If you build real-time payments in the U.S., will anyone notice?
The complicated machinations that make payments happen behind the scenes seem like something the average American doesn’t know or think much about.
But Louise Clynes, group vice president of money movement products and digital channel management at SunTrust Banks, one of the early adopters of The Clearing House’s Real Time Payments system, which launched in November, says people do care.
When the bank in 2012 began offering Popmoney, a person-to-person payment scheme that runs on the Automated Clearing House, customers started complaining that payment delivery was too slow, taking three to five days.
“Whether it’s a payment to a landlord on the day it’s due or a gift that needs to be there in time for Mother’s Day, there’s a timeliness associated with a lot of person-to-person payments,” Clynes said. “We know that payments like rent, shared expenses and gifts are some of the most prominent use cases, and they all have a timeliness aspect to them.”
Corporate clients also want to receive payments faster, Clynes said. And sometimes they need to make an emergency payment of some kind, for instance, to overcome a working capital shortfall or to meet payroll.
Alberto Casas, payments and receivables head for North America at Citi Treasury and Trade Solutions, said one reason Citigroup has embraced real-time payments such as The Clearing House’s new network is to meet consumer expectations being raised by digital companies like Uber and Airbnb. The new payment “rail” built by The Clearing House addresses many of the challenges associated with traditional payments.
“As consumers, we have become conditioned to expect a seamless, immediate and frictionless experience,” he said. “I tap on my Uber app, my car comes, I jump in, I don’t interact with the payment experience at all. It’s very clean.”
Businesses and consumers are coming to expect a similarly quick, seamless experience for things like paying bills and receiving payments from their employers or other payers.
Casas also noted the global trend toward faster payments — 25 other countries, including the U.K., have already moved to a real-time payment system.
“The world is moving towards an immediate, item-by-item settlement process and away from what is today an end of day, batch-oriented system,” he said.
What The Clearing House launched
In November, The Clearing House launched its 24/7 real-time network for messaging, payment and settlement with six member banks: Citi, JPMorgan Chase, Bank of New York Mellon, SunTrust, U.S. Bancorp and PNC Financial Services Group.
It's a “credit push system,” meaning payments are “pushed” from the bank account of the person or business making a payment to the bank account of the person or company receiving it.
The Clearing House worked with Vocalink, the vendor that built the U.K.’s faster payment system and is now owned by Mastercard. The Clearing House wrote the code and is the system operator.
Both sides can see right away if a transaction went through, said Peter Davey, vice president of product innovation at The Clearing House. This is visibility that other systems, such as ACH debit, don’t offer, he said.
Casas noted that beyond faster payments, The Clearing House’s system offers “smarter payments” in which senders and receivers can send standardized messages along with payments or requests for payment to increase clarity and reduce costly and frustrating interactions between parties.
An insurance company, for instance, could send an adjuster out to meet a disaster victim, get her email address or cellphone number, and send money to her account instantly.
“That engenders loyalty that is meaningful,” Casas said. “This isn’t just about internal payment efficiency for our clients. It's about providing a differentiated service."
Clynes also noted that the messaging capability will let SunTrust and its business customers offer new real-time-payment-oriented products and services to consumers.
For instance, requests for payment or for information sent over the network could become electronic invoices, and the consumers’ answers could become the payment.
The consumer might get a message from a biller, such as Verizon, through her bank saying, this payment is due, would you like to pay it? If she taps “yes,” the payment would pass from her bank to Verizon’s bank, and she would immediately get confirmation from Verizon that the bill has been paid.
Verizon would obtain a consistency of delivering bills and maybe a predictable cash flow.
The consumer would get an easy way to pay bills and some control: If she knows her phone bill is due on Friday, the day she gets paid, she could opt to pay the bill that day, avoiding late charges as well as having her phone cut off.
The Clearing House hopes to bring all other U.S. banks onto its system in 2018 and 2019; many will phase in their use of its capabilities, with full participation by all expected in 2020.
To that end, it’s working with the major core system providers — Jack Henry, Finastra, Fiserv and FIS — to enable their software to connect to the Real Time Payments system.
What banks have to do
“Banks that have already built real-time payment hubs will have an easier time connecting to the RTP network," according to Dave Fortney, executive vice president of product development and management for The Clearing House. “But we have also worked hard to reduce the barriers to entry into RTP. We have teamed up with third-party payment processors who are all working on providing their bank and credit union clients easy access.”
At SunTrust, it took a team of in-house developers nine months to build a gateway from the bank’s enterprise payments hub.
So far, they’ve built the means to receive payments only; this was the easier part.
“We felt that that is the right place to start to enable our clients to receive funds in a real-time method,” Clynes said.
Next, the bank will build out the ability to send payments on the client’s behalf. That will entail modifying the fraud and risk management controls the bank currently uses for payments and doing some business process and integration work to provide multiple interfaces for commercial clients. Some will want a portal for individual payment entry, others will want application programming interfaces that let them integrate their back-office systems to the Real Time Payments system, and others will want a way to transfer files, she said.
The bank is now talking to clients to understand how they would like to use the new capability.
At Citi, connecting its payment hub to The Clearing House’s new network “was a meaningful investment internally,” Casas said.
In addition to writing an API to connect to the system, developers had to write code to connect the new network to the bank’s information-reporting portals, billing systems and systems that feed in anti-money-laundering requirements.
Development took a little less than a year, he said.
“But it’s a considerable lift and one that needs to be carefully coordinated,” Casas said. “Understanding risk, compliance, privacy, security, operational processes, rules and procedures is something that takes interaction across the bank. For us this will be a continued process of development as more and more features come online.”
Is fraud a greater risk?
One concern many in the payment industry have had is that when you’re settling payments in real time, there’s less time to examine those transactions for fraud.
“Faster payments opens up higher fraud potential,” Clynes acknowledged. “So we have to ensure that when we release that real-time payment, we have all those fraud controls and checks in place.” The bank has enhanced existing tools for this.
Executives at The Clearing House argue that payments on the network are safer than most because they’re all credit push.
“Consumers are all authenticated through their banking system, and there's no debit push,” said Rob Hunter, executive managing director and deputy general counsel. “People can't get into your account with your account information credentials the way they can with debit. You have to be authenticated and authorize the payment through your bank‘s mobile or other banking platform.”
Fortney pointed out that the account-holding financial institution is in the best position to understand who its customers are and authenticate them. The sending bank can also control when it puts a transaction on the network.
“Though it is anticipated that delays will be the exception rather than the rule, a sending institution has as long as it needs to validate that this is a legitimate transaction,” Fortney said. “Once it goes on the network, it's received in seconds.”
Not the only real-time network
In addition to The Clearing House’s new system, there’s also Zelle, the real-time person-to-person payment network Early Warning launched last year that’s used by 60 banks, including Citi and SunTrust, for business as well as consumer payments.
“Each network serves a unique purpose today — [The Clearing House] as a brand new real-time payments rail, supporting nonfinancial messages as well, and Zelle is a network and shared directory supporting consumer P-to-P payments,” Clynes said.
In the future, she envisions the two networks working together to move more payments in real time for consumers and businesses.
Citi has a “network of networks" strategy.
“We want to provide the end customer of our client with the flexibility to choose how they want to be paid,” Casas said. However they want to receive a payment, the bank will route it there, be it a traditional channel, debit or credit card network, Zelle, or RTP.
“We’re not betting on any one network — we are building a single connection for our clients that will empower them to pay and receive from all existing and emerging payment methods and channels,” Casas said.
Clynes’ one piece of advice for those that haven’t joined the network yet is: Hurry up.
“What I would say is, join us,” she said. “The sooner our peers are on the network and operating at full capacity, the sooner we all derive the benefits of this new payment rail.”
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