: I have seen hundreds of use cases that use faster payments as part of a solution. The list would take days to enumerate. The most interesting case came about with a blockchain OEM manufacturer complaining that they could validate the entire manufacturing process from start to installation with a customer. But at the end of this they were dumped out to the monthly, batch-oriented, “net 30” style accounting and accounts receivable system. When they were introduced to the fact that at the blockchain lifecycle step where ownership changed, the payment for that part could be made just as immediately. This is being pursued in many places and facilitates the current accounting system integrations, just doing so at the speed of business.
A group of use cases circles around the use of checks that remain resistant to change here in the US. There are many reasons but several have to do with the underbanked, the unbanked, check cashing services that thrive, and continued use of cash. My group turned attention to where coin and currency is used because, sadly, crime follows cash! In several of these use cases we were able to see noticeable decline in danger of carrying cash and the expense of managing cash. This applies with a multiplier when it comes to being paid by check. And, yes, the classic “paycheck” is alive and well in the US. Solutions have been justified solely on the basis of avoidance of check-cashing fees for payroll.
The list goes on and on but always has a fee structure that lowers costs, improves safety, improves efficiency, and — when the bank chooses to participate — offers deposit and fee increase revenue. When the bank goes more cautiously, we see the wallets and money transfer providers consume the fees and deposits because they justify a solution to a need.
If you missed our other Q&A articles, you can view them here:
- Payments Q&A: IBM’s Dave Maddox on Consolidation, Emerging Payment Platforms, and Blockchain
- Payments & Fintech Q&A: Scarlett Sieber on Apple Card, Gen Z, and Cryptocurrency
- Quick Hit Payments Q&A with Holly Hughes
- Payments Expert Q&A: Gregory Leos Talks Acquisitions, Digital Payments, and Mobile Skepticism
- Payments Leaders Q&A: Fiserv’s Stephanie Foster Discusses 2020 Predictions, Connected Experiences, and Open Banking
- Payments & Cybersecurity Q&A: Dominic Vogel Talks Data Breaches, PCI Compliance, and Top Payments Threats
Stay tuned in the coming weeks. I will be interviewing more experts on the evolution of the payments world, shifts in the ecosystem, and what to expect in 2020.
If you’re interested in participating in one of our Q&A With the Experts series, please send us a note here.