The rapidly changing world of payments

Fred Laing II

It seems that every payment network in the United States is going through some sort of significant change. Even the check world, where little changes on a yearly basis, is faced with significant updates to Regulation CC. Those changes are not effective until next year but banks need to be preparing for those now!

For many in the electronic payments space, faster seems to be the word of the day. We now have faster ACH entries, with same-day credits implemented last September and same-day debits this September. Volume isn’t significant yet but NACHA is seeing growth rates in double digits. Next year every receiver of ACH entries will have to make same-day credits available by 5 p.m. local time which truly makes ACH a faster payments network. Another important part of same-day for the ACH network is the opportunity for banks to return any transaction in a same-day timeframe limiting the bank’s risk. All this is a major step forward for the ACH network.

All of this faster payments hype really began with the issuance of the “Payments System Improvement – Public Consultation Paper” that was published in September of 2013 by the Federal Reserve. Out of that came two task forces, the Faster Payments Task Force and the Secure Payments Task Force, both of which were charged with finding ways to make payment systems faster, more efficient and more secure. The Secure Payments Task Force continues to work given the rapidly changing payments security space but the Faster Payments Task Force has completed its work. It published a two-part report detailing the process the task force used to study how to make payments faster and then 10 recommendations to the industry as we strive to make them happen. Currently there is a group, called the GFFT, or Governance Framework Formation Team, that was formed after the close of the Faster Payments Task Force, that’s working on defining the framework for how different providers of faster payments would need to interoperate and how that process would be organized and managed. A lot needs to be done between now and their planned completion date, slated for the end of 2018.

There are a number of faster payment options being developed today, all of which are planning on being real-time. The Clearing House will begin piloting its real time payments network this month with a number of large banks. RTP will truly be a new payments rail, something we haven’t seen since the advent of the debit card. It doesn’t operate on one of the many other networks like ACH, wire or card. And it will feature 24/7 365-day processing and settlement, something no other network can offer today. RTP is a credit-push approach only, with robust messaging and remittance capabilities. Finality is immediate and payments are irrevocable although there is a mechanism that allows for a request for the return of a payment. At this point, as intriguing as real-time payments are, building connections to the network could be expensive and then finding users that will pay for real-time could be difficult given the limited demand at this point. The Clearing House plans to make the network available through a number of core providers or with a direct connection later in 2018.

Another faster payment option is Zelle from Early Warning Systems. Zelle has focused initially on the person-to-person space but will be expanding its offerings over the next year or two to a much broader list of use cases. Similar to Venmo and PayPal, the individual being paid only needs to supply their phone number or email address to get their money. Of course that means there needs to be an “alias directory” that converts the phone number or email address to the routing number and account number necessary to post the transaction. That’s not an issue if it’s “in network” but if a Zelle user wants to send money to a non-Zelle financial institution those dollars will be credited via the debit card networks and will be a one-day payment.   So what’s “in network”? Right now there are 35 to 40 large banks and a few mid-sized banks that have signed up to participate in Zelle. Early Warning is looking to increase that number so more of their Zelle payments can be real time.

On top of all the noise about faster we are seeing movement in the international payments space. A number of the more prominent vendors are working to find ways to implement the ISO 20022 standard to streamline these payments. And a few companies like Ripple and RC3 are working with distributed ledger technology to make these payments more efficient. This is a rapidly developing space, so watch for more developments here.

If you were thinking payments were boring and dull, it’s time to think again!

Fred Laing II is president of the Upper Midwest Automated Clearing House Association, Brooklyn Park, Minn.