The always-interesting Federal Reserve Bank Chicago Payments Symposium just closed, and predictably, a lot of the discussion (and argument!) was around “faster” – the evolving progress of the United States towards improvements in our payments systems. I was particularly interested in hearing other people’s views on the outlook for this in our country.
I came away with two conflicting pictures in my crystal ball – either one of which could, I think, come to pass.
Picture One
A set of 10-20 faster payments “solutions” (systems, networks, products), all used by some reasonably large number of consumers and/or enterprises, which magically interoperate or exchange transactions among themselves in some fashion. This is the “let a thousand flowers bloom” approach. It is also the impression I got from talking to many people who are involved in the impressive, multi-year, 300+ person Federal Reserve Bank Faster Payments Task Force.
This group of people has been industriously working through a detailed process to come up with criteria for a faster system; evaluate a group of proposals from solution providers against these criteria; and explore what type of standards, governance bodies, or rule sets would be needed to make interoperability work.
The good news here is the thoroughness of the work, and the consensus value in having 300+ enterprises (yes, not multiple people from the same enterprise….) collaborate on this process. The bad news is that this group has no real authority – no power, you might say. So I think a reasonable person can question whether or not it can create a governance structure with rules which a diverse group of enterprises will agree to be bound by. After all, in many cases such rules would run sharply into the problem of “network fantasies” which Glenbrook has written about in the past. So I am troubled both by the difficulty of moving from theory to practicality, and, frankly, by the time this would take to do – even if it could happen.
Picture Two
The other option focuses on the coexistence of two concrete yet separate implementation efforts. One, of course, is The Clearing House’s new real-time payments system, reportedly nearing readiness for technical testing, and expected to launch at some point in 2017. This will be open to all banks in the U.S., and is roughly modeled on the U.K.’s hugely popular Faster Payments system. The second implementation is the more organic process of connecting existing debit networks (definitely Visa and MasterCard, but the regional networks as well) to “front end” consumer payments ordering systems: think of both clearXchange (now owned by Early Warning) and PayPal as being in that category: look at recent news releases on deals between PayPal and the debit networks, and ditto for Early Warning. The debit networks, of course, are using their “pull” pipes to “push” payments: essentially taking a real-time authorization message (used for cards) and repurposing it as a payments notice: instead of asking the authorization question “is there enough money?” they are sending a “push” message: “you’ve got money”.
In this second scenario, it is pretty easy to imagine that the debit-network solution, with a variety of front-ends, could dominate the consumer, P2P business, and also be used for a large variety of small consumer-to-business payments (gardener, nanny, plumber, etc.) The Clearing House’s new system would then most likely become the dominant solution for B2B payments. Bill payment is the “jump ball” – I could see this gravitating towards either system.
So the good news here is that this is going into place very quickly – the debit network capabilities are already there and the TCH solution is coming to market very soon. The bad news, I’d argue, is that, in my humble opinion, it is quite unlikely that these two systems – the TCH system and the “network of (debit) networks” – would interoperate. But maybe that’s not necessary. I would argue that if this “picture” succeeds, the chances for the other picture – and all the other myriad systems – is pretty bleak.
What do you think? We’re curious as to your opinions – please comment on this post, or, if you are going Money2020, go to the Faster Payments panel which is being moderated by our partner Elizabeth McQuerry.
