This week's first transaction over The Clearing House's Real-Time Payments system may be a huge step for speeding up payments in the U.S., but it also highlights the long road still ahead.
The Clearing House envisions its network as ubiquitous, but it knows it must play nice with the many other initiatives underway as part of the Federal Reserve's faster-payments push. What remains unclear is how The Clearing House's system will complement those other projects as one piece of a complex, nationwide puzzle.
"This launch really just gets us to the starting line," said Russ Waterhouse, executive vice president of product development and strategy at The Clearing House. "The task at hand now is to really light up the industry."
The system went live Monday with a real-time transaction between BNY Mellon and U.S. Bank, just two of The Clearing House's 25 owners. Those banks will soon be joined on the network by Citi, JPMorgan, PNC and SunTrust, who together represent the financial industry’s earliest adopters of RTP.
The Clearing House understands that without ubiquity, its RTP network would just sit like any other number of faster payments schemes that have been tested and are ready for action, but lack players. Without true collaboration, RTP runs the risk of facing the same struggles that held back clearXchange, a predecessor to the Zelle P-to-P network. Though clearXchange boasted many of the same large banks as its owners, it took four years just to get all three of its founders on the network — and even then they weren't operating under a unified brand.
To appeal to potential participants, The Clearing House says its push-credit-only system will help banks, particularly smaller ones, get customers back who may have fled to other fintech products. In addition to eliminating overdrafts, the push credits in real time also keep sensitive credentials more secure by keeping them off networks and goes a long way to reduce paperwork.
"We have also created economics that are attractive to the broad banking ecosystem," Waterhouse said of the 4.5-cent per transaction fee applicable to all banks. "With the operator fee being the same, it means the larger banks will really pay the majority of the freight on this, and that's a positive."
The Clearing House is also relying on its technology partners – FIS, Jack Henry and D+H Corp. — to move the bar of the RTP toward ubiquity. "They are core tech providers, lighting up their networks and applications so they are real-time enabled," Waterhouse added. In general, the RTP is built to enhance other networks.
However, The Clearing House RTP, while a significant advancement in moving money through the banking network in real time and the first new payments concept in decades, does not represent the end of Fed's work in this arena.
Rather, it is "a very big and important event" that adds to the capabilities in the marketplace, and more clearly directs the Fed's faster payments task force to address how everything can work together, said Connie Theien, senior vice president of payments industry relations for the Federal Reserve System.
"There is a lot of work to be done by the industry to collaborate around governance, rules and standards around all of the things that will create that ubiquity and interoperability and a widely available capability," Theien said of various faster payments puzzle pieces.
The Federal Reserve is supporting all of the collaboration efforts in building a governance framework that could apply to all facets of faster payments, Theien added. The Fed task force also has to study and determine if gaps exist that would slow down the process of achieving ubiquity within the infrastructure, she said.
In meetings earlier this year, the payments task force asked the Fed to consider some operational roles in a faster payments scheme, one being the development of settlement capabilities that would operate 24/7 each day of the year. It also contemplates whether the Fed could participate in using its network that connects 8,000 banks as a means for supporting ubiquity, or possibly act as a clearing operator.
"We are kicking off those assessments in meetings now and will communicate more about this in the middle or third quarter of next year," Theien said.
While The Clearing House worked over the past three years on its own faster-payments rail, Nacha and the Federal Reserve moved to speed up Automated Clearing House payments in introducing Same-Day ACH, which now covers both credit and debit payments.
Still, Nacha has been quick to remind banks that Same-Day ACH is not the same as real-time payments. It's just much faster than the ACH's standard two- or three-day process.
For the RTP to take hold, it has to make a difference to the everyday businessman, maybe even like delivery truck drivers making the morning rounds in New York City, TCH's Waterhouse said.
"A lot of those deliveries are cash business, and that's a risky form of transaction," Waterhouse said. "The RTP could modify that for drivers, as they could request payments on the app on their smartphone or iPad to the bank, and a confirmed payment from the proprietor could come in seconds."
Indeed, the ride-sharing company Lyft has championed real-time payments for a very similar use case: Paying drivers immediately after they drop off a passenger. Today, the best options are debit-based systems like Visa Direct, but this limits its applicability to drivers who are willing to link a debit card, according to Lyft.
"We are doing work with banks right now to create more end-to-end processes through the RTP system," Waterhouse said. "RTP can't do it alone, but it can be a key ingredient in the process."