Episode 192 – The Rising Value of Rich Account Data with George Throckmorton, Nacha

Yvette Bohanan

February 22, 2023

POF Podcast

The Payments Network that Moves Data, Not Money

Take a listen to Yvette Bohanan and George Peabody as they speak with George Throckmorton, Senior Director at Nacha and the head of Nacha’s Phixius data network initiative.

Payments networks are remarkable constructions. They bring competitors together around a common set of rules and capabilities that then move millions of transactions a day and untold billions in value. That’s the network effect.

While payment networks are globally ubiquitous—and often decades old—the idea of a dedicated data network is still relatively young. That’s what Phixius, an initiative of Nacha, is all about, sharing the critical data about a payment but not itself moving the money.

What do we mean by the “data about the payment”? The sender and receiver bank account numbers are fundamental; we have to know the source and destination of funds. But how do we know they are correct? That’s important because it gets expensive if a transaction fails.

There are other errors that can trip a transaction. The sending bank needs to know:

  • It has the right routing and account number of the target account before executing the payment
  • It has the correct name associated with that account
  • And, that the account is able to receive funds via the chosen payment method

With that data in hand, the transaction error rate drops. Fraud and risk management operations improve. Before Phixius, an ACH payment originator would not know until at least the following day if a transaction failed because of mismatched account data. Now, that can be determined ahead of the payment itself. It also reduces error management headaches at both of the intermediate financial institutions.

Not Just Technology

Nacha has ticked many of the boxes needed to scale its data network. Networks are a story that goes way beyond technology.

  • Nacha is a neutral party, indeed a non-profit, whose expertise lies in its rule making as much as technology design. It doesn’t compete with its bank customers.
  • Phixius is a data conduit, not a data store. It leaves data management up to the parties at either end.
  • Its rules and tech provide a growing API set, data formatting based on ISO 20022, operating rules, and transaction logging.
  • Phixius is a cost-following service. As with many payment networks, Phixius expects its direct users to mark-up its data services to their own end users.

Account Validation is the Beginning

The initial target use case was B2B transactions in an attempt to wean businesses off of checks because checks remain hugely popular with businesses paying one another. A snail-mailed check, along with copies of the invoices it is paying for, provides the reconciliation information needed by the supplier. The data is in the mail.

B2B use case adoption lagged because change is hard and inertia hard to overcome. (We suspect that, once the Phixius network expands, vendors of ERP and accounting systems will address the complications of integrating the new data service to support straight through processing).

What the Nacha team found instead was strong interest in the fundamental use case of real-time account validation. Just making sure that routing and account numbers match up to the account owner’s name is a big deal. And Phixius data validation is applicable to both batch and real-time payment systems.

The Phixius model of data sharing will be applied to other vertical use cases. It will be intriguing to see where it goes next.

Ramping Up

Phixius has been in operation for more than a year and has handled over 2 million transactions. Keep in mind that once an account has been validated, there’s no need for frequent re-validation so comparing that number to transaction count is misleading. Phixius has banks, fintechs, and processors connected to the network. Now it’s time to scale up participation. We think the network’s advantages should drive adoption.

For more background on Phixius, take a listen to George’s interview with Peter Tapling, advisor to Nacha, in Episode 131 – Bridging the Payment Information Gap with Phixius.

And, of course, go to the Phixius.org site.

George Peabody:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends in its evolution. I’m George Peabody, co-host of Payments on Fire. And, as always, I’m delighted to be back with you, Yvette – how are you?

Yvette Bohanan:

I’m doing well, George. How are you today?

George Peabody:

Very well. So this is going to be really interesting. I, of course, love co-hosting Payments on Fire with you, Yvette. And today, we’re going to have a conversation that’s near and dear to my heart about data, and specifically, bank account numbers. And their importance as data that’s used to obviously make payments happen, speed payments operation. But also, account numbers have everything to do with fraud management. And it’s not just the account number, it’s also the process of how did we validate that account number. How do we know that it’s good? What other things do we know about it? What other metadata do we know about the behavior of an account? And that’s validation. And so yeah, it’s going to be a really interesting discussion.

Yvette Bohanan:

Absolutely. Saying account numbers are critical for processing a payment transaction, it’s sort of one of those things that we say it’s an oh-duh moment.

George Peabody:

You’re right.

Yvette Bohanan:

But the rub is, exactly what you’re pointing out, this is sensitive information, first of all. And everyone, regulators, people in the industry, they’re all over protecting sensitive data. Right? But you also have to validate this stuff to make sure that you have proper controls around the transaction. Otherwise, you’re not going to be able to initiate it, you’re not going to be able to complete the payment. Right? It’s going to go south one way or another. And it’s been historically really tough to implement those proper risk controls around the sensitive data. So getting into things like authentication of the account number. Actually by and large, if you think of the six systemically important payment systems, it’s not happening in many of them these days still, as we sit here in 2023.

George Peabody:

Hardly a real-time function.

Yvette Bohanan:

Exactly, exactly. So I’m super excited, because this question about what do we do, how do we put controls around this data comes up over and over and over again in our workshops, in our bootcamps. Right? People are trying to figure this out. And people who are new in the industry are a little bit shocked. They don’t have more tools at their disposal. So I am personally very, very excited today that we are going to be talking about Phixius. And that is Phixius with a ph, folks. P-H-I-X-I-U-S. It’s an initiative, it’s a technology, there’s a rule set for it. And it’s being brought into the industry by an organization that’s at the center of US payments, Nacha. Right? National Automated Clearing House Association.

But before we get into our guest and today’s topic, George, we’re going to roll back the time machine to a time when I was not on Payments on Fire, but you certainly were. Episode 131, August of 2020, you chatted with a gentleman named Peter Tapley about Phixius.

George Peabody:

Proof that I’ve been interested in data for a very long time.

Yvette Bohanan:

You have been interested in data and payments for a very long time. And Phixius was just getting stood up. A lot’s happened since then. And if our listeners haven’t listened to that episode, don’t leave now, but I highly recommend it. There’s stuff that you covered a lot of ground in that episode with Peter on how Phixius works, the mechanics, the participants, Nacha’s role in developing and managing it. And we’ll get into a little bit of that today to set some context as well. But then we had episode 184 more recently, with Michael Herd from Nacha. And we like to say, and coined in a PV post a while back, “Payments after 50 years is hotter than ever.” And we just love saying that. And Nacha is hotter than ever with ACH.

George Peabody:

ACH is hot.

Yvette Bohanan:

ACH is hot. And so they’ve been around for 50 years between or since 2020 and today, in 2023. There’s been some significant rules changes and updates in the operating rules for ACH. And one of them is account validation, among other things. Right? So then the question is, well, if there’s a rule about account validation now for web debit transactions, just to be clear, how are we supposed to do that? Right? Are we supposed to make that happen? And there’s a lot of ways to do that, but today we’re going to talk about Phixius. And we’re going to connect the dots between 2020 and 2023, and catch up on how it’s progressing since it’s been stood up.

So, with all of that being said, it is my pleasure to welcome George Throckmorton to our episode today. George is the senior director at Nacha, and the leader of the Phixius program. George, welcome to Payments on Fire.

George Throckmorton:

Thank you, Yvette. Pleasure to be here.

George Peabody:

So George, let’s not waste any time. Let’s get into this. If you and I are in an elevator, what’s the high-level story of Phixius? What is it?

George Throckmorton:

Yeah. I think, George, the story of Phixius will be one that’s familiar to our listeners. It really began with Nacha really doing one of the things we do best, in convening the industry. We are a convener, as part of our association role in the payments industry. And when we convened the industry over the past 10 years or so, it was with a primary focus of what are the hurdles to really getting the remaining checks out of the payment system in the United States, and converting them to electronic. And specific, I think we all saw from the Fed studies and from all of the knowledge that we all have, that consumers had pretty much given up on checks and they were moving to electronic, but it wasn’t the same for businesses.

So we went and talked to businesses about why they were still writing checks and what were some of the reasons they didn’t convert. And really, all of these reasons boiled down to one thing, it was around information and data. And I think when we talk about data and information, people tend to think, well, we’re talking about the data that travels with the payment, maybe an invoice number, maybe the name of the company that I’m paying. And in fact, that’s not the data we’re talking about. When we talk to businesses, they explain that there are many, many steps that we have to go through before we get to the step of originating a payment. And these are the challenges that we have. And then also on the receiving side, there are many steps that have to occur before that payment is applied. And so if we could work out a way in which we could exchange information better than what we do today, that would speed up the process for us to stop writing checks and move to electronic payment.

I think, Yvette, you referenced her conversation with Mike Herd. And certainly, Nacha has seen a very strong ramp up in B2B adoption for ACH. Double-digit increase year over year. And probably some of that is out of necessity. Obviously, the pandemic. But even before then, we saw businesses starting to ramp up. So even if that’s the case, if we’re not necessarily now trying to figure out how do we get adoption to occur, because maybe it is occurring now, it’s still important to understand the experience that businesses are going to have with ACH and how that’s going to work for them. So that’s where the story began.

And what the response was from Nacha after looking at options, what we found was there were solutions out in the industry. And many businesses would say, “Look, I’m a member of,” whatever network, and these networks are growing. And those networks are created for that purpose. So that we can exchange information with one another. We can be sure that we know the party on the other end is who they say they are. And we can comfortably and securely exchange payments. However, those same businesses said it’s not for everyone. While there were some that were satisfied and were moving to electronic payment, there was a long tail of businesses who were saying we’re basically underserved. We’re being required to join multiple solutions and networks, and we can’t manage that. There’s no standard to what we’re doing and we need help. And so they began to talk about a utility that might exist and could help do this.

So that’s where Nacha also agreed with that gap, and we decided to invest in the technology and resources and people, and provide that utility out to the industry. But George, they didn’t make it easy, and it never is when you’re moving forward for the entire industry. Right? It’s not one customer or one client, it’s for everyone. So what the guardrails that were set upon Nacha if we were to proceed, was really three basic things, I think. One industry said, “If you’re going to do something, we need to embrace and adopt standardization. That is one of the problems we have today. If we’re going to share information with one another or verify data with one another, there has to be a standard way in which we do it. If not, we can’t adopt it. It’s just impossible to get kind of the mass adoption we want.” So that was one.

Number two, was the paper that’s needed to do data exchange today and verification is cumbersome. And when I mean paper, I mean contractual obligations. I think we’ve all seen the rise of what might be called open banking. Right? What is called open banking. Globally, and even some of that in the US. And I’m not talking about open banking today, but it is similar in that we’re sharing data with one party to another. But they’re all bound without kind of a central authority by these multilateral contracts that really negate, I think, the opportunity to have this mass adoption and where we get over the hump. So that was the next hurdle, how do we get rid of these contracts?

And then the final guardrail for Nacha was we don’t want another centralized database. We have those today. There are many consortium models in which we can upload our data and we’ll get permission, and then we can get data from that source. And if you’re just going to do another one of those, don’t bother. What we need is interoperability. So those are all big challenges, but I think we were able to meet those.

George Peabody:

So Phixius, you’ve got that in place, it’s amazing. Just quickly, how long have you been operating? How long has the Phixius platform been in place and what kind of volume are you seeing of these messages that its transporting?

George Throckmorton:

Yeah, for the Phixius, it is a peer-to-peer network. And as Yvette mentioned, we talked to Peter back in the kind of early days in 2000, I guess ’21 or 2020. After we went through a period of proof of concept, we did a pilot where we had a few organizations connect. And we tested out our technology, we tested out our rules. An important part of Phixius is not just how do you build the infrastructure, it’s the governance, it’s the rules. So we did all that, George, and went live approximately two years ago. Since then, we’ve onboarded a number of organizations onto the network. And I’d love to talk about that further, about what does the network look like and what it’s comprised of. But since that time period, we’ve done over 2 million transactions, if you will. I don’t want to confuse folks, in that Phixius is a peer-to-peer network for information exchange, it does not move money. So when I’m talking about transactions-

Yvette Bohanan:

Exactly. It’s not a payment system, George. Right? I was just going to jump in and clarify that. And I’m glad you got there, because you have a rule set, which most payment systems do, and you have a message format, but you’re not settling funds, you’re not touching money. You’re not even really holding account data. Right? You’re sort of, for lack of a better word, gentling trust between these parties.

George Throckmorton:

That’s correct. Yeah. I think, certainly we didn’t need another rail to move money on. And I think the ACH network has proven to be very much in demand, as we’ve said, by all businesses as we’ve seen that growth. But as Phixius is not moving money, it is just moving data from one point to another. And sometimes that data’s being moved so it can be verified. Sometimes that data’s being moved so it can be exchanged. And Phixius’ role in this data exchange is really just to establish the handshake between the two businesses. The data is moved back and forth via an API. And those APIs that are used, they’re all on ISO 20022 APIs. So thereby you get the standardization. Everybody doesn’t have their own API that are on the Phixius network, they all use the standard APIs to exchange data with one another. So we’ve been very, I think, excited about the adoption for Phixius and how we’ve seen it grow, George, over just a short period of time.

George Peabody:

Got to say, George, how impressed I am that you’ve been able to get the members of Phixius, the users of Phixius to get over that. And I loved how you put this when we were talking in a pre-call, about everyone wants to get, no one wants to give, and you’re able to get these different parties together to agree us, you say it on the standard rule set. What’s proven to be the big draw?

George Throckmorton:

Yeah, it’s a great question. So when you’re developing something like this, anyone who’s ever tried it knows that creating a network effect is very difficult. George referenced, everybody wants to get, no one wants to give, and so you have to have two parties. So what Nacha found was the original use cases for Phixius, for B2B, where those businesses want to exchange kind of large amounts of data about one another. What we found was they really weren’t ready to consume that data or a way in which they could send it. So we went back out to the industry and we said, “Well, that’s okay. We’ve already built the infrastructure. What is it that you’re focused on?” And as that kind of led us into, it was about risk management and fraud. And when we dove in even deeper, they said, “This is really about validation and account validation.”

Even before Nacha had issued its web debit validation rule, businesses were still saying, “We are focused on this.” Not because it’s running rampant and we have a bunch of fraud and all that. Not saying that at all. There’s no data to say any of that. But we believe that for the future and as we’re seeing transaction volume growing, we need to be prepared, we need to have these kind of solutions in place. So, George, for us, that was really kind of the watershed moment where we said, “Okay, why don’t we shift a little bit? We still have the other API that we can use and a few of those, but let’s do the account validation API.” Everyone had a need for that.

And remember, Phixius is not just for ACH, you can validate data for any payment type. It’s payment agnostic as far as what data could be exchanged. But clearly, account validation is an ACH thing. And so we at Nacha joined the network ourselves, because we could provide this service and get that network effect created. And that’s what we did. And so by far, as a matter of fact, all transactions that I talked about, these 2 million and plus and growing, they are account validation transactions and they are compliant with the web debit rule. And then they go even a little bit further than what Nacho would require for an account validation. And remember, that rule only requires that you validate the first time you see a new account. There’s no need to validate it over and over and over. And certainly-

George Peabody:

I was thinking the same thing.

George Throckmorton:

And certainly, the businesses that are connected to Phixius, they know that they. They’ve built the logic in to say, “Let’s not revalidate when we just checked it an hour ago. We don’t need to check it again.” Validation for Phixius, as I mentioned with the web debit rule in mind, is about validating the routing and account number of the receiving account. Whether it’s a debit or a credit, it works no matter what. But when you’re originating an ACH transaction, and again, think about Phixius, well before I’ve even sent the money, I haven’t even connected yet. I need to do this beforehand. Maybe when the customer enrolls for electronic payment or maybe when I onboard a new business and I get their information, I’m checking all of this data before I even, as I said, initiate the first payment.

So routing number is the first data element. And believe it or not, routing number is not an easy thing anymore. The Fed has stopped publishing routing numbers on their website, which was available to anyone. And so now we found that businesses don’t have updated lists. They don’t know when routing numbers have been retired. They don’t know when new ones are introduced. And okay, there’s not a lot of this going on. We all know there’s not a lot of new banks signing up in the United States, but it’s a lot of activity. And so we are able to validate the routing number as a legitimate one that belongs to a bank.

We also, along with the routing number, the account number provided, we’re able to determine if that structure matches the routing number. Every bank has a specific structure, and structure could be how many digits, how many spaces, how many zeros, leading zeros, those kind of things. Everything that you would see on the micro line, right on the check. And so we’re able to validate that.

And then we are checking a resource on the backend for transactional data on that routing and account number. As merchants, billers, processors, all of these types of institutions, have banks reported data on this routing and account number, either good data or bad data. Right? Transactions have gone through, it’s a transacting account. Or maybe there’s been some returns, like account closed, that would be a red flag that that account should not be used. Or maybe it’s account not found, has been that return code. So we’re able to provide that information back to the requester.

And then most recently, recent as this week, we’ve now implemented an API that will do all of that, plus also validate first name and last name on an account. How’s that been reported. And even a business account. I will caution to say, I think business account validation is harder than consumer account.

Yvette Bohanan:

Absolutely.

George Throckmorton:

I mean, how they do business as and what the name and it’s just harder. So I’m waiting and hoping that things will get better and better as account validation data is available. But right now it is offered and we’re seeing a lot of success.

Yvette Bohanan:

George, just to kind of dig into this for a sec. I want to double click on a couple things with you here, because what you’re saying is really powerful. When you say can, in real time, before you even actually initiate the payment transaction, you’re getting this validation. A lot of what you were describing is what the answers to the sorts of questions you really want to know before you initiate a payment would be, is the account good? Is it open? Is it closed? Is it transacting? A lot of that feels a lot like the return codes we would get from ACH files after the payments originated, and maybe days later, especially if there’s a weekend and bank holidays or whatever.

So in these 2 million transactions that you’ve processed, are there any returns? Are we saying that, for example, on the ACH system, you use Phixius upfront and you eliminate, by and large, the vast majority of returns coming through in return files from the RDFI? Is that a fair statement?

George Throckmorton:

Yeah. But I have two points I think in my response to that. First of all, you’re correct. We haven’t published any of these yet, but in the coming months we’ll have some case studies for Phixius users. And you’re right, since they’ve turned on account validation and they turned it on for all their transaction codes, whether it’s a web debit… I’m sorry to get too much in the weeds there for-

Yvette Bohanan:

No, it’s okay. You’re fine, you’re fine. Go on.

George Throckmorton:

Or PPD credit or CCD or whatever it might be, they turn it all on. What we have heard from them, and we’re getting ready to document, is they have tremendous savings in administrative returns. A return is expensive for a business, so they estimate it could cost them as much as $20 or $25 to work a return. By the time you factor in the fees and the research and then you figure out kind of what went wrong. So you’re right, there’s a lot of that we’re preventing.

There are also methods of account validation on the ACH network. There’s the ACH prenote that has been an option, as far as I know, forever on the network. In which you kind of sent a $0 transaction and you hope that you don’t get a response, because that’s a no news is good news transaction. And then there’s a micro deposits, they became really popular over the last decade or so.

Yvette Bohanan:

PayPal pioneered all that, right? They needed a way –

George Throckmorton:

Certainly did. Yeah, they engineered, “Hey, this is a good way to know if someone owns an account.” And they can tell us what two amounts we posted in the account. So micro deposits are away as well. And Nacha has just introduced some rules around micro deposits to make them safer, and so that’s a good thing. But what we found, and I think, George, you mentioned this in your opening comments, is what Phixius is providing I think as a, I don’t know, the optimal solution. One, is because it happens in real time. You get the response and so you’re not waiting a day or hours or whatever it might be. And also, things like micro deposit, they have a pretty large abandonment rates, where the consumer doesn’t tell you what. They refuse to follow through, and so you have to make the decision, are you going to take the risk anyway.

But those transactions are fine and Nacha obviously is aware of those and they’re part of compliant with the web debit rule. But any technology is also what Nacha recognizes can provide account validation services. So, for Phixius, it really meant this was a way to create the network effect. I think once we get this rolling even further and we see more transactions, more people coming to the network, and really, this is a low cost option for them as a utility being provided by Nacho, I think we’ll see growth in other APIs. We’re already working this year on new APIs that will allow reporting of return data. So that can even help even further to prevent fraud in these admin returns. Really focus on risk management and fraud, I think that will be a continued theme throughout the rest of this year. All exciting.

George Peabody:

George, Yvette and I are full of questions here. Question, who is coming to Phixius? Who are your users? I mean, I naturally think of banks, but I’m getting a sense you’ve got other parties who are connecting up and actually using the system.

George Throckmorton:

Yeah. The way the network functions, believe it or not, is pretty similar to an example of the ACH network. So in Phixius, we do have organizations who connect directly to the network. We call them credentialed service providers. It just means that they’ve kind of passed the mustard with Nacha. They’re reputable companies and we know the business that they’re in. And these types of businesses are everything from large payment networks, which are on your card networks. They include large fintechs, providing services downstream to banks. And you’re right, George, and financial institutions as well.

And so when you think about the network, the number of companies connected directly to Phixius doesn’t have to be that big. Right? Because those companies are providing services downstream. Let’s use a fintech for example. If a fintech connects to Phixius and they are now able to do an account validation request, they can do that for themselves if they want, but typically they’re not. They’re doing that so they can provide a service to the bank. So the bank is the customer of the fintech. And the bank says, “I need to offer account validation to my businesses.” Fintech says, “Here’s the product, it’s white labeled, you call it whatever you want.” The businesses of those banks are using it. They don’t know about Phixius, they don’t need to know. But, much like the ACH network, businesses love ACH and they love using the network, but they don’t connect directly to it, they have to go through a bank. Phixius is the same way, where businesses are using the network. They may not be aware of it, they just know that they press the button and that they get a response.

So because of that, the network can grow very rapidly. When I say how many people are or how many companies are connected directly to the network, I would tell you that for me, my ultimate goal would say we don’t need but maybe 50 of these organizations, and we have mass adoption because of that downstream effect. Today we’re already servicing, I believe it’s more than 10,000 businesses have access to Phixius. Where they can enter routing and account number, and it ultimately goes through the network and they get the response. So the network is open to all of those businesses, George, it’s just not FIs. But certainly, you’re right, they’re great use cases for FIs who need to share data with one another. Here’s a secure way in which they can do it.

Yvette Bohanan:

So you’re saying a couple interesting things here. We’re going to shift gears on you a little bit, George. One of the things that you’ve brought up is the fact that Phixius works across any payment system. Really, it’s payment system agnostic in the sense that you’re a validation provider. You’ve also mentioned that you’ve standardized messaging of exchange on ISO 20022, which is smart. Right? You get a lot of bang for your buck with ISO 20022. We also know that this is based on some distributed ledger technology. Now, dare I say blockchain. And in other parts of the industry there’s sort of this battle ranging, debate ranging battle royale, I don’t know, about can ISO 20022 exist with distributed ledger token-based technology or not and all that kind of stuff. And here you’ve done this. You’ve married up the ISO 20022 SPAC framework with an underpinning of a distributed ledger technology.

So can you just tell us what the distributed ledger technology part is doing? We’ve been talking a lot about the API and the payload supported by ISO 20022. But what’s this underpinning being used for? We don’t need to explain what blockchain is, there’s plenty of tutorials out there on the internet for that. But how have you married this up? Because I think that’s the interesting aspect to this.

George Throckmorton:

Yeah, my approach related to technology was certainly this was a new initiative for Nacha. I don’t have a big development team, so I needed a partner. And I went out and looked at many options to who could partner and help me create Phixius. So what we did, Yvette and George, is kind of took the approach of let’s not figure out how we can make blockchain work, it’s more of, “Let me tell you what I need from a systems perspective. What are my user requirement, how I need the system to function, and you tell me what the best technology is for that.” And so we did that.

And what you need to understand about Phixius, and it does leverage the Ethereum fork and all this in blockchain and smart contracts and all of that. But really, the relevance to that is some of the use cases require, I think, the use of that smart contract to really fire off notifications.

So I’ll give you an example, an account validation request, when you get a response, it is quote, “Warranty” in Phixius through the rules, that you’ve got a valid response. That other organization has put forth their best effort to give you their best answer to is that routing and account number good. But that warranty, it immediately expires. Right? Because I don’t know what can happen in a minute. That bank account could be closed and we’re not aware of it yet. And so that is a short warranty. But with other types of data, where the API is asking for, “Tell me a bunch of information about your company. Tell me the address of your company. Tell me who to contact if I have a question about a payment. Tell me about which payment types you accept. Tell me the information about those payment types, and then tell me what remittance you would like to get and how you would like to get it.” Email, PDF, with the payment, whatever it might be.

When that is exchanged, obviously, there’s the chance that it could change over time. Right? I could change bank accounts. I could change whatever I’m doing. So for that, we leverage blockchain in a manner that says if that information changes for that use case, anyone who’s received it would get a notification to come get a refresher of that data. So it does answer the question, if I exchange information, how do I know how long it’s going to be good for? Right? When does it expire? Blockchain helps with that.

Yvette Bohanan:

Excellent. Okay. So very elegant use of technology here. And agnostic, so anybody, any payment system, say it that way, could leverage this layer to create a lot more interesting support for different use cases in different, what we call payments domains, bill pay, B2B, et cetera, et cetera, where you’ve got to know what’s going on in the payment transaction.

George Throckmorton:

Yeah, I believe so as well. I think some of the challenges when we were getting the network started was, exactly what you said, is we understood the potential but you’ve got to narrow your focus to get things going. Right? We can’t continue to talk about all the things it could do. What is it that we needed to do right now? And again, for right now it was validation of this types of data to be used for ACH or other payment types if needed. But certainly, to validate that bank account data.

Yvette Bohanan:

So I got to ask, because I’m going to circle back on you to that question about do we eliminate returns and the fact that this is in a realtime environment and the good results you’re going to be publishing. Hopefully you can answer this question, but I’m going to just… the elephant in the room is NSFs. Right? R01 is the biggest return code out there for any kind of debit, whether it’s ACH or whatever you get when there’s no money here. Right? Can I answer the question using Phixius, is there money in this account and how much?

George Throckmorton:

Yeah, so I mentioned account validation. And obviously, the number one use case right now for Phixius. Again, when we go back to the story of Phixius, understanding the gap that businesses said they had and how we create a utility to fill the gap, it’s not meant to be a competitor or disruptor to the market. And certainly, in the US there are many, many options for account validation that can do from everything from the minimum, all the way to what you could imagine. Almost to say I’m guaranteeing this ACH payment is going to post. The account has enough money in it. Heck, I don’t know, they could even, there’s not a new concept to even hold the money and to guarantee the payment for a fee. So for high risk payments, that is definitely an option out there for businesses. They can choose any number of these vendors and we support them all. And actually, wish they would connect to Phixius and discussions with them at this point.

However, to your question, what is Phixius doing, we are not including balance information or credit worthiness of an account. So right now we’re focused on the return codes that I mentioned, account not found, unable to locate and the account was closed. And so they really account for a lot of the transactions we’re talking about. Right? For NSF you can do a retry and all of that. And I know, ultimately, who wouldn’t want to know or have a guarantee that an ACH debit is going to post. Who wouldn’t want that? Right? But you have to, I think, go back and understand what is the ACH network and how does it operate and the rules around that, and everything that’s been built over the last 50 years that you mentioned. It’s just not designed for that. I think there are other options if that’s what you need.

Yvette Bohanan:

Okay, got it. Got it. It’s a very interesting center of design that you’ve come up with here, based on all the feedback that you went out and collected. And I think it’s that utilitarian mindset that kind of helps you make those sorts of decisions of setting that line of demarcation around what you’re trying to do here.

George Throckmorton:

Certainly. We didn’t change our organization, turn it upside down. Nacha is still a nonprofit. Our core is writing the rules and the governance for the ACH network, and on the association side as well. And that will continue to be the core of what we do. So Phixius kind of falls into that. Being that nonprofit, trying to serve the industry, that’s exactly what we’re doing. And benefit the ACH network. There’s no doubt that that is certainly a goal of mine as well. As you’ve just called about, reducing returns, good transactions in the network.

Yvette Bohanan:

So George, one of the interesting SEC codes out there in the world of ACH is the international ACH transaction, IAT. Very few people know about this code. It’s been around for a while. Is Phixius doing anything to help promote the usage of that or make it easier to use or make it safer to use or whatever?

George Throckmorton:

Yeah, we absolutely are. I think as part of what’s coming up next for Phixius. And this year we’ve completed development on an API that will help with IET. And Nacha’s been looking at how to improve that transaction for some time now. And to kind of level set what this means, when a global bank receives an instruction to take in an international payment and the destination of that cross border payment is a US account. So they’ve got a bank account, they want to put money in it, they will originate what is called an IET transaction. That transaction will flow over the ACH network. Today, we use every bit of that transaction we can to include as much data about that payment as possible. Because international payments obviously are under additional scrutiny.

Yvette Bohanan:

The travel rule, you have to know the ultimate beneficiary, you have to know what’s going on here.

George Throckmorton:

So yeah, sanction screening is a big deal. And so you’re not just validating a routing and account number anymore, now you’re validating a bunch of other information. So what we have found, what will happen if IT is unable to deliver all of that data, when the receiving bank gets that payment, they will sometimes suspend it. And then they have to call the originating bank, get additional information to make sure they’re okay to post the payment. And it obviously adds days and expense and all that, and it’s manual. So with Phixius, the financial institutions are connected to Phixius, they can send a real-time a API before originating that payment that is a full ISO fax message. Anything and everything you’d want to know, all the way to down to the address levels that are included in ISO, all the information about the beneficiary that, again, that you could possibly carry. And they can provide a real-time response then.

So the RDFI or receiving bank who would get that payment, they respond in real time to the originating bank and say, “Hey, with all the information you’ve given the payment looks like it’s going to be good.” Or they may say, “You know what? There are additional data fields that we didn’t get from you, and we’re going to need those. Can you resend in another API?” So we think, although it’s early stages for that, it’s another variation of account validation for cross-border. But I think one that’s very interesting. And as you said, Yvette, can add some value and improve the ACH network and the IET transaction.

Yvette Bohanan:

That’s fabulous.

George Throckmorton:

So I would encourage anyone who wants more information and kind of deep dive it, you can go to nacha.org or phixius.org. Click on the links and you’ll come to the page at Phixius, where you can schedule a demo. Takes about 10 minutes and you don’t have to listen to me talk so much, we actually walk you through a demo as we promise. And it’s kind of self-explaining how the network works, and Nacha would love to talk to anyone interested.

Yvette Bohanan:

Fabulous. Fabulous. Well, George Peabody, I think it might be that special time.

George Peabody:

I think that’s a wrap, George, thank you very much. This is really exciting that a data sharing network has been established. And I love how you’re applying it to the use case that has the most traction right now. And of course, you’ve got a platform that can be expanded over time. When I think of the B2B space, I was very interested to hear that you say that those enterprises really weren’t ready to consume that much data, and that’s because it was partly because of their own internal systems aren’t set up to do that yet.

George Throckmorton:

Exactly. Be careful what you ask for.

George Peabody:

Haha. That’s great. Well done, and thank you so much for joining Yvette and me on Payments on Fire. I really appreciate it and wish you all the best year ahead.

George Throckmorton:

Okay, thank both of you, and thanks for the opportunity.

Yvette Bohanan:

Take care.

George Throckmorton:

Okay. Bye now.

Yvette Bohanan:

Bye. All right.

George Peabody:

What do you think, Yvette?

Yvette Bohanan:

Well, first of all, if I was out there as an operator of any payment system, if I was looking at this from a fintech perspective, if I was looking at this from a bank perspective, if I found myself once again, as I have many times in my career, in the boiler room, I don’t know where things… you really know how this stuff really works. Right? I would be –

George Peabody:

Aren’t you’re glad you escaped the boiler room?

Yvette Bohanan:

I know. I’m too old for the boiler room. I would be so into this. Right? I think this is like a win-win, win-win, win. First of all, contemporary technology. Right? So we are moving ahead ISO 20022. Interesting use and combination, as we touched on, of a permissioned Ethereum-based tech blockchain for the smart contracts that are basically eliminating those bilateral agreements. So you’re getting to something that’s contemporary, that’s real time and that scales. And is payment system agnostic. And has some guiding principles at work saying, “We want all participants in all payment systems to benefit from this. We’re not trying to displace anybody per se.” Right? And utility cost structure. So you can use it and you’re not going to erode margins anywhere too much.

And, if all of that isn’t enough goodness and light, anything you do to reduce the overhead of manual operations, coming or going, good news or bad news, initiation and returns, whatever you want to call it, is so impactful. Right? Wow. But they’re three years in. And they’re three years in and they have 2 million transactions. Which is respectable, but we’re talking about systems that operate at scale in trillions. Right? So it’s interesting and it’s proven, but you and I both know building that network effect and hard climb.

George Peabody:

It is hard. And I think you said to me one day that the seven-year overnight success, which is a fintech thing. And in some respects, Phixius really fits into that bucket and it doesn’t-

Yvette Bohanan:

Makes it very fintechy, yes

George Peabody:

And It even has a more difficult challenge in that creating the network effect in and of itself is particularly hard. We have a lot of fintechs and solution providers who really do point-to-point bilateral solutions, and those are more straightforward. This is not just leveraged its strength to say a rule maker bringing all those multiple parties around a common rule set, as well as the common technology, that’s a very challenging task. And they’ve listened to the market. They went, “B2B and that, let’s move over to consumer account validation.” And now let’s see what kind of traction they get. I love that you pointed out that the operational savings… George spoke to the savings that an enterprise would have when it has to unwind a transaction, 20 bucks or something like $25 to do that. But I’m thinking about the clerk who shows up in the morning at the credit union and looks to see what ACHs have bounced overnight. Phixius has reduced that number. So now that individual CU has no idea that it was actually Phixius fixed that problem.

Yvette Bohanan:

Phixius fixed it. I like that. That should be their tagline.

George Peabody:

Say that five times fast.

Yvette Bohanan:

We can trademark that one. That’s on us. It’s almost as good as, “ACH, after 50 years, is hotter than ever.” Right?

George Peabody:

There you go.

Yvette Bohanan:

When, George, we should have been in the marketing team but not… No, we’re not going there. I’m just kidding.

George Peabody:

It only happens with me once in a blue moon.

Yvette Bohanan:

But humor me this, when we talk about, you brought up the point and George, George, the B2B folks weren’t ready to consume all the data, sort of like be careful what you asked for. So they shifted over to the consumer. But you look at the risk mitigation aspect of this alone that he brought up. Right? And I think this came up when you were talking on the prior podcast with Peter, that how is this information getting exchanged right now? It’s in an email attachment, it’s in a spreadsheet, it’s in a plain text email, it’s on a fax machine in some countries. It’s all over the map. Right? And here, business email compromise is like the number one concern for businesses. So of course this is going to come back around to the B2B domain. Because you eliminate a lot of the opportunity for fraudsters to get important details to commit other fraud schemes. Right? So it’s going to help with business email compromise.

What are we seeing in fast payment systems? Authorized push payment fraud. Number one issue. Who am I really sending this money to? What’s this destination really? That’s super powerful question to be able to answer.

George Peabody:

All I’ve got right now is a phone number or an email address and some hope.

Yvette Bohanan:

Yeah. And I’m getting gamed, right? You’re always mentioning it’s the scammers delight. Right? So really powerful, bill pay.

George Peabody:

Not so much there, I think.

Yvette Bohanan:

Yeah, helpful, but not critical. So P2P, definitely B2B-

George Peabody:

I wish those fraudsters were paying my bills, that would be cool.

Yvette Bohanan:

Right? What’s up with that? Why aren’t they? When we look at the commerce domains, could be interesting. Would a company that’s trying to do pay by bank and break into the commerce domains find this helpful? We might. So yeah, a lot going on here.

George Peabody:

Just to roll back to your comments about business email compromise. Hadn’t quite put together that straight through processing, which is where the accounting system, the ERP system is integrating payments and messaging. And when that happens, you don’t need that email. Right? It’s happening end-to-end, from the buyer to the receiver, the seller. But if those transactions are essentially guaranteed to go through, that’s a big deal.

Yvette Bohanan:

George, this is just making me think of some proverb that we should be ending this, when the pebble quietly drops into the lake and then the ripple effects that go out over time. Right? Are we witnessing a pebble being dropped into the payments lake, if you will?

George Peabody:

I’m just not going to stick with you flogging that metaphor, I’m sorry. But I applaud the attempt.

Yvette Bohanan:

Hey, I could have said the pebbles being dropped in the data lake, and the few people listening up there would’ve gotten it. But anyway.

George Peabody:

Well, thanks as always, great to be with you here on Payments on Fire. And thanks for this conversation, really. This is exactly the kind of initiative that we need to see to really improve our resistance to the fraudsters. To up our risk management game, everybody will improve our operations. So it’s really cool.

Yvette Bohanan:

Yeah. So hats off to Nacha and George Throckmorton and the whole group there, and everybody that’s helped them, this is good stuff. And that we wish you the very, very best. And for all of those people that have attended our workshops and asked the question, “What is out there to help me with this problem?” Here you go. This one’s for you, folks. So until next time, hang in there and do good work. We’ll talk to you soon. Thanks for listening.

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