The advent and then dominance of COVID-19 has put the concept of globalization in a different light. What was once the darling of economists and CEOs has been questioned, as the pandemic had no regard for borders or populations. Maybe, the under-the-radar whispers have said, global commerce needed to retreat behind those borders until the pandemic was sorted out.
But even a cursory look at the events that shaped this week in payments shows that globalization will carry on. Look no further than the ship blocking the Suez Canal this week — yet another “Black Swan” event that has rocked the world — for evidence that the connected economy depends on trade, cooperation and supply chains. And other developments this week show that the world of finance is truly connected. Take, for example, real-time payments.
“I think what’s surprised me is the incredible advances we’ve seen in places we didn’t expect,” The Clearing House EVP Russ Waterhouse told Karen Webster when they met to take on the latest edition of The Week in Payments.
The advances Waterhouse describes are as diverse as they are myriad — particularly this week, when RTP took some major steps forward in Saudi Arabia and Australia, cryptocurrency got a sort of thumbs-up from the Fed, and Peloton continued its evolution into an eCommerce platform via the power of its subscription program. And while no one has a crystal ball, Webster and Waterhouse agreed that what’s happening now offers a very compelling clue as to what’s coming next.
Faster Payments Great Global Leap Forward
Instant payments was in the news this week as Saudi Arabia’s instant payment scheme went online, and Australia marked massive growth in its RTP system. Growth, Waterhouse said, isn’t at all surprising given the government mandate pushing RTP ubiquity forward in Australia — which has given the system a massive headstart in pushing transaction volumes through their system.
“The other thing they’re doing is taking a hard look at their other rails and asking if they are really fit for purpose, or should they be migrating more and more traffic to this new rail we’ve invented and invested in that produces a much better consumer experience,” Waterhouse said. “I think they’ve taken a hard look at ACH and are asking if that’s really the way, or if some of these use cases are better suited to real-time payments over MPP.”
Lacking that kind of government backing or mandate, the U.S. isn’t pushing toward ubiquity as fast, said Waterhouse, but the push is still on: He noted that both Bank of America and PNC have announced their intentions to settle Zelle transactions on the RTP network. It’s an important building block, said Waterhouse, because it opens the door to a whole host of use cases, particularly now that they are rolling out tokenization on the RTP network.
“I think you’ll see more embedded experiences,” Waterhouse predicted of the expanding real-time payments future. “And tokenization becomes an enabling feature for that, because you can essentially provide a very secure, authenticated method that places the payment credential into that electronic experience, and it becomes seamless to the consumer.”
In some ways, he said, the RTP network is a bit like the iPhone: desirable on its own, to be sure, but once more tools are out there, people begin to innovate to create new apps and use cases for the technology. It’s something that Waterhouse believes will happen with the RTP network as more and more people gain access to the system.
Crypto’s Mainstream Push
Cryptocurrency was all over the news this week, with a paper expected from MIT and the Boston Fed on creating the digital dollar and the Fed chairman offering his remarks on crypto’s potential (and how far off it is), which have made the digital fiat an increasingly hot topic.
And it’s a topic that raises another question entirely: Why?
“The first question is, what problem are we trying to solve for?” asked Waterhouse. “Because we have digital money today. Every time you use your mobile banking app, you’re using digital money. So it’s not like we don’t have it.”
Moreover, he said, the common reasons for moving to digital fiat — such as to boost financial inclusion — have some issues. First, the vast majority of Americans already have a bank account, and only 5 percent of the population is actually unbanked. Second, he said, the reasons that most people are locked out of the banking system can be solved with better mechanisms than digital fiat currency.
“If the goal here is to promote financial inclusion, Congress could look in the mirror and solve that,” Waterhouse said. “They could look at other ways to solve those problems. Technology has come a long way since the rules were written.”
Moreover, he noted, crypto by its nature creates problems in the banking system as we know it, which is predicated on the idea that a bank can take in funds and use those to finance loans. Digital fiat likely isn’t fungible in order to work in the banking system as designed. The way Waterhouse sees it, the Fed would need to introduce some other construct alongside the digital fiat to create fungibility.
As Waterhouse noted, for anything that crypto purportedly can solve, there is likely another solution in place already. The enthusiasm for a push to digital fiat isn’t so much a mark of how useful it is to central banks so much as how threatened they’ve been by it.
“I think when Libra was announced, it got a lot of central bankers worried, because they looked through that lens and said, ‘Hang on a second here. Our ability to control monetary policy could be undermined by this concept of Libra.’ And so I actually think that’s what started the conversation within a lot of central banks,” Waterhouse said.
As he noted, the future will depend on cryptocurrency’s ability to find a problem that it solves uniquely better than anything else.
Subscriptions’ Time To Soar
While not a Peloton owner himself, Waterhouse does take Peloton classes, and so found himself folded into the growing digital community, enabled by payments. It’s an example of what Waterhouse described as a critical growing trend.
“Peloton at its core is a friction-free payment system,” he explained. “And you can look at Microsoft and how it has pivoted more to a subscription base in terms of its revenue model, as opposed to buying it once and installing it. So there’s clearly a demand for more capability in the payment systems to support subscription payments.”
The goal now, he noted, is to accelerate the payments model. So if a consumer knows they’re going to buy a Peloton subscription, they should be able to see that as a standing order in their bank app, and should have full transparency, control and the ability to cancel it anytime. “It’s a way to extend the payments capability into that same life experience,” Waterhouse explained.
Because in the end, he said, the most important value is the consumer’s control of their money — being able to spend it how they want, when they want and where they want. Technology, as we saw in all of this week’s news, makes that possible. The interesting part to watch will be the specific developments that grow out of that greenfield of potential.
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