Usain Bolt is the fastest human on earth, but cheetahs are three times faster. Does that make cheetahs better than a 6-time Olympic gold medal winner? It’s sort of the same debate, says MPD CEO Karen Webster, that’s raging about faster payments today. How fast do faster payments need to be? And who’s best positioned to make them fast? Then again, maybe, she says, it’s time to talk about faster and smarter payments. And step one in that conversation, she said, should be to kill off checks.
Usain Bolt is the fastest human on earth, an 11-time World champion and the first man to win six Olympic Gold medals in sprinting. One of his claims to fame is that he can run 100 meters in 9.58 seconds. That makes Bolt’s pace about 27.44 miles per hour.
That’s pretty darn fast.
Until you compare Bolt to the fastest animal on earth: the cheetah.
A cheetah’s top speed is between 68 to 75 miles per hour. National Geographic did a video simulation of Bolt racing a cheetah. The cheetah left the fastest human on earth in the dust.
Of course, that doesn’t mean that Bolt is a slouch. It just means that fast is often relative and highly correlated to the situation in which fast is being referenced.
Which brings me to the subject of “faster payments.”
There were a couple of announcements last week about faster payments. One was from The Clearing House, which announced its partnership with VocaLink to establish a new set of rails in the U.S. that would enable “immediate” payments.
The other was from SWIFT, which announced a global initiative designed to use its existing global network of correspondent banks to enable same-day payments between businesses anywhere in the world.
Both are in response to the criticisms that the core banking rails everywhere – and in the U.S. in particular — are in serious need of an upgrade. The gauntlet that’s been thrown in front of the FinTech community and U.S. financial services sector is to get on board with delivering faster/real-time/immediate payments, well, fast.
No one, especially bankers and the operators of those core banking systems, argues against the need to modernize them. But where there’s plenty of debate is around defining who needs faster payments and when, how fast do payments need to be, who’s best suited to enable faster payments rails and what those faster rails replace, if anything at all.
A debate that needs to start with not only who can make payments faster, but what is needed to make payments between parties better and more efficient.
And one that considers the tradeoffs between how fast money moves, how much it costs to speed that up (e.g. underwrite the risk of good funds, comply with existing rules and regs and build new rails) and make money move smarter (apply rules to when money should move and attach relevant data).
Because, “faster” is a relative term. Same-day, real-time and immediate are all variations on the faster payments theme that mean totally different things when it comes to deployment.
In order to move money from one party to another, there’s a whole pile of risk management and compliance rules that need to be considered – compliance and risk management to be sure that there are good funds on the originating side of the transaction, and compliance and risk management to authenticate the identity of the receiver.
And the faster that money moves, the more critical those functions become. Making money move faster also means that the rails that underpin the payments have the speed, intelligence, flexibility and power so that money moves more effectively.
Which might also even mean that in some circumstances, moving money the same day or even the next is just as good as (and maybe even better than) moving money in the blink of an eye.
Last February, Bank of America Merrill Lynch asked 177 of its commercial banking customers what would help them better optimize and manage their payments process.
Making the process faster wasn’t at the top of their list — only 7 percent said they thought faster would help solve their payments processing issues. That’s probably because their own back end enterprise systems aren’t real-time so can’t process payments received that way.
Their response is consistent with the Fed’s own study of the need for real-time payments. That study suggests that only about 5 percent of the time – in situations like disasters when money needs to move into the hands of people immediately – are real-time/immediate payments considered “essential.”
That also seems to be how it has played out in practice, too, in the countries that have adopted real-time payments. Their reported numbers suggest that real-time/immediate payments are used in about 2 percent of their payments use cases.
It’s also consistent with the response I got when I asked a group of treasury management execs at Fortune 100 companies about their interest in real-time payments. Their biggest issue wasn’t sending or receiving money faster, it was about making their internal processes that supported payments better. For them, being able to establish dynamic terms for different suppliers, getting those suppliers onboarded more quickly and vetting them to be sure they were legit was a much higher priority. When they need to move money, they use wires which work perfectly fine – and are fast!
Efficiency and flexibility is what seems to be on everyone’s wish list: a system that provides better information to assist with reconciliation and more payments options to accommodate supplier preferences.
And move off paper checks.
Forty percent of those in the Bank of America survey said they would like some help in moving from paper (aka check) to electronic payments.
Which suggests that perhaps one of the ways we could make payments faster is by killing off the biggest source of friction in payments: the check!
Part of the reason that a lot of business to business or consumer to business payments aren’t faster isn’t because it takes two or three days to clear a check, but because it takes 14 or 15 days to get the check in the first place.
We just completed a study with Sage Payments on the adoption of new technologies by small businesses. We confirmed what is already very well known that almost half of all business payments in the U.S. still involve checks, and that number is even higher when it comes to how SMBs pay each other. (Nearly 50 percent of all cross-border payments are also made by check, according to a recent study for reasons that will surprise you: businesses don’t understand they have other options available to them.)
For some businesses, using a check to pay another business is just the way that payments have always been done – and they see no reason to change that. Others say that the data that travels along with a check makes reconciliation easier.
But for lots of SMBs, checks are a payment method that allows them to control and manage cash flow. If you are the business that’s writing the check, I suppose that’s swell. But if you’re on the receiving end, it’s anything but swell. Our study showed that checks add nearly three weeks (18 days) to the timeline of getting receivables into the bank account of a SMB.
So, short of killing off checks, which could be a great start and something we should totally organize a campaign to do, who’s in contention to be the set of rails that make payments faster in the U.S.?
There are lots of parties vying for that title.
NACHA made a move earlier in the year to make payments faster by ratifying Same Day ACH for every single FI in the U.S. – all 13k of them. Starting in the fall of 2016, NACHA will have three settlement windows that make it possible for the funds that move along the ACH rails to move faster, if the relying parties want it to or need it to, and settle in the same day that it was sent. All banks in the U.S. will have the ability to enable Same Day ACH – and a business model to support it, should that be an option the banks want to make available to their customers.
The Clearing House, as mentioned earlier, would like to build and operate the faster payments rails for the U.S., too. The Clearing House settles $2 trillion every day on behalf of a subset of banks in the U.S., including some of the largest. Their announced partnership with VocaLink is designed to move money around the banks in the U.S. in real-time. According to the press release that was issued last week, this system will allow U.S. consumers and businesses to send and receive payments in real-time, and create the enabling platform for the innovation of businesses and use cases around real-time payments. VocaLink is the technology that enabled the U.K. Faster Payments initiative and the system that is live today in Singapore. The press release says that this new system will launch sometime in 2016, which would make it live something like 2.5 years faster than it took VocaLink to implement the U.K. Faster Payments Initiative with about 12,980 fewer banks. It’s ambitious to say the least.
Then there’s FIS, which also announced a deal with The Clearing House back in October to launch a real-time payments capability. This partnership will leverage the FIS real-time technology backbone that can enable its 3K FIs to have a real-time payments capability. FIS also bought enterprise banking player, SunGard, back in the fall for $9 billion. TCH said in its release last week that it will continue to work with FIS, presumably to extend its capability beyond that which it has today to include more banks. But to make things murkier FIS has its own faster payments initiative, although it isn’t clear how much traction they have.
clearXchange, the bank-owned rails that enable P2P disbursements, is also throwing its hat into the ring here, too. Early Warning, another bank-owned authentication platform, is in the process of acquiring clearXchange in order to add additional authentication capabilities to rails and expand the disbursement use cases to include B2P and G2P. clearXchange also suffers from a lack of ubiquity, although it says it can “fake it” by allowing consumers who bank with non-clearXchange member banks to enroll on their webpage and receive funds into their accounts.
ACI is putting its muscle behind making payments faster and smarter by leveraging its core banking infrastructure and software to innovate new use cases for real-time payments, including retail payments.
Then, there are the card rails that operate global real-time rails today. MasterCard and Visa have both launched products that sit on top of their rails: MoneySend and Visa Direct, respectively. They currently power a number of originating bank products. I got an email from American Express the other day touting a business to business cross-border payments capability using their rails, too. For card rails to take off, their current fee structure needs to be adjusted.
Both card rails and ACH rails power a variety of innovators who have built APIs on top of them to enable P2P or Account to Account payments between people and companies. SquareCash, SnapCash (which rides Square Cash rails), Google Wallet, Facebook P2P, Venmo, IngoMoney, Dwolla and Sipree are among those who offer people and businesses an alternative way to move money on top of their existing rails.
PayPal is a global network that moves money between the nearly 180 million people and businesses domestically and cross-border with PayPal accounts, and soon, the cross-border remittances powered by Xoom.
Western Union also operates a set of global rails that enables money to be moved to anyone else and paid out in a variety of ways to the other party, including cash, and in real-time, if needed.
And then there’s the blockchain, which its advocates say will replace everything we have today – as long as we are all happy and comfortable centralizing on bitcoin as our common currency.
Which as I’ve written, as have my colleagues, is not a very good idea.
The blockchain is perhaps the most misunderstood innovation of the year. For some reason, everyone thinks that they are two separate concepts; they are not, at least as of now. There is no blockchain without bitcoin.
Described, albeit inaccurately, as the Internet of money, the various blockchain schemes in the market enable close to real-time payments by relying on bitcoin as the method of transport from one point to the other. The sender of funds has those funds converted into bitcoin, which is how they travel across the blockchain. The receiver has those bitcoin funds converted into their fiat currency so that they can use them since the only real place that bitcoin is used much is the Dark Web, where I’m told you can buy all sorts of naughty and nasty things and services.
Advocates say that blockchain eliminates the dreaded “intermediary” that slows everything down and enables the permissionless movement of money which makes it both secure and instant. But the blockchain is the intermediary between the two endpoints on each side of the transaction. It’s just that the blockchain isn’t a single entity but a large number of unaffiliated miners governed, very loosely, by the some combination of the Bitcoin Foundation, community consensus, and the hardwired bitcoin protocol.
Now that makes me feel better. Instead of banks and networks, we have a group of unregulated and unknown miners as the bedrock of our financial system — moving trillions of dollars a day around the world.
Setting bitcoin aside for a moment, the blockchain is an innovative concept. Its innovation is the distributed ledger and software that makes it possible for money to be smarter when it moves between parties — and yes, for it to eliminate some of the hops that money must make its way around the world. Perhaps the blockchain’s greatest contribution to the faster payments debate is that it’s inspired many to think more deeply about how to modernize our core banking system by, in many cases, leveraging the risk and compliance underpinnings of the existing networks and rails that operate our global financial systems today.
Whether it’s Earthport and its partnership with Ripple or Citi and its Citi Coin initiative or Token and its software and APIs that leverage existing bank infrastructure, Chain and its “blockchain-like” ledger or SWIFT and what it’s said to be exploring with its existing network of correspondent banks, the notion of distributed ledgers and improving the speed and efficiency of how money moves is now regarded as a top priority in and around the payment ecosystem today.
Most of it is also pretty far into the future. And, as the head of one of the largest blockchain initiatives said last week, it’s the “gluten” of banking. I’m pretty sure this is fad — though will probably soak up a lot more money than Angry Birds, pet rocks, or the Hula-Hoop and last longer, too.
The real hairball with making real-time rails function isn’t speed – banks can “fake” real-time today and do all of the time. As long as someone is willing to underwrite the risk of allowing money to be made available instantly to another party, we can have real-time payments all day long.
But real-time payments, as a concept, won’t work if it isn’t available to and throughout every bank everywhere in the world. And that’s a pretty tall order here in the U.S. – much less around the world, especially when the use cases for real-time are demonstrably small.
So, perhaps where the debate needs to shift is away from making payments faster – same day, real-time and immediate are, after all, very much in the eye of the beholder – to making payments smarter.
Smart payments can be fast and even lightening fast, but smarter payments accrue and convey value beyond just speed. The winner of the smarter payments race won’t be won by who can get money to another person a nanosecond faster, but who can get it there most efficiently, most securely, and most consistent with the rules and regulations that make sure that the right people are getting the right money.
Now, about getting rid of those checks … who’s with me?
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