Quick payments: worries about banks
On Friday, December 14, 2018, the initiative group Financial Innovation Now (FIN) sent an open letter to the Federal Reserve in response to the agency’s proposal to create and launch a real-time payment system in the USA. In FIN, companies such as Amazon , Apple , Google , Intuit , PayPal , Stripe and Square have merged . They listed in the letter the already familiar theses about the status of quick payments in the USA, that the country was far behind the rest of the world in this regard and therefore jeopardizes its competitiveness.
The importance of fast payments was also emphasized as a means of solving problems with financial accessibility in the USA, where most of the residents use banking services. The authors argued that the Fed is best suited for the role of a player capable of controlling a universal, integrated and real-time payment network, even despite the agency’s limited experience in payment innovation.
The document pays special attention to the fact that access to payment systems today is possible only through the services of existing intermediaries - banks and payment networks, and they cannot keep up with the needs of consumers and businesses. FIN members argue that in addition to slow access to financial resources faced by individuals and legal entities, working with existing intermediaries leads to increased risks and increased costs due to the natural obsolescence of the existing financial infrastructure.
According to FIN members, the solution proposed by the Fed will eliminate these problems by creating a modern and integrated system with other channels.
FIN understands that it will take time to create and launch a new network, and until the network is commissioned, members of the initiative group want to have direct access to the national payment and settlement system. As stated in the letter, such a step would eliminate all the inconvenience of working with intermediaries and open access to the conduct of real-time transactions for all who need them.
Now access to the system of gross settlement in real time is only for financial institutions that keep deposits and deposits.
Summarizing, we can say that the FIN members support the Fed’s initiative to implement the fast payment system, but at the same time they want the Fed to provide companies with the opportunity to bypass the banks during its launch by opening for the initiative group access to the gross settlement system for accelerate partner and client payments.
Only time will tell if there is anything more than a clever attempt to strengthen the position of FIN participants in negotiations with banks and credit networks about commissions, because creating a simple website and writing a public letter does not take much effort.
Perhaps FIN will be able to direct the Fed in the desired direction. It is possible that this step will also affect the dialogue on fast payments in the United States.
It turns out that the Fed has ceased to be a coordinator, attracting almost 500 influential players to reach a consensus on accelerating the introduction of fast payments in the United States. At least in the opinion of FIN members, the Fed is more likely holding the key to potentially simple and cheap access to bank accounts, bypassing the banks themselves.
This may indicate that the essence of attempts to put the Fed in the center of talk about fast payments is not at all in the desire to make the US payment and financial system more competitive. Moreover, there is no evidence that the lack of a unified system of instant payments is indeed holding back the country's potential. Most likely, this move is aimed at turning the banking system into a cheap and accessible means of access to depositors' accounts. According to the Fed, access to deposits in the world of fast payments could well be free or should cost as much as the agency would consider acceptable.
In such a world, “old players”, whose infrastructure over the past twenty years has allowed fintech companies to grow, accumulate a huge customer base and market capitalization, can turn into a “pipeline” for making payments.
Speed is not all
FIN members are the same players. Yes, they have accumulated considerable weight and trust in the payment environment and do not allow financial institutions to sleep at night. They also, at the right moment, supported the initiative of the Fed, which should settle all the problems of fast payments.
This initiative coincides with global trends, in which the central banks of many advanced countries began to encourage the movement towards fast payments. It also combines perfectly with the popular opinion that instant payments are possible only if regulators force banks to introduce them.
The letter is especially significant against the background of another recent event - the failure of most US banks to support the association TCHwhich for several years has been trying to launch a solution in the country that is an alternative to the Fed's gross payments with fast payments. Only some of the largest banks were in favor, but without universal support this idea is not feasible.
It is also interesting that attempts to accelerate payments are being made just at the time when payments have already reached the best rates in history. For example, for universal support and implementation of the “ACH Day to Day” scheme in the USA, no public announcement was required from regulators.
NACHA was able to enlist the support of 13,000 US banks, since it offered a solution for the cases, one of the key conditions of which is the completion of the transaction during the day. This is an example of an efficient and economical business model that did not take revenues from other banks, but at the same time provided monetization of services. Yes, it does not work in real time, but it seems to be good enough for many practical scenarios.
Card networks today also allow instant payments. MasterCard (Send) and Visa (Direct) use a debit engine to instantly transfer money to customers' accounts, as well as small and medium businesses. They also provide FIN members with instant access to funds in individual cases.
Debit transfer system allows you to achieve speed and savings.
A recent PYMNTS study that examined cash payment cases for more than 9,000 consumers shows that 84% of them prefer to use a debit card as a recipient identifier as opposed to a phone number and email addresses. According to analysts, there are two reasons for this. First, it is easier for the consumer to order a debit card than to open a bank account. Secondly, consumers trust debit cards and consider them a convenient layer between the business that sends the funds and their own account.
Naturally, innovators are already using "ACH day to day." So, according to the NACHA, more and more medical insurance payments are made according to this scheme instead of checks, which are still widespread.
In addition, the Square Card debit product for business from Square company deserves mention. A merchant can instantly receive payment directly to his MasterCard debit card, and Square earns from an interbank commission. Visa and Ingo Money announced the development of similar products for small and medium businesses a few months ago.
Innovators, as they should, connect technology and their ingenuity to establish a link between regulated and secure old systems and new ways of creating value in a dynamic digital world.
Is it possible to improve the situation? Of course, you can always do better.
The need for a more modern system
It turns out that you really do not have to wait patiently when real-time payments will finally be available in order to use them to generate new sources of innovation for ecosystems. Payments are already moving between banks and through payment channels quite quickly.
However, the speed of payment is not the only criterion for determining its total value. Payment is the process of transferring legitimate and properly allocated funds along with details of the transaction. The launch of real instant payments will require the creation of a system that eliminates any errors, since the instantaneous nature of transfers implies their irreversibility. Even if banks now have access to instant payments, they will have enough reason to slow down these processes simply for the sake of reducing the risks of fraud and banal customer errors.
Many obstacles to the introduction of fast payments are the result of a legitimate struggle against fraud and money laundering, as well as a desire to ensure the stability of the banking system.
The Fed certainly considers these reasons weighty. Any proposals for creating an instant payment system and providing access to its network will be considered on the basis of the security and stability of the existing financial system.
For the time being, this means that the advantage of fast payments remains with banks and card networks, as they are already moving funds quickly through regulated channels, gaining the trust of consumers, businesses and the Fed. Their channels are available to everyone, from ordinary citizens to businesses.
But this does not mean that the existing financial infrastructure should not be modernized. Updating it with productive and thoughtful initiatives would stop talking about the need to speed up payments. It would also help to focus on creating a modern flexible system that includes all the successful solutions that are working at the moment.
Banks and card networks should take a closer look at the idea of real-time processes and how to implement them. And they should not forget about the various initiatives of other companies to introduce fast payments, aimed at getting easy access to depositors' accounts.