The Evolving ACH Landscape

We’ve been tracking blockchain, distributed ledgers, etc for a number of years, and we’ve always been enthusiastic with the promise…but pointed out that it isn’t quite there yet, at least for payments. An announcement today caught our eyes:

"The Innovation Engineering team at Royal Bank of Scotland has built a Clearing and Settlement Mechanism (CSM) based on the Ethereum distributed ledger and smart contract platform."

In the Finextra article announcing it it says:

"The test results evidenced a throughput of 100 payments per second, with 6 simulated banks, and a single trip mean time of 3 seconds and maximum time of 8 seconds," states the bank. "This is the level appropriate for a national level domestic payments system."

So first the positives. That’s significantly higher throughput than any other test we’ve seen so far, by a fair margin. It’s also faster than many other systems.

But…

We’d perhaps take issue with “appropriate level” though. Not a criticism of the test or the technology, but more a reflection of the task.

100 payments per second sounds an awful lot to those not in payments. With 86,400 seconds in a day, that’s 8.4m transactions a day. UK Faster Payments in August was running at around 3.2m transactions a day. Yet of course payments don’t flow uniformly through out the day or even day by day. Anecdotally, we’ve been told that c.70% of Faster Payment transactions are sent between the last settlement of the day and the first one the next day, a window of c. 16 hours. But realistically few of those will be made at, say, 3am. The actual window is therefore closer to 8 hours or less for those 70%. That means, even if they are running evenly, it's approximately 110 transactions per second.

The system will be scalable, so it would seem feasible for Faster Payments to be replaced by what was tested. However, in fact it perhaps highlights the real issue. On an average day, it would cope. It’s planning for the unaverage day that’s the issue. The UK ACH system, BACS, highlights this well.

BACS processes on an average day roughly 15m transactions. Given the operating window for the actual processing (10pm to 4am), that’s actually c. 700 transactions a second, significantly higher that the test through-put. But systems have to be designed to cope with worst case scenarios, referred to as peak days. These occur when month ends meet quarter ends meet various other things such as Public Holidays. The BACS record peak day to date is 103.7m. That’s a staggering 4,800 transactions a second.

What do we learn from this?

The technology being tested has evolved rapidly, and is continuing to do so. The volumes now being processed are rising rapidly. Yet today the technology probably isn’t ready for a national payment system quite yet, with the exception of some smaller countries or for specific lower volume systems such as high value. Furthermore, it's important that the systems are tested from a peak day plus a comfortable amount of head room on top (nobody wants to operate at 99.99% capacity!)

But compared to as little as 18 months ago it, the conversation has shifted noticeably from could it replace to should it replace, signifying the very real possibility that it will happen in the near future. Coupled with APIs and PSD2, the payments industry could look radically different in less than a decade.

 

 

What MasterCards’ Acquisition of VocaLink might mean

Today, MasterCard announced the acquisition of VocaLink  in the UK.

Before I start I should say I have worked for both organisations, and any comments that I make are mine, and nor am I mentioning anything that isn’t in the public domain.

In some ways the acquisition is surprising, given all that is happening – PSD2, the PSR threatening to fundamentally change VocaLinks ownership and the PSF (it’s payments – never too far from an acronym!) talking about replacing the infrastructure altogether.

It’s easy to think this is perhaps MasterCard re-inserting themselves back into the UK market as since their acquisition of the Switch brand, virtually all the cards have flipped to Visa. I think it’s actually more for three reasons.

Firstly, real-time payments. I’ve written about the charge towards real-time, and VocaLink are well positioned. They operate the UK Faster Payment Service in the UK, and the underlying technology is at the heart of the systems in Singapore, Thailand and The Clearing House in the US. In addition, the market is likely to explode. The ECB said at a recent conference that they expect 60-80% of all SEPA CT transactions to migrate to SEPA Inst. Even at today’s volumes, that’s 12 billion transactions in addition to the UK’s 1 billion. That's volume any processor would be eyeing. Coupled with PSD2, where card volumes may well fall, then is rationale alone for the acquisition.

Secondly, look at electronic payments more broadly. The VocaLink core payments engine is award winning. It was built to win business across Europe in the post-SEPA world, and is capable of handling multiple schemes on the same platform. Indeed, part of Sweden’s transactions run on it to today alongside a very different UK scheme. Imagine now the offering that MasterCard has in say emerging markets – the ability to deliver 100% of electronic payments.

The third is when you bang together some of the technologies of the two businesses. These are ideas, and of course they are far harder than they sound but just think about the possibilities:

– Real-time payments + MasterCard global network = true real-time global ACH;

– ACH/real-time + low value debit transactions = decoupled debit on your own transactions;

– ISO20222 remitance data + VocaLink B2B skills+ MasterCard global network + MasterCard analytics + MasterCard finances = Synegra meets Tungsten Network, but on steroids.

There is much still to find out, and yet more to mull over, but the signs suggest some exciting times ahead.

Faster Than A Speeding Payment: The Race To Real-Time Is Here

It’s been two years since my last reports on real-time payments, and much has happened, not least of which is the perception and understanding the industry has. As a result, the discussions in many countries that don’t have real-time payments infrastructure are now when they will adopt, rather than why would they adopt. Yet in that intervening period, it’s not just the pace of adoption that has accelerated, but that market and thinking around real-time itself has matured as well.

As a result, I’ve just written a new report titled Faster Than A Speeding Payment: The Race To Real-Time Is Here.

Central to the report is the fact that rather than just being “faster ACH”, it is increasing being seen (and should be seen!) as a fundamentally different payment type than anything that has gone before it. As a result, banks, whether they are about to implement their first system or whether an existing user, need to think about where real-time is heading, and to plan accordingly.

This thinking – and more – is set out in the report, and seeks to explore the following questions:

  1. What is the pace of real-time payment adoption?
  2. Why should our bank plan for real-time payments?
  3. What should a bank do regarding real-time payments?

The pace question is clearly indicated in one of the charts from the report:

table

From the 32 countries identified in the initial report (and the criteria we used, which is important!), in 2 years we’ve gone to 42 countries, cross-border systems, and countries who claimed they didn’t see the reason why they would adopt, at least one (the US) is currently reviewing more than 20 systems, all of which might co-exist.

The report goes in to much more detail, but there is a clear implication. Real-time is firmly here, and it’s increasingly being seen as the payment system of the future. Banks that who try to limit the scope of projects today then may be saving themselves money in the short -term, but they are likely to creating more work, more costly work, in the future. Given that most payment networks have a life span measured in decades, it’s a long time to be stuck with a compromise.

Ultimately, however, it’s about building a digital bank as well. Without doing so, banks will be providing the tools to their competitors, yet unable to use them themselves. Adding a real-time solution to a process that takes weeks, such as a bank loan, makes no difference in terms of the proposition. Fintechs are able to use a real-time payment as the enabling element of a digital experience because all of the solution set is real-time – an instant decision and payment of the loan sum is a game changer.

Digital payments without a digital bank would seem futile.

The next step in European ACH competition?

Yesterday saw very interesting news coming out of Europe regarding a joint venture between 6 European ACHs.  To understand why many of us have sat up and taken VERY close interest in the announcement, we need to review some recent history first. Much of this will be covered in more detail in a forthcoming report on ACHs. In the very early days of SEPA, the European Commission made many public comments. As SEPA was as much a political goal as anything, many of these were observations on how the Commission thought the market ought to develop. Given the size of the task and the perceived reluctance to the banks to do anything about SEPA, the Commission narrowed down the observations to a set of specific requirements, eventually culminating in the regulations that made migration mandatory in Euro countries. The downside is that some of the initial elements triggered some activity, but they were never fully pushed through. One such item was the Commissions perceiving their to be an over-supply in payments processors. In the Commissions view, a single market would reduce the 50+ processors to between 5 and 7. That would be enough for a competitive market, but not so many for an inefficient market. The latter stance is based on the fact that processing is broadly a fixed cost business and so the larger the volumes processed, the cheaper the cost per transaction is to process. As a result of this statement was a flurry of activity amongst the ACHs to be one of the “survivors”. It triggered a wave of mergers (Equens is a German/Dutch/Italian merger for example), near mergers (everyone courted everyone else!) and direct approaches to banks and markets to acquire them as customers and boost volumes. But whilst there were mergers, the market broadly remained unchanged. Indeed, some markets chose to build their own SEPA compliant ACH, rather than use the services of a SEPA-ready ACH. There are many reasons for this, not least ownership and control. The announcement yesterday therefore was very significant. At face value, 6 ACHs are going to collaboratively process cross-border SEPA payments. Given the tiny volumes, this isn’t exciting. However, dig deeper, and it becomes clear that Equens – arguably the largest ACH in Europe – is providing all the infrastructure and services to the new company, and the new joint entity company is registered at… Equens HQ. Those other 5 ACHs are considerably smaller – their volumes combined are still dwarfed by Equens. Secondly – it’s for cross-border SEPA payments today but mentions possibly delivering the real-time payments interoperability that’ll be required going forward. That means more ad more services that will be offered by Equens to these other ACHs. It’s particularly noteworthy as many believe that EBA Clearing has been positioning itself to provide exactly that service, and has been leading the discussions. The third point is a broader one. There has been considerably more talk in the last few months about processing, given various elements of PSD2. It’s not yet clear whether the scheme/processor split will apply to “just” card companies, particularly when some of the ACHs process cards. A number of organisations have also mooted whether the XS2A provision potentially provides a way to bypass ACHs – that is break the connection between bank and ACH. Given the range of potential impacts, it seems likely that there will at least some impact. Finally, we are aware of more than one discussion in Europe about the future of that countries ACH, particularly as they ponder on how to deliver a real-time payments solution for that country. All bets are off. The net result suggests to me that we’re entering new phase for payments processors, particulalrly ACH, which has been a relatively stable market for many years. The industry – and technology – is in a very different place than when the discussions happened in c. 2005. What made sense then may not make sense now. We believe that the announcement yesterday will be just the first of a number over the next 2 years. The phrases exciting times and ACHs can be at last mentioned in the same sentence!

Same-day ACH: is anyone excited?

This week’s NACHA vote in favor of mandatory rules changes enabling same-day ACH settlement is no surprise. Some of the press coverage suggests this represents some sort of significant achievement. Really? By March 2018 (when the network is currently expected to be able to fully support systemwide changes) I predict there will be industrywide consensus on the inadequacy of the measure. Even proponents of the measure suggest the vast majority of ACH traffic will remain the next-day float-neutral type – for good reason. The majority of payments will not see a change for the same reasons the ACH has served the industry so well for so long. Specifically: • Dependability • Low-cost With this vote, we’re now going to burden this lowest cost of payments networks with perpetual, systemic cost increases for all participants. And we’ll do so for a very small percentage of network volume. NACHA’s own estimates predict that by 2027 (I don’t make predictions that far into the future) a whopping 1.4 billion same-day payments. That’s 6% of 2014 ACH network volume – presumably a much smaller percentage of 2027 volume. NACHA estimates industrywide implementation costs of $118 million initially and $49 million annually. So, by 2027, the industry will have spent nearly $500 million so banks can offer customers a premium priced same-day payment option using the ACH when other, faster options already exist. I think the NACHA volume estimates are optimistic and find the characterization of same-day ACH as “modernizing the payment system” curious. What’s modernizing about running the same batch system a few times each day instead of once each day? If demand is for real-time payments, this initiative will be found sadly lacking. It’s like installing more pay phones as a way to compete with mobile devices. Am I missing something?

Reflections on Nacha Payments 2015

As many of you know, I’ve been on something of a world tour, which started with Nacha Payments in New Orleans in mid-April. Expect a flurry of blogs as I pass on my impressions from my travels, starting with the Nacha show. Whilst I may live in London, I have global coverage. Payments is an interesting business – whilst its perhaps one thing that unites all businesses and consumers in all countries, and we are moving increasingly to global standards, the finer details show that it is still a parochial business. I don’t mean that negatively, more that payments have evolved over decades, if not centuries, to address specific local needs. That’s why the SEPA project was so difficult – even what we meant by certain terms turned out to be not straight forward. Nacha Payments this year was in New Orleans. For those not familiar, it’s a long standing show focused primarily on the ACH business. It has a very active conference schedule – I was on a panel with Dwolla and BBVA talking about real-time payments – and an exhibition floor. The US is the single largest payments market, so it’s not surprising that the show is very US in focus. What still surprises me, even now, is the fact that in a shrinking list of exhibitors each year, every time I attend there are vendors I’ve never even heard of, let alone am familiar with their products. This demonstrates the size of the market rather than my lack of knowledge! Take-aways for me: What a difference a year makes. Last year, one senior banker said real-time payments wouldn’t happen in the US in his lifetime. This year, it’s seen as a when, no question about if. Indeed, all the talk was about the “secret” (so secret that every meeting I attended asked me about it!) meeting the key Clearing House banks were having to build out the requirements for the Clearing House solution. The general opinion is that the Clearing House is seeking to go live long before the Fed working groups even get close to having a plan for requirement gathering. More on this soon. Business is alive and well. At first glance, the exhibition floor looks notably smaller than the previous year. One thing to note is that the conference is often attended by more junior people, who also get re-certification credits for attending sessions – with so many sessions to choose from, the exhibition hall is often very quiet. Yet all the vendors reported greater numbers of good meetings, with tangible next steps – in short everyone was happy. Which several said wasn’t the case of some of the new sexier shows as Money2020. It strikes me that they’re very different events. Looking overseas. Payments are largely domestic in nature and what works in one country doesn’t always work in another. For example, check technology from the US (which writes 2/3rds of all checks globally) won’t be of interest in Finland (as checks were abolished in 1993!). As such, payment conferences tend to be very domestic in focus. Not a criticism, just pragmatic. Given the changes the US is facing, and given that many other countries have already faced many of the challenges, it was interesting to see such a noticeable increase in conversations seeking an international viewpoint. I don’t think we’re anywhere close to a global market – but the US seems to have taken a significant swing from “not invented here=not relevant” to “don’t re-invent the wheel”. See you next year, in Phoenix!

Braveheart or need a brave heart?

A somewhat topical post, if mildly parochial, but which serves to highlight something more broadly. On September 18th , a new nation could be born, as Scotland goes to the polls to vote whether it should become independent from the rest of the UK. The debate has raged for months, if not years. The latest polls suggests a Yes win, with a flurry of activity now from the No camp. Why blog about this? Well there are some interesting questions that would be raised in relation to payments that are worth highlighting here. Note that this is based on the hard line being stated primarily from the No camp before the vote, but one assumes compromises would be made if there were a Yes vote. Currency Whilst Scottish banks print and issue their own money currently (I have a Scotland-only £100 bank note on my desk), the Bank of England has categorically stated that there cannot be a shared currency. Debate rages about how quickly Scotland could join Europe, so equally the Euro is out as well Central bank Scotland would require a central bank to be able to issue a currency. The creation of one is not necessarily a technical challenge, but the funding of it in the short term might be. Big business Many big banks have already pledged to move their head quarters out of Scotland should there be a Yes vote – Royal Bank of Scotland, Lloyds (owners of Bank of Scotland) and National Australia Group (owners of Clydesdale). Note that this isn’t moving out of Scotland altogether – however, at least one unnamed source has hinted doing business in Scotland will become harder and less attractive. A new currency also means that every business doing business in or with Scotland would need to make the appropriate changes, and an equivalent changeover to the Euro switch would be required.   So what does this mean for payments? Well, nobody quite knows. On day 1, systems could keep running. But longer term, it poses some interesting questions. The options crudely are: Keep as is – people continue to clear and settle in Sterling, regardless of location. Given the hard line on currency union (or lack of), this seems unlikely Shared infrastructure – the infrastructure remains, but is dual currency, with an additional settlement site at the new central bank of Scotland. That works for Scotland-Scotland, and UK-UK (the sort codes could be mapped to allow this). This doesn’t address the cross-border issue. Parallel infrastructure – Scotland recreates all its own systems. This would allow Scotland to plan the ideal system, and with low volumes, it would be relatively cheap to buy. However, it would require every bank and every corporate to change how they process paymenst as well… very expensive! So what does this mean for payments? The fate of a nation is a big thing, and we shouldn’t trivialise it for the thing I’m interested in – payments. But it does serve to highlight how embedded payments are and how critical they are, yet the debate hasn’t mentioned them once. Without a payment system, any country would collapse in hours. Nobody is suggesting that this will happen of course – but then nobody is actually suggesting *anything*. Because payments are rarely thought about by anyone outside of payments, it’s pretty safe to assume that no-one has considered this fundamental part of how a country functions, and it will need to be addressed rapidly. I best go dust off my passport and get some Scottish visas I think!

Real-Time Payments Gathering Pace

A number of you will know that I’ve been working on real-time payments with many clients around the world, and will have seen previews of some of the information in my forthcoming reports. One chart I have shown regularly is the likely adoption curve for real-time payments. This takes a classic innovation adoption bell curve. The top of the curve is where the market has reached 50% adoption. Of course, the question then becomes how many and of how many to plot where we are today. Many of the conversations I have with clients often start with a belief that there are only a handful of schemes globally. The truth is rather different. A good but not exhaustive scan showed that there were actually 35 systems globally. Using a set of criteria, such as levels of GDP, maturity of electronic payments, presence of an RTGS system, we estimate that there are 115 countries which we believe could adopt a real-time systems. That actually puts us just over 30% market adoption. At this point, I ought to point out that there are a few fudges to this figure. For example, note that we say systems, not countries, as some countries actually more than one real-time system (India for example). But it doesn’t detract from the underlying trend. Indeed, the use of the past tense was deliberate, as yesterday saw the announcement from the Finnish Federation of Financial Services of an RFI for a real-time payment system, bringing the total to 36. We also hear rumours of several other countries in advanced discussions. This also supports our other hypothesis. A study of the adoption of RTGS systems globally proves remarkably similar to both the shape of the adoption curve but also to the timelines. If we take that adoption pattern and project forwards, it would suggest that the next 5 years will see a flurry, if not significant numbers, of other systems being announced. It would seem that we are on the cusp of a revolution in payment processing – are you ready?

NACHA Payments 2014 Roundup

After attending IPS, NACHA Payments is always a slightly strange experience. Not bad, just quite a different set-up. IPS is very international – if anything the UK is under represented – and more senior. NACHA offers much to the more junior member of staff, particularly those seeking to renew their AAP accreditation. This means that the attendance is much, much higher, but that there is a real mix of people. As a result, some of the sessions are detailed, nitty-gritty discussions, great for learning about areas I don’t usually cover. The main topic of conversation for me was real-time payments. I’ve spoken a couple of times in the past at NACHA on the topic, partly because of my involvement in the UK Faster Payments scheme, and clients will know about my forth coming series of reports on the topic. Real-time was also mentioned in numerous places across the agenda, with several friends and former colleagues speaking. The focus of my first report was also the starting point for many of my conversations – addressing the many myths that seem to pervade about real-time. These include:
  • that it’s only in the UK and Singapore (it’s not – there are at least 35 other systems globally)
  • that its new and leading edge (its not – at least one system is 40 years old)
  • that it’ll canabalise wire revenue so should only be a p2p proposition (multiple examples proving that this doesn’t have to be the case!)
Shortly before NACHA Payments, NACHA announced it’s enhanced Same Day ACH proposals which also came under great debate. It’s my belief, and shared by a growing number of people, that the Fed has decided the US *will* have a real-time payments system. As such, one group of people saw this announcement as being a response to ensure that NACHA is not bypassed in some way. Jan Estep, the CEO, of NACHA, was on one of the panel sessions, and was asked about how this attempt will be any different to the previous NACHA proposal. The vote on that proposal received a Yes from the majority of banks, but not the 75% voting majority to pass it. It’s widely believed a handful of big banks effectively blocked the proposal. To my point at the beginning about there being a large operational audience, Jan gave an excellent and detailed explanation of how this proposal differed from the last. But a number of the audience suspected that the question was rather more pointed and was really asking why the blocking banks would suddenly vote for this now. That specific question was never addressed. By the time the conference finished, I was left with the impression that the debate had turned a corner, or at least moved into a new phase. Over the last year, I’ve increasingly found that people have formulated their opinions on the subject. But as my discussions highlighted, there are a lot of misconceptions, and I’m not always sure some of the people contributing to the debate aren’t muddying the waters further. I think the next step for the Fed is to address that, and even if it stops short of compiling a list of requirements, a view on what isn’t the solution would be helpful. I understand the logic of the NACHA proposal, but I fear it’s a short-term solution to a long term problem.

Real-time Payments: Different questions, funnily enough, get different answers.

Bob recently posted some views on the same day ACH – as always, great points, well made. Somehow, in Twittersphere, some of the comments got attributed to me, and from that some of those have got re-interpreted as me being anti real-time payments. As my daughters would say, whatever! That’s not the point of this blog. What really struck me was the fact that some saw Bob and I as having different opinions. I would say that I don’t believe we do (at least not in the majority of the issues), but that we were addressing different questions, and, unsurprisingly, end up with different answers. To crudely paraphrase Bob’s post, he quite rightly points out that the business case, based on today’s business, doesn’t stack up. Secondly, he points out that consumers don’t really want real-time payments – how many of us wake up with the urge to make a payment?! Let’s pose a different question, the one I’ve been primarily discussing. If you were starting with a blank piece of paper, would you replicate what we have, or would you build something better and faster? A no brainer. Second question. The current system is roughly 25 years old – do we think that the same system will still be good enough in another 25 years? The answer is again obviously no. No-one in the industry who’s close to this thinks that this isn’t going to happen. The questions we’re really asking are when, what is the trigger, how quick and how soon (i.e. incremental improvements or big bang)? Interestingly, there seems to be less discussion on how, with ACH seeming to be the default. Whilst I’m not suggesting that ACH isn’t an option or even where the majority of other systems have developed worldwide, it’s interesting in that there are already real-time systems in the market, running primarily on card backbones. The answers to those questions are still much for debate. And who gets to answer them even less so. One noticeable difference compared to some countries is the governance of payments in the US. I believe – and please correct me if I’m wrong – that there is no single body who could regulate and dictate such a change. Equally, there is no body managing the future direction of the payments industry. Which, considering that in revenue terms, the US payments is bigger than both the US hotel and US airline industry *combined*, is both remarkable and perhaps something of a risk to the industry. As the US faces more regulation in the same way as many other regions around the world already have, a joined up, united front would seem an absolute need. We may not all agree when we need real-time, but I’d be curious to know whether we agree on the need for an overarching payments body to protect our interests going forward. This blog is written on the eve of Nacha Payments, and the real-time topic is already dominating the discussions before the event has even started. The Nacha announcement has been met with a wide range of responses, but with more than a few suggesting that Nacha has both over stated their position, and that the solution misses the point. The week is shaping up to be very interesting.