The U.S. is moving faster than ever into seamless, account-to-account payments. That means enterprises and their payments providers are able to initiate a payment from one bank account and direct it to another. Think payroll. Think supply chain.

The system attracting the most interest today is the ACH, a network built on batch processing and lacking authorization. Despite those shortcomings it has some enormous advantages:

• It is ubiquitous. The network effect matters for payments even more than it does for social networks
  It is cheap. Compared to wires and cards, it is inexpensive for transactions that aren’t time critical. And the ACH has sped up with Same Day ACH transactions now available

That lack of authorization and banking’s reliance on authentication methods of varying effectiveness makes these transactions a fraud target. COVID has only increased the fraudsters’ appetite for attacking this channel.

Fraud prevention in this context requires the use of data and intelligence to, among multiple steps, identify out-of-pattern behavior between counter parties.

Join Glenbrook’s Nicole Pinto and George Peabody as they speak with Eli Polanco, CEO and Founder of Nivelo, a company that offers risk scoring for ACH transactions to improve payment success rates and reduce fraudulent transactions.

Listen as she speaks to her entrepreneurial experience and shares her insights into the evolution of bank-to-bank payments.

Click for the transcript

George Peabody:

Welcome to Payments on Fire podcast from Glenbrook Partners about the payments industry, how it works and trends, and its evolution. I’m George Peabody, partner at Glenbrook, and welcome to another episode in our FinTech series. And, today we’re talking about real-time payments, and how important they’ve become here in the US. We’ve seen, and actually heard in our episode 144 pretty recently from Steve Ledford of the Clearing House, how the real-time payments network is growing. We now know that FedNow has got 110 participants in its pilot program. This is the analogous system that the Federal Reserve is standing up.

And, one of the big areas for these real-time payments to be taking places in account-to-account transfers, and account-to-account transactions, which as you might imagine, is very important, particularly, in B2B transactions. And of course, that’s where the big money is in supply chain transactions. And, one of the big challenges in B2B and established supply chains, is indeed maintenance of account information. A big manufacturer that buys from hundreds and thousands of suppliers doesn’t want to be keeping the banking account information to of its suppliers on hand. It’s just too much of a maintenance issue nevermind to a security risk.

So, there are new efforts being stood up to make that more straightforward, such as Phixius from Nacha, which is all about creating, essentially, a business payments directory with a level of trust, and confidence in the security and accuracy of those payment credentials. And underneath all of this, of course, there’s the ACH system that Nacha has build its rules for. And, I’m joined today by my colleague, Nicole Pinto. And Nicole, first of all, great to have you here.

Nicole Pinto:

Thank you.

George Peabody:

Yeah, good. And, I know you’ve been looking at this space with respect to ACH, and I’ve always thought it fond of saying with ACH, it’s got two big attributes. It’s ubiquitous, every bank connects to it and it’s cheap. What else are you seeing?

Nicole Pinto:

Yeah, I think there’s definitely been a lot of renewed energy and focus around ACH lately. That part of it driven by the termination of the Visa, Plaid deal. And, also an interest in using ACH for a broader array of use cases, so that account validation piece that you mentioned earlier for B2B is coming up again. So, there’s an upcoming rule around account validation for web debit transactions as part of Nacha’s broader fraud screening guidelines. So, that kind of in first that there’s some renewed interest, and making ACH more efficient, and safer, secure.

George Peabody:

And, those web debit transactions are, for example, like a PayPal transaction. Where I, as the PayPal user, I’ve given PayPal my credentials and permission to my bank account number, and permission to pull funds from my account.

Nicole Pinto:

Correct, yeah. Or, online transactions using ACH to pay online, but there’s no authorization technically for ACH. Whereas, with cards there’s 3DS, or for wires there’s various steps, sanction screenings, callbacks to kind of verify the transaction or prevent fraud. So here today we have Eli Polanco, CEO and co-founder of a Nivelo.

And, we are going to talk about how Nivelo was helping to enhance ACH infrastructure, especially when it comes to risk mitigation. So Eli, great to have you. Yeah, we’re excited to learn more about the company, and what you’re helping to solve for in this space.

Eli Polanco:

Thanks, Nicole. Thanks for having me.

George Peabody:

I’m really glad you’re here, so go ahead, Nicole.

Nicole Pinto:

Before we get started, we’d just to learn a little bit more about your background and kind of what led you to start the company.

Eli Polanco:

Yeah, absolutely. So, I’m born and raised in the Dominican Republic. I’m an immigrant to the US, I came here when I was 18 to go to college. Since then, I’ve worked in New York, in London, lived in Virginia. So, I feel like I am a citizen of the world, and I come from a background of builders. My parents are entrepreneurs, and so my experience has really, every time I move as an immigrant, I experienced one way or another, a banking edge case. Where the risk infrastructure was not ready for my KYC, my account, my money movement experience.

And, I’ve always wanted to build in the FinTech space, I’ve always wanted to figure out ways to make infrastructure better at those edge cases. And, I’ve been working in the banking industry now for over 10 years, specifically, focusing on payments. And, specifically focusing in on account-to-account payments, how do we make instant delivery of money, earn money, a reality regardless of where you are, what the payment is for? And, that’s really what led me to start building with Nivelo last year. Prior to Nivelo, I was leading the crypto payments team for JP Morgan. So, have always been interested in any redefinition of payment rails that truly shift the way that we conduct risk management.

Nicole Pinto:

Awesome, so what were some of the factors that you saw that led you to start the company?

Eli Polanco:

Yeah, no absolutely. I have been watching the payments space, particularly, in the US for a really long time. 10, 20 years ago, I really saw this FinTech revolution that was happening a lot with merchants and commerce, and the ability embed credit card collections in any merchant and making digital e-commerce a reality for a lot of companies, and really driving that internet economy. And, I love that and I’ve always thought, okay, that’s great for commerce, but how about the trillions of dollars that are used for not commerce payments. But things like paying your rent, paying your mortgage, getting your paycheck, paying your friends and family.

I feel like a lot of those money movement payment use cases had been stuffed for a really long time. And, I saw this shift of revolution from looking at commerce and credit cards to looking at account-to-account payments. I saw companies like Venmo, Gusto, Robinhood, really redefining how to bring speed to any type of payment. And, I saw that revolution really happening from the FinTech space, not at banks, were democratizing those rails. We’ll bring in a closer to businesses and individuals, and I want it to be a closer part of that transformation.

So, I really built Nivelo with an approach that brings it closer to the community that’s building, so FinTechs, and businesses, and corporates. And, really from the ground up building something that is meant to serve the account-to-account payment use case community that is focused on digital enablement, faster pay and self-serve for customer. So, that’s really why I shifted to building not at a large bank, but in a startup for the FinTech community.

George Peabody:

So, Eli, walk us through where Nivelo fits in What would an ACH transaction, would that be a good place to start?

Eli Polanco:

Yeah, yeah that would be a good place to start. I think, as you rightly called out most of these payments, these $55 trillion of payments as the actual amount of payments in a year that flows through ACH. That’s about 99% of account-to-account payments in some way gets settled on the ACH network.

So, if you’re going to be innovating in that space, that is the natural starting point. I also like to talk about to really understand the pain point that we’re helping solve, I really like to evaluate what’s been happening with COVID in 2020. Because, I really think it showed what happens when an industry wants to move to digital fast payments, and doesn’t have the right infrastructure to do it.

We saw last year, come March, come April, a ton of industry businesses, whether it’s supply chain or payroll, what have you, that still have traditionally been using checks or slow legacy infrastructure like ACH to settle payments being in a bit of a bind. And, we saw a growth in credit scams, 45% growth in payroll diversion scams. We saw cyber criminals stealing identities, taking over accounts. We saw payments getting lost, error, scams going through because we were moving to digital payments without, as Nicole pointed out, the right authorization and decisioning techniques that have not been built traditionally for non-banks acting in the account-to-account space.

So for us, what we do is we’ve built APIs that can be embedded into businesses, whether you’re a corporate or a FinTech that’s trying to hyper boost the speed of your payments without security lapses, you can come to us and we provide this real time verification, decisioning, and routing infrastructure for your payments. So, think of it as a one-stop shop to initiate an account-to-account payment. So, when a business is saying, “Hey, I’m going to go and pay my employees.” At the point of initiation of that payment, our API gets a call out and we do three main things on that payment.

The first is real time fraud monitoring, so am I sending the payment to the right beneficiary? We analyze cash flow data from the payer and the payee for essentially a real-time credit underwriting model so that you can answer, for example, does the sender have the funds they claim to have? And we do, by the way, unlimited account and identity verification of payments. Each payment, each account, every time the payment is about to go through.

So, it’s a different shift to how things are done, traditionally account to account, which is batch base flow at the end of the day. And, where maybe account validation is done at onboarding, and fraud mitigation is done after the payment, and the scans and the errors have happened. We do that in a real-time way, preemptively via APIs. And, then the other thing that we do is, because of our ability to triage that payment for risks, and really understand the likelihood of credit, fraud, or admin failures.

We’re also able to help them out route the payment for the client, to the settlement scenario that can best fit what the payee needs and what the payer wants. So, should you settle this in a five-day, four-day ACA transaction? Do you want to perhaps use same day ACH? Do you want to pay this out via RTP and what have you?

George Peabody:

You clearly keeping at least one of your elements that go into your risk model is keeping some history with respect to the sender and receiver payers. Tell us a little bit about that.

Eli Polanco:

Yeah, and I think this is actually pretty interesting, because one of the reasons that this is one of the beauties of thinking of payment processing, not as a thing that only banks should and can do. But, something that the payer and the payee can actually be involved in doing. And, let me clarify what that means, today when you settle on account-to-account payment, you usually input a routing number, and account number, and a name, and you send that along.

And, then over the process of five days, you’ve got banks talking to each other, and tapping into their databases for accounts and identities to say, “Yeah, that routing number and account number looks okay.” That takes five days is very messaging heavy. And, all that you’re validating is the [inaudible 00:12:46], routing number and account number. Whereas, if you weren’t doing any level of validation at the start of the payment, and you have access to the payer and payee relationship data, think contracts, think past payment history, think invoices.

All of these things that are usually stored within the payer and payee, you have a lot more rich remittance data about those two notes, how they are supposed to be communicating, what that flow should look like. And, so if anything atypical is happening, you can unearth it. And, that is why this isn’t just about validating an address, is about validating for fraud, credit lapses, and big issues that can lead to multimillion dollars of payments. If you have, for example, supply chain payment gone wrong.

George Peabody:

So, tell us about the implementation process for your solution. Is there an anti that your customer should go through in terms of data prep, trying to provide you with history, or these contractual relationships? Or, is this something you’re able to build up really only in the fullness of time as we’ve had in transaction experience to base your decisioning on?

Eli Polanco:

In order for us to do our job, we bring together these algorithms that use past cashflow and historical behavior, and we couple that with verification databases. Now, on this algorithm that we need to build with historical data, we’ve created an on-ramp, onboarding that can be done within a single day self serve via our dashboards and API tooling.

So, to go from zero to hero, as we like to call it, you as a business that’s doing payments, or a service bureau, or anyone that’s originating payments in a large scale, and you want to use our service, you need a developer. You need someone that your risk or operations person to come talk to us and onboard our API. We give you access to our dashboard, which allows you to, similar to any other API company, short code snippet. You’re able to embedded in your payment initiation flow, and that gets you initial access to our risk scoring mechanisms.

We have in our dashboard, an ability to very quickly upload the files that we’re talking about, which include past payment history of the payer and the payee and past failure history. That flow works really frictionless, because we include data validation techniques, parsing techniques, so that we can deal with structured and unstructured data.

This is the beauty, the payer and the payee usually already have this information. We just create an [crosstalk 00:15:44] where you can provide it to us so that we can calibrate your particular scoring with the needed contextual information of your network. But, we can also just start scoring without it. We’ve actually amassed a pretty sizable database, And this is one of the reasons why we try to be very specific about which sectors we’re serving when.

Right now, we’re really focused on how workers get paid, the relationship between an employer and an employee. And this includes payments to salary workers, to contractors, gig economy workers, and we’ve created an amazing underwriting model for this industry. We will later apply the same techniques to ensure tech, to bill pay, and to other traditional industries that are using account-to-account payment. But-

George Peabody:

Let me just be clear, you use the term underwriting a couple of times, and it’s not about credit extension. It’s about risk measurement and risk scoring.

Eli Polanco:

Yes, and what’s interesting, going back to Nicole’s point that ACH is growing, right. Even as you have new payment rails like RTP, new synthetic payment rails like an in-network wallet. And, think of what Cash App does, for example, or what PayPal does. ACH is still growing, and why is that? Because, it’s still the deepest and more secure way to connect to a bank account and pull money from it.

As long as you’re willing to wait five days, you can pull a lot of money from an account from someone that owes you. And, so that 7% year-to-year growth that we’re seeing in ACH is actually coupled with the growth of faster payouts, because the debit leg of ACH is being coupled with the credit leg of those faster payment mechanisms. And, so if you are moving to faster payments period today, you need to start thinking of the debit leg of the payment, almost as a lending, to be honest.

You’re taking in five day liquidity risks to be able to increase the payout of your beneficiary. It’s what is what Venmo, Cash App, PayPal, all of these guys do that. And, so when I talk about credit underwriting, I talk about answering the question. What is the likelihood that the sender doesn’t have the funds that they claim to have? If the likelihood of default is high, then perhaps I should reconsider offering RTP push out on this account.

If it’s slow, I should offer it. There’s no way they should be waiting five days for their payment. But you’re absolutely right. This is a probabilistic intelligence engine. We, Nivelo, are not providing the credit. We are just providing the underwriting intelligence.

George Peabody:

So, I’ve got one more question for Eli, and then I’ll ask Nicole to interrogate you. What’s the results? What kind of impact are your customers seeing compared to their pre-Nivelo days?

Eli Polanco:

Yeah, no, absolutely. So, as I mentioned, we’re doing a lot of work, helping companies do faster disbursements to contractors, economy workers, traditional employees just wanting to receive their way to faster. We just crossed our first billion dollar month of volume that has been secured. And, in our clients we’ve seen over 50% reduction of settlement failures and payments. So, this includes unrecovered losses from non-debit.

So you’ve got a bounced check, has got a non-sufficient fund return, admin, return errors where we catch before it happens. If someone’s input at the wrong address, and fraud as well. So, obviously our clients measure historically how much false they’ve seen, when they’ve hooked up Nivelo, they’ve seen a 50% plus reduction in those numbers. We’re really excited about what we’re seeing, and we’ve done it while at the same time, providing folks with a mechanism to receive their payments faster, which we’re pretty excited about.

George Peabody:

Right.

Nicole Pinto:

Yeah, that’s really encouraging, really impressive. And, I know when you and I first met, we talked a lot about the income use case payouts, and I’d be curious to learn what’s next. And, you mentioned you’re starting a red deliberately with specific verticals, so what other use cases are you envisioning kind of for future?

Eli Polanco:

Yeah, no, we’re already doing work for an extension and to bill pay the ability of two businesses to settle bills against each other. I mean, that is one area that if you’ve ever tried to pay for an invoice handle invoice, you know how annoying it can be. Not just… Folks don’t want to optimize their liquidity, they don’t want to park cash for five days for the sake of paying a vendor bill. And, so we really think that this hyper boost that we brought to the payroll industry, we can bring to the bill pay industry. So, that’s going to be our next sector for sure.

Nicole Pinto:

And, one of the trends we’re seeing is the impetus to use faster payments in consumer bill pay, and that’s consistently comes up as a top use case. What are you thinking about enhanced risk or fraud mitigation measures for RTP transactions? Because, my past life, when I was trying to implement that operations at the bank that I was at, that was one of the top concerns that among other things. But, how are you thinking about that for in a faster payments environment?

Eli Polanco:

And, you’re asking specifically for consumer bill pay, so-

Nicole Pinto:

That, and then also just faster payments generally too.

Eli Polanco:

Yeah, no, I think… And, this is where I think one of the biggest issues with faster payments still is the debit pool, the collection. When you look at the operational rules, and the rollouts of these rails, there’s usually a restriction on, you cannot use it for debit. Which is why ACH is still being used and it’s still… So, I see RTP and faster payouts in the next couple of years to be really about disbursements, and not really about collections, because the rails are not ready for this liquidity balance check.

Like banks are still not sharing that data with each other, and until they do at the wholesale level, we’re talking at the RTDS, RTP level. We’re not going to see RTP being the best mechanism for bill pay, specifically consumer bill pay. I think with businesses, we might see that happening faster just because the volumes are higher, and because the risk is higher, there are exceptions in some of the data that you can access.

But, yeah so that would be my take on using RTP for collections. The infrastructure itself is not ready for debit, and when you look at what’s being rolled out and usually reads, “Oh, yeah for sure you can use this for payouts, but we’re restricting debit until X date.” When the X is usually unknown, so-

George Peabody:

Well, sure and in the middle is the request for payment message type and which sort of a functional proxy for debits. And, that conversation with Steve the other day indicated they’re just getting started with usage of that particular message type. So, it’s a push payment system, there’s no doubt about it.

Eli Polanco:

Yeah, no, and you’re right. It’s a hybrid, because it’s still not as good as the authority to pull. It’s a request to pay, but if you can first aim for our request to pay. And, if it’s still doesn’t work, then you go with the authorized pool-

George Peabody:

We’ll see.

Eli Polanco:

… then back coupling could work, but then it becomes a little complicated. Until you have an assurance of the funds that are getting paid to you to being available from the requester side, it’s going to be a challenge for folks to use RTP for debit, collections and [inaudible 00:24:10].

George Peabody:

So, Eli, I assume that your connectivity into Phixius the Nacha platform is really about bringing in more data for your originators and fewer models to make the right decisions.

Eli Polanco:

Yeah, that’s correct. Our company has three big goals as it relates to payment infrastructure. One is make payments faster, the other one is make payments more secure. The third is on track data that for too long hasn’t been made available when payments are initiated. And, Phixius really placed into that value. We are looking for any mechanism that will allow us to leverage secure and accurate data around the payer, the payee, or the flow itself for real time decisioning at the beginning of the payment.

And honestly, I’m interested in anything that acknowledges that there needs to be a secure way to exchange data between financial depository institutions and non-financial depository institutions. That is key in democratizing access to finance, and Phixius is doing some really interesting cryptographic techniques to allow that, and we’re all for it. We are an early adopter and Phixius and we think it’s going to be really helpful on trapping data for the sake of payment security.

George Peabody:

I love what you’re pointing to is the role of the data around the payment, the historical data around past payment behavior, and how valuable that’s become. Not only, well, in building trust in the system, as well as efficiencies, and better user experiences, and all, all of those things. But, some of the systems that we’ve relied on, they emerged well before a data carrying capability was in place. And, now we’ve got data that’s coming from the sources around the payment. It’s just an interesting historical thing to watch. Nicole, take it away.

Nicole Pinto:

What are some of the upcoming challenges that you see that you’re going to tackle head on as you continue?

Eli Polanco:

Really, for us it’s going to be about growth. I mean, we are definitely a company that the more data we have flowing, the more connection points we have into the system, the better the uplift will be. Because, all of that flows into better underwriting mechanisms, better decisioning algorithms. So, our focus is about growth. Last year for us was around building. We built our product, we launched our beta. This year, we’re coming out of beta and it’s about bringing the wins that we had with our early adopters to the rest of the community.

Nicole Pinto:

Excellent, well, I’m very excited to keep watching you guys and we’ll definitely look out for further announcements.

Eli Polanco:

Thank you so much, and-

George Peabody:

Yeah, thank you Eli.

Eli Polanco:

… thanks for the interest in our work.

Nicole Pinto:

Absolutely.

George Peabody:

All right, don’t go anywhere. I’m going to do a few things, like turn off the recording and do the thing that normally terrifies me where I’ve stopped the-