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One of the richest areas of fintech innovation right now is in instant payments. The launch over the summer of FedNow has brought heightened awareness to instant payments but there have been other offerings available in this country for some time.
My next guest on the Fintech One-on-One podcast is David Watson, the President and CEO of The Clearing House. They are the creator of the first instant payments network in the USA called Real Time Payments, a network that has been operating for over five years now. We talk about the mechanics behind instant payments and the benefits for both consumers and businesses.
In this podcast you will learn:
- What David saw at The Clearing House that was really attractive to him.
- A short history of the 170-year-old company.
- The total volume of payments flowing through the US payments system.
- Who The Clearing House serves.
- How the ACH payments system works.
- The enhancements The Clearing House provides for wires.
- How they work with physical checks today.
- The technology behind their Real Time Payments system.
- Who is using RTP today.
- The different use cases that are flowing through RTP.
- What happens when you send a real time payment to a bank that is not in the network.
- The difference between RTP and FedNow.
- How David feels about competing with FedNow.
- His thoughts on the card network’s instant payment offerings.
- How fraud in instant payment networks can be mitigated.
- His vision for the future of instant payments.
Connect with David on LinkedIn
Connect with The Clearing House on LinkedIn
Connect with Fintech One-on-One:
- Tweet me @PeterRenton
- Connect with me on LinkedIn
- Find previous Fintech One-on-One episodes
Read a transcript of our conversation below.
Episode 449: David Watson, President & CEO of The Clearing House
Peter Renton 00:01
Welcome to the Fintech One-on-One podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you for joining me on this journey. If you like this podcast, you should check out our sister shows The Fintech Blueprint with Lex Sokolin and Fintech Coffee Break with Isabelle Castro, or listen to everything we produce, by subscribing to the Fintech Nexus podcast channel.
Peter Renton 00:39
Before we get started, I want to tell you about the many opportunities you have to reach the Fintech Nexus community. We have an entire suite of digital products that include webinars, in-depth white papers, and case studies. We have advertising opportunities within our newsletter, website, and podcasts. We also do sponsored articles, dedicated emails, and much more. We can create a custom program designed just for you. If you want to reach a senior fintech audience, then please contact sales at fintech nexus.com today.
Peter Renton 01:19
Today on the show, I’m delighted to welcome David Watson. He is the CEO of The Clearing House. Now most of you will have heard of The Clearing House. They’re a huge payments infrastructure company owned by some of the largest banks operating in this country. In this show, we talk about the different types of payments, we talk about ACH, we talk about wire, even checks, and all the checks that are flowing through their system today. And of course, we talk about RTP, their real time payments network. We talk about what it is, how the technology works, what kinds of financial institutions are using it. We talk about the differences between RTP and FedNow, and whether or not FedNow has actually been a good thing for RTP. We talk about the different types of technologies being developed today. David gives his perspective on some of those. He also provides his vision for the future of instant payments, and much more. It was a fascinating discussion. Hope you enjoy the show.
Peter Renton 02:22
Welcome to the podcast, David.
David Watson 02:24
Thank you. Pleasure to be here, Peter.
Peter Renton 02:26
Okay, great to have you. So let’s get started by giving listeners a little bit of background about yourself. Like me, it sounds like you’re an immigrant to this country. Tell us how you arrived here. And just some of the highlights of your career to date?
David Watson 02:40
Certainly, yeah, no, I mean, originally from Scotland and sort of landed in the US in 2011, via a variety of different European financial centers. I spent the bulk of my career with Deutsche Bank running different payments and transaction banking product and business lines before deciding in 2019 to sort of change track a little bit and move into the market infrastructure sector where I moved over to Swift to run strategy and eventually product over there before I joined The Clearing House seven months ago.
Peter Renton 03:14
What was the impetus? What did you see at The Clearing House that was really attractive for you?
David Watson 03:19
The opportunity to come in and really help change the industry here in the US and help drive it towards the future state of payments that is continuing to get much greater in terms of noise and attention was one that is very hard not to be interested in. And when you look at the role The Clearing House plays at the foundation, the US economy and the payments infrastructure for over 170 years, the ability to actually help our adopted home team, if you like and the US market, really drive industry wide transformation and collaborative transformation is something that is hard to turn down. And I think for me the real sales pitch was would I rather help an individual corporation or bank help its p&l? Or would I like to come to The Clearing House and help drive industry change and industry progression towards the future was really what resonated with me and my passion for payments really brought me here as part of that.
Peter Renton 04:18
Right, right. So then, you mentioned The Clearing House has been around for quite a while. Can you just give us a little bit of the history about how The Clearing House came to be and how that’s evolved into what it what it does today?
David Watson 04:33
If we think about what The Clearing House does today, it’s kind of the same as it was formed to do 170 years ago. So we run highly reliable payment systems. So whether that’s for the more modern real time payments, the ACH payments infrastructure, the wire business for high value payments or our check clearing processing that we do. We’re really there to help bring settlement and safety and security and reliability to the financial services settlement of payments. That actually is what we were founded to do 170 years ago where our job in New York was to help banks settle payments between each other. Of course, back then it was still checks, but it was more checks, currency, and even gold that we used to settle between the institutions. Historically, we filled a major role in the sort of growth and stability of the banking system first in New York, and then eventually in the United States. And we were the Fed before the Fed, is a way of thinking about it. So obviously, The Clearing House organized from the private sector by banks stepped in during times of crisis, to make sure the banking system continued to function smoothly, we printed money and held gold all before the Federal Reserve Bank, and the government institution that is that, existed. So we’ve a long a long history in payments, and today owned primarily by 22 of the nation’s largest financial institutions. We provide collaborative and competing options versus the government’s Payment and Settlement Systems they offer through the Federal Reserve.
Peter Renton 06:01
Before we get into the meat of it, I’d like to get a sense of the scale of the US payment system, can you just give me some sense of what volume of payments flow through the US financial system?
David Watson 06:15
Studies from the American Banking Association, the ABA, have estimated that there’s around just under $130 trillion of business that happens across the different payment cycles. And that’s come through from different Federal Reserve payments studies, ABA various places. You know, we ourselves clear and settle over $2 trillion in payments, through our own networks.
Peter Renton 06:36
Over what time period? $2 trillion per day?
David Watson 06:41
Per day. So if you think about the size and scale of that is massive. And really what we are seeing and continue to see for the last 10/20 years and even accelerated by the sort of the pandemic we’ve all been through, is the explosion in payment volumes, and particularly in payment volumes in those new sectors around instant payments, real time payments, payments with richer data, different types of new and modern networks, and continue to see a lot of innovation as a result that comes hand in hand with high growth. So it’s a it’s a pretty colossal market, the US payment system.
Peter Renton 07:15
Right, right. And then so The Clearing House, you said you got, I think you said 22 banks, like owners of your organization? Does that mean that you primarily work with 22 banks? Or do you work with the entire financial system as far as credit unions and banks?
David Watson 07:33
Yeah, most definitely we work with the entire ecosystem. Our ownership structure is one thing, who we service is obviously something completely different. Our sort of mandate from our owners is not to turn a profit directly for them or for ourselves. It’s very much around how we as a financial services industry, to move forward in terms of innovation, but also maintain that safety, security, reliability that we’ve provided for so many years. If we think about some examples, like our new real time payment system, more than 90% of the banks who use that network, are actually small to medium enterprises, per se. And at the end of the day, whether a bank is big or a bank is small, what’s important when it comes to payments is the eventual ubiquity of solutions like ACH, wire, and eventually real-time. Enabling all customers of all institutions, regardless of size, to have the access to state of the art payments capabilities, regardless to who they bank with.
Peter Renton 08:33
Right, right. Got it. Okay, so I want to go through some of the different payment types before we get to RTP. And I want to start with ACH. Obviously, it’s been around for 50 plus years, it’s probably the most used of all of the different payments flows. But can you explain if someone’s making an ACH payment, a business making an ACH payment to another business or a consumer – Can you explain how the flow of funds works? And where does The Clearing House kind of get involved in that flow?
David Watson 09:05
Sure. I mean, ACH is the kind of plain vanilla mass payment system, if you like. It’s designed as a batch-based clearing and settlement system, with clearing being the sort of the messaging and the pairing up of payments between two sides, and settlement being the confirmation of the movement of funds from one person to another that happens at the end of the process. And really, that ACH batch based system was designed for high volume, within business, our payment files and individual transactions to happen. That clearing happens obviously before settlement, sometimes that same day, sometimes the next day or more. So it’s not designed for Instant Payment Capabilities. It was designed in essence to make sure things happen. The funds themselves can be pulled from a payer’s account, we call that a debit ACH, or pushed out to a payee, so called credit ACH. And those things happen within business hours, not over weekends or holidays. And certain ACH items can settle provisionally, with final settlement only occurring after a passage of time. So we often refer to ACH as a delayed settlement mechanism. There are some same day ACH capabilities, there’s very small volumes of those that happen. And they are limited also by business hours, but the majority of payments are settled the next day or in a couple of days, sometimes over weekends and holidays, three to four days. But it’s a very robust, fantastic all reaching system designed primarily for those batch based clearing and settlement mechanisms.
Peter Renton 10:42
And what is The Clearing House’s role in that process?
David Watson 10:47
Yeah, certainly. Our role much like it is for the other check, RTP, and wire businesses we have is to provide that clearing and settlement mechanism. So we are the place where the matching happens and the confirmation of movement of funds and settlement happens. And that tends to happen with ourselves with ACH, or with the Fed. So we are each operators of ACH systems governed by Nacha. And our systems are interoperable. So people can send their full payment flows to The Clearing House to clear and settle, we will clear and settle those that happen across our network. And those that need to clear and settle into accounts that sit on the Fed’s network with institutions who use the Fed, we have a, for want of a better word, a pipe that exists between the Fed and The Clearing House to ensure the cross settlement of those transactions also. So it has complete ubiquity across the market.
Peter Renton 11:40
Right. Got it. Okay. Okay, so then what about wire? And wire’s also been around for a long time – it’s obviously faster than ACH. But is anything different with wire, other than speed?
David Watson 11:54
Yeah, I think if we were to look at it just as a simple product comparison, wire tends to be high value and speedier and more expensive as a result, as you would expect. And that’s the main difference between wire and ACH if I sort of step back and think about it in laypersons terms. When I look at the difference between what The Clearing House does for wire and the Fed, we have a slight enhanced proposition there where not just speed and sort of the ability to hold large sums of money moves with finality quickly, we also offer within our CHIPS® product, the ability to actually manage your liquidity a bit clearer. So when it comes to wire business at the Fed, you obviously need to fund every payment before it can go out your account or use your overdraft. So each payment uses its own amount of liquidity equivalent to the value of the payment itself. What we do at The Clearing House with CHIPS® is in essence, the same files, formats, capabilities, and confirmation of payment. But we manage the liquidity with participants matching payments off during the day, thus making it a much more efficient process for banks who use CHIPS® versus who use the Fed when it comes to liquidity savings.
Peter Renton 13:03
Got it. Got it. Okay, so then, what about checks? Do you still, I presume you are, still working with checks today? I mean there’s less volume, but it’s nowhere near zero. So how are you processing physical pieces of paper?
David Watson 13:16
No, it’s a great point, right? I think I run a payments company with state of the art payments capabilities. And as we’ll talk about soon, one of the first, or should I say, one of the newest payment networks with RTP has been launched in 40 years, you know as FedNow the last few weeks. But yes, even this morning, I wrote a check to my local PBA, Police Benevolent Association as a donation. So that check business is still alive and well, despite how we may wish it to, perhaps not be. But what we do here at The Clearing House is again the same thing. We process checks, we then enable their clearing and settlement. And we do that using check images. So in this day and age where either through your mobile phone through your banking app, or within a bank branch, where they capture the image of a check. Those images of those checks are then used to clear and settle funds between the different banks and between different accounts. And that’s the same role we play, providing that confirmation of settlement, you know, the removal of aspects of that settlement risk, and actually the pairing off of two sides of a payment transaction as articulated by that original piece of paper that’s there. We definitely do continue to see a reduction in check volumes. And I think once we see the rollout of real time payments from ourselves and the Fed, and various other propositions in the marketplace from card companies and other places, we will continue to see the reduction in checks. We are, as an industry, seeing a bit of an increase in check fraud, actually in the last sort of 12 to 18 months, which I think will accentuate as an industry our conversations around is check still fit for purpose for many of these types of payments that are still flowing over today or should we be more assertively shifting those to some of the more state of the art real time payment systems?
Peter Renton 15:07
Well, let’s talk about real time payments. RTP. You launched this, I think five years ago. And maybe you can tell us a little bit about what you’ve built exactly, and how the technology works.
David Watson 15:21
Certainly, yeah. I mean, yeah, five years ago, we went live with, as I say, the the first new bank payment infrastructure built in the US in over 50 years. And we did so using pretty modern architecture and some much richer global messaging and data standards, which really means that what we have with RTP, or real time payments, our RTP network is a bank account based, real-time clearing and settlement infrastructure. So whereas what I spoke about before, it tends to be with ACH or check, a delayed settlement mechanism. This is the instant and the final funds movement with immediate irrevocable funds availability, 24 by 7. And that is the first time in the US we’ve had such a network. And recently, of course, FedNow has joined us on that journey. But each individual RTP payment clears and settles simultaneously, a little bit like wire, and instantly, but also 24 by 7. We do have a current cap of a million dollars on the real time payments network. And that’s something that’s grown over time and will continue to do so. But I would say that each RTP payment does indeed provide confirmation to the sender. The funds have been received by the beneficiary within seconds. So the idea that when I pay you, the money actually moves immediately. And I know that you have the money immediately, versus other mechanisms where either I think you have the money instantly, because it’s happened over a payment fintech app or a banking app. But actually the settlement happens over ACH in a delayed manner, one or two days later, or in a check example where you’re, maybe even you’re mailing it somewhere and the funds, who knows when they’ll come out of your account. But with real time payments 24 by 7, that settlement happens there and then, and very importantly, you and I are both aware of that confirmation of the movement of funds pretty much instantaneously.
Peter Renton 17:15
Right, right. So are all 22 of the banks involved in The Clearing House, are they all using RTP today? I mean, what about smaller community banks? Any credit unions involved?
David Watson 17:27
Yeah, sure. Look, financial institutions of all types and sizes use RTP. It’s open to any insured depository FI in the United States, any of them can connect to RTP should they wish, and honestly we encourage them want them all to do so. 90% of the FIs on the platform today and on the network today are actually as I mentioned, smaller FIs. By that I mean they’re under $10 billion in assets. And they can be community banks. They can be independent institutions, they can be credit unions. It’s open, as I say, to every and any insured depository. And actually, a large number of them are small to medium enterprises, in addition to some of the big players. What I would say is that, where we are right now, in the early stages of a piece of payment infrastructure is that receive only if you like the ability to receive an instant payment is much easier than obviously sending them. And therefore we do have a natural progression, where institutions tend to join the network with the ability to receive instant payments into their customers accounts as you and I want to receive these instant payments that could be sent to us. And then over time, you begin to realize that you also want to have the ability for your customers to send. Now a send institution obviously has a little bit more work to do, they have to monitor funding levels in the joint account that runs with the system. So the customers are actually able to send payments 24 by 7, and they need to enable the ability in their online banking channels to permit the origination of a real time payment through their banking apps or websites or other mechanisms. So sending institutions, there tends to be a progression where an institution joins, they receive payments, then over time they adjust to become a sending institution as well.
Peter Renton 19:10
Okay, okay. So I’m thinking about it. You mentioned like a lot of the “instant payments” today – I’m using air quotes with my fingers – are, as you point out, not really instant. Their ACH settlement a day or two later, but they appear to be instant to the consumer. What are the use cases that you’re seeing flowing through RTP right now that are truly instant?
David Watson 19:35
Sure. I mean, there’s many examples, I could I could fill the whole podcast. Let me cherry pick a couple of slightly different examples that help accentuate that. The first one I would give is, is instant wage access. So today, a large, or nearly all of us tend to receive our electronic income through a monthly or every two weeks, or weekly sort of payment roll if you like payroll file that gets true batch processing, a big file is sent from your ADP or other system up to the ACH network. And these delayed payments happen over a period of time. For certain industries, for certain individuals, that’s perfectly fine. And there’s no need or desire to change that. However, there is very a much customer need and demand both on the corporate side as well as on the employee side for instant wage access in many industries. And we see a big increase in that when it comes to two sectors, in particular, the so called gig economy, as well as the sort of service industry. So what is instant wage access? You know if I oversimplify, it’s the idea that when you finish your shift in the restaurant, and you clock out at the end of the day on your time, immediately afterwards, that system is linked to log your hours for that day, you know how much money you are due to be paid for that day, and a real time payment can have that money for your shift in your account, seconds after you finish the shift. And that’s a very different model from waiting a month to get your pay slip or other mechanisms. And whether that’s the service industry, or in the new gig economy, where people are perhaps doing a variety of different type of agreements or deals to get paid for the business and the hours. And the work that they do, actually is proven to be one of the most explosive use cases on the network so far.
David Watson 21:17
Another type of example I would give is, we have over the ACH network, the so called ACH debit capability. So the idea whereby if I know your routing number, and I know your account number, you know, I can initiate debits from your account, something that is unique to the United States. Yes, there are controls in place, they’re not necessarily as robust as we might all like, or how it’s being used as maybe not how we would like it. Because the control of the funds removal tends to sit with the person who’s taking the funds. Now what we have with RTP is much bigger control on the send of the payment, if you like. So I actually, yes, you could make a request for a payment from me, but I control pushing the money out of my account. And that’s something that from a real time payment capability is key, that this is very much a push payment network versus a pull payment network, like you see in some aspects of ACH, bringing control back to the person who owns the funds, and the person who’s initiating the payment. But doing so with an overlay, like requests for payment, where you can still have the ability for Verizon to ask you to pay your bill, you just control how it’s paid, when it’s paid and the instant nature of its paying. And again, that use case gets very, very interesting. When you talk about things like when you want to move money to your brokerage account to do some trading, well, nobody wants to then move that money and wait three days for it to land into the brokerage account to start trading, the odds are if you’re choosing to move money in, you probably want it to go in straight away. And therefore the ability to have that brokerage account of your own make a request for payment to your account. And that process instantly in real time when you initiate it and have those funds immediately available in your brokerage account is a very different experience than how we do it today as individuals.
Peter Renton 23:05
For sure, for sure. So like you’ve got a payroll, a run of payroll and say you’ve got, you might have 1000 people sending out money to, like someone’s going to bank with members of RTP, with people that are set up with RTP. And some will not because you don’t quite have 100% coverage. So what happens when the company is trying to do an RTP process and there’s 10/20% of the banks that these people are banking with where they’re not part of the send or receive process? So what happens there?
David Watson 23:38
It’s a really good question, and one we discuss a lot. And the question comes up when you don’t necessarily have complete ubiquity for a new product and service like you have with an old one. And how do you deal with that interim period? What I would say is that the obviously the end state, real time payments, and FedNow, the other player in the market, is for us to have 100% coverage of banks using instant payments. Now that will happen eventually, although in the US without a mandate, the growth is slow and steady. Other countries tend to have mandates and they grow a little bit faster, or have that ubiquity a little bit faster. It’s not customary here in the US for us to rely on mandates for business and commerce. It’s not within our DNA, and it’s not our approach. As such, we’re not necessarily as Big Bang. We don’t have the same sort of seismic event to require all banks to offer instant payments by a certain deadline, as you have in many other countries. But RTP has been growing and the pace continues to accelerate, particularly with FedNow coming in, and we will get there.
David Watson 24:39
So your question is, well, what do we do in the interim? Well, in any interim, there’s a variety of different options. So some institutions actually work with their clients for a mechanism whereby they send all payments over the RTP network that can settle real time and real time at the destination. And then route those that can’t, to the ACH network for now. And as more and more accounts become available, more and more banks, because routing comes to RTP instead of ACH. I think what will happen there as an industry as we add more and more quorums, if you like, across the two platforms, and it’s not always about numbers of banks, it’s also relative to how many clients, how many accounts, and how many payments each bank makes. But as we grow from the 66% of deposit accounts in the US that are connected to RTP today, to a larger number, we’ll see more and more of that availability and ubiquity. Which raises of course, the other question of as FedNow goes on the same journey, at some point as an industry, much like we did with wire, with ACH, with checks, we’ll also have to see what interoperability between those two networks looks like to ensure that across the US economy we have the most broadest accessibility to instant payments for consumers and corporates around the country.
Peter Renton 25:55
So let’s talk about FedNow, I mean what is the primary difference between RTP and FedNow?
David Watson 26:04
I mean, the primary difference really revolves around in most aspects, timing. So the main difference, of course, is the RTP has been running for five years, has a pretty solid track record, and has been in continuous operation during that whole time. It has 66%, as I mentioned, coverage of accounts across the country, over 360 banks and credit unions are live. 150,000 businesses are sending payments on it each month, 3 million consumers use it every month to move money between accounts. And really, we continue to be on that journey of introducing more and more value added features to our core offering whether that’s requests for payments, enhanced security, investigating tokenization of account numbers. Literally that’s the main difference, because Fed is obviously in its infancy. It has 35 financial institutions who are connected, it’s very new to the market. And it’s going to be coming on that journey with us, but a little bit further delayed. What I will say is that FedNow finally coming live actually gives them another emphasis into the market of the importance of real time payments. And I’d say we’ve seen a 7% increase in our volumes, since the go live of FedNow, as people actually use the go live of our competitor to say, yes, this makes sense. Or, in many instances, our pipelines are increasing as many banks who sat on the sidelines because they knew there would be a FedNow are now coming to us and saying, okay, FedNow is going live, we want to do both at once can we start talking to you? So we are seeing through FedNow, also that increased interest in the product and its use cases, which is great.
Peter Renton 27:40
So then FedNow is obviously a competitor, but it’s run by the federal government. So it’s a little bit different. They don’t have to make a profit necessarily, but they could mandate things that you guys could never mandate. So I’m just curious about how you feel. I mean, obviously, you’ve been competing with FedNow with the Federal Reserve for decades. Like are you rooting for FedNow to be really successful? Or are you rooting for it not to be successful and really having RTP become the standard? What’s the thought process there?
David Watson 28:14
Yeah, I mean, for me, it’s, first of all, I would say is infinite. You know, I have a 20 year career in financial services, I’m used to working with someone on a Monday where they’re my client, on a Tuesday it’s the other way around, and I’m their client. On a Wednesday I’m competing against that same bank or person for an RFP of a mutual client. And then on a Thursday, we’re sitting around the table, thrashing through a joint loan book or product offering. And then on a Friday, we’re side by side at a collaborative industry event with 20 other banks. So that weird environment where you’re clients of each other, you compete, you collaborate, and you have a vested interest in the broader industry is a little bit how I compare market infrastructures also. So of course, I compete with the Fed. And of course, it’s my job to make sure that RTP is a hugely successful product. And through competitive spirit, of course, I want more volumes that the Fed has and have the lion’s share of the industry. That said, of course, FedNow is here, we have two instant payment networks in this country. What’s most important for the US economy is that instant payments are successful, regardless to the infrastructure. So both in my role as a custodian of one of those pieces of infrastructure, but also someone who is in essence mandated and comped on a basis of furthering the industry, it’s important to me that the topic of instant payment settlement moves forward. Therefore, we do work with the Fed and more so of late now they’re live, work with them on well, how do we see common areas of interest that is for the betterment of the economy overall? Whether that’s from the taxpayer funded Federal Reserve or the private sector funded consortium that we are, we actually have the same end goal strategically in sight. We just have of course, each hope that our own platform has the lion’s share of the volume when we do so. So there’s a lot of room for collaboration as well as competition in that relationship.
Peter Renton 30:09
Right, right. And then what about the credit card networks? Visa Direct, MasterCard Send, they’re both pushing those as Instant Payment type mechanisms. Do you feel like they’re a competitive threat as well?
David Watson 30:25
In a way yes, but competition is nothing new in payments. And there are numerous payment choices for consumers, businesses, banks, and this will likely only continue to proliferate in the way that we are as an industry, and the way that the fintech sector is playing an active role in helping drive our industry forward. Consumers like choice. And it’s a good thing for commerce, and no one payment solution works for every situation and every customer. There’s room for many different kinds, we already have ACH, wire, real-time, we have different forms of cash, checks. Although probably, as I mentioned, that’s the one that we do want to go away over time. ACH may be good for a certain type of payment, RTP for another. And yeah, there is room for payments over card networks as well, in that model. I think Visa/Mastercard, push to card options work well for some of those use cases. But there are other uses where you know, that instant settlement use case makes a lot more sense. So you know, where’s that? When there’s a need for much richer data to accompany the payment. It’s when there’s a desire for settlement to occur real time for that use case. Existing connectivity, for example, use cases such as instant wage access that I spoke to earlier, is much more straightforward over real time payments, then would be over over a card network that in many instances, actually is delayed settlement behind the scenes. So there’s room for it, there’s definite competition, but I think really, as an industry and as a user or buyer of the payment capabilities, we have to always think in a customer use case basis, and which one makes the most sense for that particular use case.
Peter Renton 31:59
Right. Got it. So I want to talk about fraud for a minute, because I’ve seen so many articles about FedNow and our instant fraud, and you’re from the UK, the UK Faster Payments Service has been around for more than a decade. And Australia as well has had instant payments for a long time. And you guys have been running an instant payments network for five years. How do you handle cases of fraud? And have you seen a lot of attempts with fraud in your system?
David Watson 32:29
Yes, you couldn’t get a topic that is more prominent for consumers or for banks ourselves. It’s huge, right? I mean, as I say by definition, RTP payments are push payments, meaning the account holder has to authorize and send the payment. 101, that’s a better control that we have than some other payment types today. So there’s a first step in how RTP is a powerful tool in combating fraud. Now, of course, we all know that large parts of today’s fraud does also involve tricking someone to make a payment. In other words, the payment is authorized, but it involves a fraud. There, you know, as a network, we’re very aware of the growing trend. And as a result, we’re growing cautiously, especially for consumer-send payments. So that’s one of the reasons we’ve set different transaction limit levels over time and slowly increased it to make sure that once we see controls, test them, we’ll get more comfortable, we increase you know whether that’d be volume from an institution to us or value level for payment types.
David Watson 33:30
Today, p2p payments are focused on sort of “me to me” payments where the consumer sender provides us the account number and bank RTN if you like, and Zelle payments. With Zelle, sort of rules that address fraud loss and allocation. What we’re doing is advancing our request for payment capabilities to enable other consumer payments like bill payments and whatnot, to happen over the RTP network, whether it be changing them to push payments from the individual, but also do so while introducing warranties and dispute resolution, which are aimed at then ensuring that in those cases where a fraud does happen, a consumer will get their money back. So it’s a little two fronted around how you try and prevent the fraud happening in the first place, and how you make sure that if it does happen, you have the right mechanisms in place to actually deal with the warranties and dispute resolution around it. But as a result, I think what we see is that push payments have always had and continue to have a lower rate of fraud than pull payments, like we see in the check fraud that continues to increase year on year, debit fraud that’s been estimated at around $1.2 billion annually by the ABA. You know, I think we see a lot of potential for RTP to remove those frauds. Really, we have to continue to be vigilant on top of that, not just today but going forward and do that not alone. Do that with the banks.
Peter Renton 34:51
Right, right. Okay. I want to close with looking towards the future. And you know, we’re here in this sort of hybrid world now where we’ve got cash, we’ve got checks, we’ve got ACH wire instant payments, and various different other things that are being developed. But what is your vision for the future of instant payments? Are we going to live in a world where most electronic payments are going to be done instantly? And what’s that gonna look like?
David Watson 35:21
Simple answer for me is yes, I mean, much like everything else in society, there is a much greater focus on instant. Consumers and businesses expect instant availability for purchase of the service and product that they’re looking at, whether it’s Amazon working out how they can get your deliveries to you quicker and quicker and quicker, or how your ability to call a cab is drastically increased in terms of instant availability through platforms like Uber, or the streaming of media through Netflix where you want to instantly and at your touch, whether it’s free or pay for play for purchase, the entire industry or multiple industries are moving towards the instant landscape. And payments is no different. It’s moving in the same direction, instant availability. I think what you don’t hear as often is someone sort of sitting around the dinner table saying, I really wish my payments were instant, you know, I don’t know, maybe occasionally at my dinner parties, but it’s just me talking and nobody knows who I’m talking about.
David Watson 36:14
But in reality, what people are asking for in terms of the instant availability of other products and services, has a direct correlation to then the instant payment that comes with it. Payments used to be years ago, 20/30 years ago, payments were an afterthought. How you paid for your service happened way after you got the service or product. Sometimes you had a credit account or people would mail you an invoice. Payment was an afterthought for the back office and for sort of the collections team, if you like. That changed, where payments actually became a product in itself about 10/15 years ago. They were managed more in the front office of both banks and corporates. Treasury teams became more important. Suddenly corporate treasurers were being invited to the board meetings when before the boards didn’t know what the department was.
David Watson 37:03
Where we are today is we’ve gone to the next evolution of that. Payments are actually embedded in the design of a product and service. Amazon that I mentioned before, they have payment e-departments of their services, because when they actually design products and services, they want to understand how they can make that payment aspect happen instantaneously at the same time. So it’s embedded into the actual design of future state products and services, which is a very, very different world from where we were when ACH was founded and payments were sort of mailed out in an invoice you know, please pay within 30 days and the check was mailed back or ACH payment made. And I think that drive is what will really lead us to that instant payments environment that is there to support and be part of the instant product and service environment that we move to in this technological day and age.
Peter Renton 37:49
Okay, David, we’ll have to leave it there. Really fascinating conversation. Thank you so much for coming on the show today.
David Watson 37:55
Thank you, Peter was a pleasure and a topic that I’m very, very passionate about, as are many out there.
Peter Renton 38:02
Well, I hope you enjoyed the show. Thank you so much for listening, please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off I very much appreciate you listening, and I’ll catch you next time. Bye.
