Repeal and Replace: The Payments Rails?

Repeal and replace?

This is no debate about the healthcare system.  Rather, it is a question that takes shape as innovation comes, as it always does, consistently and constantly, to the payments world. With change comes examination of the infrastructure in place that’s necessary to make payments smoother, more transparent and, of course, faster.  

In an interview with Karen Webster of PYMNTS, Janet Estep, president and CEO of NACHA, noted that technology is always under the microscope.

The question, as posed by Webster, may be boiled down to a binary one: Old rails or new ones — how to support and promote the innovation that everyone agrees is essential for creating better connected payments experiences for consumers and businesses?

In that conversation, Estep said, “There are three buckets that we can talk about…as we talk about payments and payments systems, which are both in a state of evolution, as well as a little bit of revolution. There are a lot of startups in the payments industry, for instance, and I would put them in a bucket of evolutionary change.” 

Those firms, she said, have worked to develop innovative user interfaces or channels, with attendant focus on features or functionality and an eye on “taking away pain points” of traditional payments systems. However, she said, those firms also use the infrastructure of existing payments systems without having to replace them wholesale.  

The evolution comes with new levels of messaging, or the creation of services for processes that need additional support. She gave the example of cross-border payments, where companies are offering new services to ease pain points tied to international activity, via ACH and other conduits, with the impact of streamlining B2B and other transactions. 

The second bucket, so to speak, lies with innovation that takes place within core infrastructure, said Estep. “You have both evolution and dramatic changes [here].” She offered up changes underway with ACH as a form of evolutionary pacing, with changes in speed, or perhaps format changes of the payment itself. In those cases, there is change that is incorporated into existing infrastructure that already has scale, security and ubiquity in place as distinct advantages for firms to embrace more efficient payment methods.

As for the third bucket, said Estep, “these are really more revolutionary changes.” This would encompass infrastructure changes such as new payments rails and new hub and spoke systems, including real-time payments systems and innovative use of distributed ledger technology. 

These more revolutionary changes include a variety of new things, she said, such as new systems, interfaces and processes, as well as building up of both senders and receivers.

Time exists as a form of currency, the duo agreed. This refers to just how long it takes for, as Webster put it, “the new things…the revolutionary new things to gain scale and ubiquity.”

The more time that existing infrastructure has on its side to evolve, exist and improve along with enhancements, Estep noted, the more the huge pool of financial institutions can continue to provide value to their clientele, with incremental returns coming without the need for large investments across activity that pays off for both providers and customers. 

Incremental changes, said the executive, “can also be a bridge to something that is new.” Thus, if there can be compatibility in terms of messaging or in terms of formats or risk management, she added, spanning from old to new, then value is unlocked. 

Turning to Same Day ACH, Estep noted that NACHA has seen very good adoption since the September 2016 launch of the service “in a lot of the ways in which it was expected.” For instance, working with payroll files or insurance claim payments, which had already been a part of ACH activity, now also has embraced same-day functionality. NACHA is, said Estep, starting to see changes in “those areas where it was a pain point to get payments to someone.” Online marketplaces can leverage same-day features to pay participants on that platform earlier than had been seen previously, through individual or bulk payments across hardware ranging from desktops to mobile devices.   

Looking ahead, Webster noted that Phase 2 of NACHA’s rollout, encompassing same-day debits, is just a few months away, slated for fall of 2017. Some banks have updated operations to be ready for debits, while they also readied for Same Day ACH credits. For its part, said Estep, NACHA is in dialogue with financial companies to make sure that reporting mechanisms are up-to-date, and that firms are reporting to NACHA on new use cases. As 60 percent of the ACH today is, in fact, debit, she noted, “We do expect solid use of Same Day ACH for debits.”