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There has been a lot of talk about "faster payments." What is the benefit of moving payments faster?
Selnick: The interesting thing is that we’ve been talking about it, but only a few customers have asked. Certain audiences already are used to holding onto hand-held devices and are saying, “What’s the big deal? We do that now.” Smaller businesses say that faster payments may help them fill orders faster, because their customers can pay them today. Business-to-business activity is going to make a big difference in people believing faster payments are good and real.
Picillo: From the top down, the United States is still lagging the industrialized world in terms of faster payments adoption, but it’s somewhat of a challenge, as it’s a very disjointed marketplace here. In other countries, there’s a single-sourced solution, but here, you’ve got start-ups, mom-and-pops, big players and a consortia of banks—everyone getting in. It’s the industry race to zero as there has been very little support to pay for these services.
Welles: In commercial banking, we are hearing that speed is not the issue. It’s about the data and the reconciliation, and none of the solutions appear to be solving for that. I’m not sure anyone has that right just yet. I can’t point to a single solution and say that is what the majority of U.S. businesses need.
Let’s talk about the market fragmentation you mentioned. How will that be addressed?
Picillo: Well, the Federal Reserve Task Force is open to everyone — fintechs, small, medium, and large providers as well as others in the industry. It’s going to be interesting to see what agreements can be reached under the Fed’s leadership.They’ve contracted with McKinsey to herd the cats, so to speak.
Welles: I think we will see continued fragmentation for a while. With Same Day ACH, we do see applications for our large payroll providers: situations like system issues, holidays, last-minute changes, or failure to send a payroll file. When any of these scenarios happen today, it can be a mad dash to resolve them. It will be a huge benefit to have Same Day ACH for those particular cases. Who knows? Maybe in time, it becomes natural that money settles same day and we forget we even have next-day windows.
Then, there are real-time payments. Today, wire has a lot of value with its irrevocability and long-standing cross-border capability. But, if The Clearing House real-time system works on an international ISO standard format for reconciling, it really helps businesses. And, it may overtake the benefits of wire transfers.
On the credit card front, I just don’t see people giving up cards and the credit aspect that comes with them, so card usage will persist.
I also don’t see faster payments magically coming together overnight. It’s evolutionary versus revolutionary.
Same Day ACH implements Phase 1 in September. How does it complement the work being done on real-time payments?
Picillo: When we think of Same Day ACH, in my opinion, I view this as more of a back-up solution versus something that is initially widely used. However, thinking longer-term, if you look at our wire volume, potentially converted, what does that mean for banks’ revenue?
On real-time, between wire and ACH on the commercial side, we feel we’ve really taken care of our business customers’ needs. On the consumer side, the industry is lacking in payment options.
But, all types of payments are already moving more quickly. For example, I had some landscaping done. On Tuesday, my wife wrote him a check, and it cleared on Tuesday. He’s based in New Hampshire, using a different bank, and I am in Boston. And, his check cleared the same day.
For what use cases do you see faster payments offering a distinct advantage?
Picillo: Some payments professionals on the card side feel that Same Day ACH potentially could replace cards if merchants come together to use it. Cost is a huge driver for merchants and using a more cost-effective alternative would be a great option. But, a customer is not going to put down the card without incentive. If the merchants can make it happen, it’s a win for them for sure.
Welles: Merchants will pay for surety of payment. If Same Day ACH becomes that sure transaction, it offers a way to make collections safe and guaranteed. They certainly would like to eliminate card interchange and other expenses.
There’s also an opportunity here for banks. I think of the consumer or smaller business who says, “I like to use my bank’s bill-pay site, but when I need to pay right away, I go biller-direct.” With real-time payments, they now have another option to ensure their payment is made on time — right from their online banking platform. And, it provides an alternative that doesn’t require them to sign into 15 different websites in the process. They also don’t want increased exposure to identity theft, so using fewer sites and higher confidence in security on their bank’s site, make that a preferred solution.
What about fraud? What are the impacts of faster payments on fraud potential?
Picillo: The risk and fraud components of real-time payments are worrisome. The industry, banks and providers, have to do a whole lot of upfront work to make sure fraud levels stay low. What is missing from the current landscape? What gaps need to be filled? What information can or can’t be shared without violating CFPB or consumer laws? We are going to have challenges with faster and real-time payments and will need to overcome them to be successful.
Why is it critical that any real-time system connects all FIs?
Selnick: When I look at the direction given by the Federal Reserve Faster Payments Task Force, I consistently hear the need for ubiquity. There’s an underscore of, “We can’t discriminate. Everyone needs to play.”
In addition, the Fed doesn’t want many different standards. It’s a Beta versus VHS scenario they are trying to avoid.
The theme seems to be, “We need to make money move around so everyone can do it. It can’t be whoever has the tech dollars wins.” All sizes of financial institutions need to have access to a real-time payments system.
The Fed has said that the market needs to drive the real-time solution. How do you think the market is rising to the challenge?
Picillo: I think part of the challenge in the industry for banks right now is to figure out where they need to place their bets. Two large banks recently announced their partnership on a digital payments network created by banks, for banks. This got us thinking, “Is this something Webster should consider participating in?” But, we aren’t sure it’s the correct path right now as there’s a lot of cost involved with that kind of partnership.
For most of the products we offer, we’re a consumer of technology. It’s a buy strategy not a build strategy, and we go where our vendors are going. Leveraging a large data processing core that does all the GL and back-end work is a much more effective use of resources than smaller banks trying to figure out real-time payments individually. We are a consumer of fintech, so we’re looking for the solution provider to offer it.
Welles: That’s why I think The Clearing House partnership with FIS and other core technology providers is brilliant. If we can purchase or upgrade to access new payment solutions, it really helps; otherwise a new system would be a huge barrier. Tech vendors can make it easier for us, and incremental change is also faster and less costly than a “throw-out-the-old-and-put-in-the-new” approach.
Picillo: So, this is my personal view. I look at Apple, and Apple created this wonderful technology, and now people can’t live without it. If I equate that to a faster payment, I wonder, are we creating something that no one is really beating the doors down for? I’m not an anti-tech person, but I don’t know where the demand is coming from.
I’m a fan of the show “Shark Tank,” and generally the entrepreneurs that come in there do so to solve for a pain point. I don’t think moving money for consumers is a huge problem today. We need to participate because we need to stay relevant.
Selnick: We want to be creative and innovative when we can be — in ways that make strategic sense.
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