Reflections of Nacha Payments 2017

Reflections of Nacha Payments 2017

Analysts have definite fixed points in our year. For me, one is the spring conference season, and which nearly always includes Nacha Payments, the big US payments conference. I was unable to attend last year, so I was particularly looking forward to returning this year. Indeed, there are groups of people I often only see at the event.

After being away, the first thing was that struck the exhibition floor was now much, much smaller. Not just that the stands were smaller, but there were fewer of them as well. Indeed, no banks had stands (though several had meeting “pods”). I also noticed that, at some point (or perhaps I had never noticed it), Nacha had snuck onto the Payments logo the word Faster. And the floor and conference sessions were abuzz with talk of real-time payments.

This had some interesting side effects.

First, the belle of the ball was The Clearing House, with virtually every conversation I had referencing their real-time solution directly or indirectly. Same Day ACH, by comparison, didn’t come up in a single conversation at all. Even in the few sessions I managed to attend, it was only briefly mentioned.

Second, the number of attendees (by our estimates) was up, though still down on a few years ago (my trip report blog for 2012 reported 2,500 vs. the 1800 this year). The result was a definite buzz, particularly on the exhibition floor, where most vendors reported good activity and good levels of conversation.

Third, the topic of conversation was real-time. If name checks in discussions are a valid, albeit unscientific, measure of which real-time solution will succeed, then The Clearing House is significantly ahead of Zelle, but with no other real-time solution even mentioned. Indeed, there seemed to be surprise that so many solutions were going through the Fed process. Whilst the Fed obviously is respecting confidentiality of those going through the process, the vendors themselves need to be very vocal and visible, or they could find themselves being seen as late to the party. I’m party to a number of the names, but I’ve not seen anything from those organisations at all.

Finally, and most interesting, was the sudden appearance of APIs. In Europe, because of PSD2, for the last couple of years, APIs have been something that banks have to discuss because they will become mandated. Their appearance in the US has quite probably been triggered by some of the international banks, but the types of banks discussing them was much broader. In Europe, APIs and real-time will most likely go hand-in-hand – it’ll be interesting whether that will be the case in the US too.

Next year Nacha Payments is back in San Diego. Given where the real-time adoption will be, it’s likely to be a pivotal moment in the industry. I think that sets up the event to be a must attend event. See you in San Diego!

What MasterCards’ Acquisition of VocaLink might mean

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

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 Clearing House and Real-Time Payments

The Clearing House and Real-Time Payments
The game is afoot! The announcement from The Clearing House regarding real-time payments last week came as no surprise – indeed, it felt inevitable. The Federal Reserves’ significant work around the topic, and their clear determination that it would happen, seems a clear indication that they wouldn’t rest until it was delivered. The question then is how will it be delivered. The Feds conclusion from its consultation was that new infrastructure would be required, rather than re-using existing infrastructure. This posed two questions 1) would the Fed build it themselves? Or 2) do they would expect someone else to build it, and how would that actually happen? We dismissed question 1 pretty quickly – it would have created a monopoly (just about the only in US payments), and the experience of the Fed Same Day service perhaps highlighted they weren’t perhaps best placed to deliver. Who does that leave? Having already nailed their flag to the mast with their Same-Day proposal, and stating that they believed that this was adequately fast and would complement a real-time solution, Nacha was unlikely (at least at this juncture) to put themselves forward. Some seem to have considered the Fed comment about not re-using debit card infrastructure as something of a swipe at PayNet. Given the number of banks already connected to it, and the work around the rules and business model, we think that this rather underestimates what PayNet can do. CME look to have thrown their hat in the ring, with their investment in Dwolla. Whilst CME claim Dwolla is real-time, it isn’t as the chart on Dwolla’s own website even says itself. Yes, in some instances, but equally, it can take up to 4 days. Unless, of course, there is exciting news coming from Dwolla soon….! There are a few other names being mentioned as waiting in the wings – we’ve certainly heard lots of rumours about who else is preparing to announce, though have seen no hard evidence so far. So does this mean that this is a slam dunk for The Clearing House? Not quite. First, to the point around monopolies, we don’t believe the Fed will be satisfied with just one infrastructure, unless it also has a significant shift in policy in mind. Secondly, the Clearing House proposal is very high level. Whilst we’re not saying it won’t be suitable, we’ve yet to see enough to be confident that it will be. The Clearing House has a strong track record in this regard, so we think its just a timing issue. Thirdly, as the proverb suggests, whilst you can lead the horse to water, you can’t necessarily make it drink. We’d define success in this instance as wide-spread uptake. We’re less clear as to how that will happen – will Clearing House Members be mandated to use? Incentivised? As my recent report on real-time payments sets out, the success is in large dependent on how well it is positioned in relation to other payment choices, and how well it is product managed. One thing is for certain though. This won’t be my last blog on the topic – there will be plenty more to happen yet!

Zapp makes progress

Zapp makes progress
Clients following our payments research will know of our interest in Zapp. Zapp is a new UK payment method that utilises the Faster Payments scheme. Zapp is a way for the merchant to create a Faster Payment in the consumers device (mobile/tablet/laptop) using a wide variety of methods (bar code, SMS, QR code, etc). This provides all the relevant data – value, account details, etc. The consumer then just authorises the payment. We’re interested for a number of reasons. Firstly, as mentioned in my first real-time payments research report, there seems to be a myth that real-time payments are P2P payments primarily. Zapp is very much a way for consumers to buy things both online and offline. Secondly, there has been a move to thinking about real-time payments enabling other products, rather than just being a standalone payment method. These are known as overlay services, and a number of initiatives (Australia, Finland) have explicitly stated their desire for overlay services to be created. A few overlay services have been created for Faster Payments – PingIt and PayM for example – Zapp is by far the biggest, most ambitious, and potentially, disruptive. Thirdly, Zapp state that is cheaper than the alternatives. Implicit in this, is cheaper than cards. Zapp are very careful to ensure the language they use doesn’t imply its card like (and therefore potentially subject any regulation around fees that could be considered interchange). Yet the route to market includes using large merchant acquirers. With any new payment method, adoption is slow. Payments are a 2-sided market. You need sufficient numbers of consumers to have adopted to interest merchants – yet consumers won’t adopt something that they can’t use. Zapp has potentially half the equation solved, with large banks signed up and Faster Payments reaching 100% of UK current accounts. It was interesting to see then the announcement this week that Zapp have signed some major retailers to take part. Furthermore, these are big, household names – Sainsburys and Asda are two of the largest supermarkets in the UK. With official launch in 2015, there is still a long way to go, but the chances of success seem to improve daily.

Real-Time Payments Gathering Pace

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

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.

Is the ACH the Best Path to Faster Payments?

Is the ACH the Best Path to Faster Payments?
Yesterday, NACHA issued a press release announcing initial steps towards same-day ACH. This is a second attempt at accelerating ACH payments. Rather than a “big bang”, this second attempt advocates a phased approach, inviting banks to invest in three projects instead of one. The sentiment seems worthwhile, but I’m not convinced that this is a good idea. In considering faster payments, there are many considerations. Among them: what exactly needs to be faster and who is the customer? Who stands to benefit from faster payments? What Needs to be Faster? Particularly in the case of real-time payments, it is important to distinguish: 1) Notification of payment 2) Payment guarantee/ funds availability and, 3) Settlement In my view, accelerating 1 and 2 are more important than 3 and less costly to bring about. Who is the customer? Who would stand to benefit the most? Many assert strong and growing consumer demand for faster retail payments. We see more interest than demand, particularly if costs are factored in. Celent surveyed over a thousand US consumers in August 2013. In part, we explored payment expectations. With little variation across age demographics, more consumers expect instant confirmation of payment (59%) than expect real time gross settlement (42%). Other factors weigh more heavily than speed. When I Pay Source: Celent survey of US consumers, July 2013, n=1,053 In my view, merchants and regulators are more invested in faster payments than are consumers. Faster payments mean earlier access to funds (retailers) and less systemic risk (regulators). That’s why most systemically important payment systems are RTGS. Faster payments are a certainty – in time. What’s far from certain is how it comes to be – what rails are used. Some advocate using the ACH. I disagree. Moreover, I find the current dissatisfaction with the ACH amusing. Designed as an efficient, electronic, float-neutral payment system, the ACH is highly effective at fulfilling its designed purpose. More recent demands on the ACH, while not without efficacy, have also resulted in increased cost and complexity. Same-day ACH, in my opinion, is simply not compelling. If enacted through a rules change and offered optionally at a premium price, it may succeed, but would result in precious little use. Real-time ACH would be altogether different – a fool’s errand in my opinion. The ACH works splendidly when used as designed. An analogy if I may. The NACHA press release stated: “The Network has always served as a foundation upon which we can build and innovate to meet the growing needs of today’s users and those of tomorrow.” That sounds a bit like inviting telco’s to build more phone booths in response to consumer’s demand for mobility. The “square peg in a round hole” analogy may work as well. I’d love to hear your views.

Faster…or fast enough?

Faster…or fast enough?
My last post mentioned that I was on a panel at International Payments Summit talking about real time payments. The topic is one that has cropped up many times recently in analyst inquiry calls in the last few months. With all the activity in the market, such as the decision in Australia to implement such a system, it’s perhaps not that surprising. What is surprising though is the number of myths and misunderstandings surrounding the topic. I thought it worth highlighting – and straightening – just a few here. #1. Real time isn’t always really real-time The most frequent myth is that everything end-to-end is suddenly instant. In reality, most (though not all) real-time systems are real-time in notification and authorisation, not settlement. In fact, in some systems in certain situations, settlement can take place days later. The starting point should be what needs to happen, and at what speed. In deed, for many payments, its the certainty, not the speed that matters. #2 Real time isn’t p2p One belief is that there is a pent-up demand for real time to enable p2p (or perhaps, more accurately, a2a) transactions. The use case is often quoted to be that of splitting a dinner check – one person pays the restaurant, the rest then have to find a way to pay the payer. But in reality, how often does that happen? The default in the UK at least would be tell the restaurant how to split the check across multiple cards. Even if that weren’t the case, the numbers of times that this happens would not be large enough to justify the investment on its own. The starting point should be use case driven though: who would benefit from sending – or receiving – funds faster than the current method. In most systems so far, these have been typically b2c or c2b, or indeed, mandated so the business case isn’t the issue. #3. Real time isn’t just payments In many instances around the world, real-time systems are often running 24/7. That poses, at the very least, 2 problems. Firstly, what other systems are required to run in real time, 24/7? Fraud checking, authorisation, notification and authentication systems are amongst the obvious, but banks have found dependencies on many others, and not just in the sending side. Secondly, maintaining systems becomes far more complicated if they have to always be available, and being “always on” means that maintenance becomes more important than ever.