Payment Methods

What’s Fast And Slow And Read All Over?

Innovative ideas are inspired by smart people who see problems and have the conviction, capital and courage to come up with new ways to solve for them.

Take faster payments.

One such innovator recognized the vast commerce potential that could be unlocked if new technologies were used to move money and messaging between people in near real-time. The grandness of his vision and success, with a proof of concept, prompted him to reach out to the U.S. government to share his ideas. His ask, at the time, was nothing more than to meet again once he rustled up some capital and a few like-minded innovators to further flesh out his idea.

They agreed.

A year later, he returned — innovation in hand and rock-star engineer by his side. The ask was then for a small amount of money to fund a pilot and test the idea at a larger scale than current resources permitted. This innovator secretly hoped the government would be so enamored with his innovation and its potential to transform commerce (and any number of other uses cases) that they’d want to own and operate it. They left that meeting with enough money to get their pilot up and running, and soon had the proof they needed to support the use of this technology on a national scale.

With success in hand, they returned to ask for more funds to scale further. This time, the U.S. government took a pass.

Private investors, though, took notice and doubled down on the idea, raising the money needed to build out the infrastructure, standardize the tech and commercialize the idea. Soon, firms began popping up all over the country, filling in the pieces of the ubiquity puzzle essential for an interoperable network to operate at scale.

With those tailwinds behind them, it didn’t take long for one innovator to start rolling up other players in the market, buying patents, adding to the roster of rock star engineers to refine the tech, and operate what had quickly become an interoperable and ubiquitous network for instant messaging and the movement of money first nationally, then globally.

The year was 1837.

The invention was the telegraph.

The innovator was War of 1812 naval war hero, captain Samuel C. Reid, who had successfully used an early version of the telegraph in battle and saw its potential for much, much more, including commerce.

The rock star engineers were first Samuel B. Morse and later Thomas Edison, who perfected the technology to power this instant messaging system. That system made it possible for messages about the movement of money to be sent and received in near real-time and innovated how trades were settled on stock exchanges.

The company that commercialized the idea and consolidated the market to establish the first global faster payments network was Western Union in 1851. Western Union launched its national money transfer, which provided fast payments between people and businesses, in 1871. The telegraph was also used to settle interbank transfers for the Federal Reserve System in the early 1900s.

Between 1866 and 1910, Western Union fought bitterly with the federal government over who should own and operate this network now that it was up and running and ubiquitous. After Western Union (and others before them) had taken the risk, invested in building out a successful network and keeping it cutting edge (at the time), and proving its value across a variety of use cases, the U.S. Post Office decided it was time for them to run it.

After all, they said, the Post Office was in the business of delivering messages at scale.

By stagecoach and on horseback. In about eight days coast-to-coast on a good week.

I’ll leave it to you to ponder the many ironies here, including the dearth of innovation that’s come out of the Post Office since the days of the Pony Express. Personally, the Pets Forever stamps rank pretty high on my list.

Now, on Friday, 150 years since the birth of faster payments (version 1.0) and a whole pile of global payments innovation later, we were given a look at the Federal Reserve Board’s view of our faster payments future here in the U.S. That’s when it released its 64-page executive summary of its ten recommendations for faster payments, made by a 300-person task-force (it used to be more than 500!) who’ve been working on those recommendations for the last three years.

One-hundred-and-fifty years later, it’s a little déjà vu all over again, as the famous American philosopher, payments guru and baseball legend, Yogi Berra, would have said.

After the public sector and countless innovators have taken the risk and invested tens of billions of dollars over decades — innovating payments and building ubiquitous global payments networks that consumers and businesses use and trust because they safely and securely move trillions of dollars a day all around the world — it appears the Fed would like to have banks and nonbanks pony up billions more to fund and build a system they, the Fed, would like to operate.

That’s the punch line, really, if you read between the artfully crafted lines written on those 64 pages.

Yes, the Faster Payments Task Force recommends the U.S. system of faster payments be market-driven and governed by the industry. That is recommendation number one.

And it’s a good one, since that’s what’s always worked best in practice.

But recommendation number five is for the Fed to “determine the optimal design of and implement a 24/7/365 settlement service to serve the needs of the faster payments system…and level the playing field.”

Recommendation six is to “explore and assess the need for the Federal Reserve‘s operational role(s) in faster payments” in order “to support ubiquity, competition and equitable access to faster payments in the United States. In addition to providing for a settlement capability, such roles might include provision of directory services, transaction processing, network access, security and/or cross-border payments” should said stakeholders fail to agree on standards, policies and procedures.

As anyone who has ever tried to arrange a meeting that involves food and includes more than two people understands, it’s really tough to get consensus on even the little things — never mind getting 300-plus stakeholders representing an entrenched payments and commerce ecosystem about how a new, faster, interoperable, ubiquitous fast bank-account-to-bank-account payments scheme should look and operate.

Oh, wait, you didn’t realize that was the underlying M.O. of this effort?

For years, the Fed’s payments folks have been wracking their brains to figure out a way to remain relevant in a digital payments world in which it was becoming increasingly less so. As innovators and governments all over the world have demonstrated, those who can do (innovators), do, and those who can’t convene multi-year humongous member task forces (governments).

That’s what started in the U.S. back in 2014.

The Faster Payments Task Force was formed by the Fed under the rubric of avoiding the government mandates, which drove faster payments everywhere else in the world, so the U.S. could instead create a new market-driven and industry-led payments scheme.

In the two years since, a lot of people have put in a lot of hard work — not to mention invested a lot of their time — showing up at meetings and discussing the ways in which payments can and should move more efficiently between people and businesses in the U.S.

Many of their recommendations are perfectly rational and sensible — really inarguable, in fact.

Who could argue the need for secure and trusted payments rails?

No one, since that’s what we have in place and use today — which isn’t to say payments rails, like everything, couldn’t be better.

And the need to have those rails keep pace with the growing cyber threats and technologies for authenticating users in a digital world?

No one, since that’s what those who operate global payments rails today are investing in and deploying today.

And the need for ubiquity?

No one, since without it, new payments schemes struggle, and many use cases are DOA.

And standards that support interoperability?

No one, since that’s the bedrock for how our payments schemes operate today — standards continue to evolve as digital and connected devices present new use cases and the need for those standards to be modified or developed.

But, to do that all under the rubric of faster?

That’s where I get stuck.

So, it’s a bit of a puzzle, then, as to why, and why now, the recommendation out of the Task Force is for the ecosystem, especially the banks, to plow billions into building something entirely new — and then asking banks to spend millions (or billions, depending who you ask) more connecting to that something new — all in the name of faster (that is the first criteria on the list) and without a business model that would give any of those banks an incentive to do any of that?

Maybe there will be something in the big forthcoming report, but the 64-page summary doesn’t say anything about a business model for participating and the ROI for anyone to sign on.

Building a new set of payments rails is one thing.

Getting all of the banks to sign on is quite another.  And, when I say all, I mean all. Ubiquitous means all, or certainly almost all, of the 13,000-plus FIs that exist here in the U.S. have to be connected to the new system for it to work.

And those banks won’t if the new scheme pays them nothing — or next to it — while threatening to cannibalize other revenue streams like wire and debit and credit interchange. “Free” in exchange for “keeping deposits” sticky isn’t exactly setting the world on fire on the P2P side of payments. Setting a sensible business model seems critical.

And, since “free” is a business model the Fed seems to like — and could, as the operator of the settlement network, decide is the price — the question then becomes who does pay to pay to operate the network, since it isn’t going to be the consumer.

It’s also a puzzle that we’d even look to the Feds in the first place to drive payments innovation. Governments, overall, have really only driven one big innovation, and even that was done to fill their coffers. The Kingdom of Lydia is often credited with coming up with the first government-issued, standardized method of payment — the coin. Other governments ran with this idea because they saw they could turn a tidy profit by issuing coins whose metallic costs was less than the face value of the coin.

But that innovation was a really long time ago — 750 B.C.

Back at home, the Fed, though, did play a big role in propping up the paper check for much of the 20th century. So there’s that.

But none of the innovation that’s moved payments forward over the last 50 or 60 years has come out of any government or central bank anywhere in the world.

The government, as I said earlier, didn’t create the world-changing faster payments version 1.0 (money transfer via the telegraph), but you can’t blame the fed since it didn’t exist then. But the Fed did exist when the charge and credit rails were introduced, back when the first initiatives aimed at #KillingTheCheck were made a couple of decades ago with the debit card. The Fed didn’t see the need for people to conduct commerce on the web and create digital payments schemes that would allow them to do that. And the Fed’s been largely in reaction mode to innovations around digital currencies, distributed ledger technologies, risk models, tokenization, biometrics and the many other things that innovators and established players have been investing in and experimenting with for many years to move payments, and all that surrounds it, forward.

Instead, this week starts the next phase of the work focused on making things faster, when, thanks to the efforts of innovators — many of whom are members of the Fed’s own Faster Payments Task Force — have leveraged existing rails and innovated on top of them, and  made a lot of headway in checking that box. Two years later, faster really isn’t the driver of payments innovation today — making payments predictable, smarter, digital and efficient is.

In the two years the Fed has been examining this issue, innovators have gotten the job done. NACHA has implemented ubiquitous Same Day ACH with credit push and will implement phase two with debit pull in the fall. The card networks are powering instant disbursements. Innovators have invested in and launched schemes that enable instant payout to any form of payment a consumer has and wants to use to receive funds.

Perfect, no, but they are actually in the market helping make payments faster.

So, while the Fed convenes more task forces, innovators will continue to do what everyone in the ecosystem wants to see happen: investment in modernizing existing rails, building out new capabilities and devising new business models that give consumers and businesses the safe, secure, predictable, efficient, smarter, ubiqituous and, when needed, faster payments experience they want and need to drive the next generation of commerce forward.

Because innovation in payments waits for no man, not even The Man.

If, by the way, if the Fed really wanted to make payments faster, they’d #KillTheCheck. That alone would give us much faster payments, on average. The paper check clearing system is the biggest drag on faster payments in the U.S. to date — and, just like that, we’d have the $22 trillion dollars’ worth of paper checks that still float around the system each and every year instantly turn digital.

And we have the rails and the innovators we need in place today to manage that transition — safely and securely, via ubiquitous and interoperable rails.

Recommendation number one. #KillTheCheck.

Then come back to me and we can talk about faster payments.

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