In today’s market of real time, legacy payments infrastructure needs a facelift.
Recently-launched capabilities like Same Day ACH have unlocked opportunity to wield modern technology and build new solutions on top of existing payment rails in favor of speed and transaction transparency, but there’s another strategy to payments innovation that continues to gain traction.
Market incumbents and industry newcomers alike are exploring ways to bypass existing rails in favor of entirely new ones. Networks like The Clearing House’s RTP and the Federal Reserve’s upcoming FedNow service have taken this approach to building new payment rails from the ground up, while other FinTechs are exploring opportunities in technologies, like blockchain, to do the same.
One of the newest market players to tackle payments friction by developing an entirely new payment rail is Transparent Systems, which emerged from stealth mode this week with the announcement of a $14 million funding round led by Pantera Capital, with Square, Future\Perfect Ventures, IDEO Colab Ventures, Digital Currency Group, and CMT Digital also participating.
In a recent conversation with PYMNTS, Transparent Systems Co-Founder and Chief Technology Officer Jeff Kramer remained mum on the particular details of the company’s infrastructure, although the firm described itself as an “on-demand 24/7 settlement” solution that leverages “cryptographically-secured” distributed blockchain networks.
As the company readies for early adopters later this year, Transparent Systems also acknowledged that it will initially target the B2B payments landscape.
Corporates’ Real-Time Demand
With a focus on enabling real-time settlement, Transparent Systems is tackling a market that has not necessarily been the biggest target of faster payment capabilities, particularly as corporates focus on delaying payment to suppliers as long as possible. But as Kramer explained, there are opportunities for real time in the B2B landscape.
“Our initial clients are really looking for solutions that enable them to be able to send each other money 24/7,” he said. “Our clients do regular, repeated business with each other, and they would like to be able to settle with each other faster and not hold counter-party risk.”
The ability for real-time settlement to essentially erase the risk of a bounced check or insufficient funds can be an attractive proposition for businesses. But convincing a company to use any new technology, let alone a new, disruptive, real-time payment rail, won’t be an easy task.
Indeed, Kramer pointed to the persistence of paper checks despite a surge in payments innovation as a testament to just how difficult it can be to drive change.
“Change management is incredibly difficult, especially within long-running organizations,” he said. “If you think about delivering a new real-time rail to someone, once it arrives, how do they integrate it? How does it change people’s jobs and the way they do business?”
What will be crucial for new payment solutions, like those under development by Transparent Systems, to understand is that disrupting B2B payments isn’t just about offering a better payment rail. It’s also about addressing friction within processes before and after a payment is made. Kramer highlighted the example of the paper check.
Offering an alternative payment rail doesn’t just disrupt the act of payment; it disrupts a company’s use of check-printing software pre-payment, or reconciliation practices post-payment, too. Facilitating real-time settlement will also introduce significant disruptions to corporates’ payment schedules, as well as cash flow and treasury management strategies.
“You have to be able to address the ecosystem of a payment,” he said, highlighting the importance of a new payment rail to emphasize onboarding and integration capabilities to be able to work seamlessly within organizations’ existing workflows.
Starting From Scratch
Resistance to change can be difficult with any new technology, but it can be especially intense when encouraging a corporate or its bank to adopt an entirely unfamiliar payment rail. A financial service provider that develops a new technology on an existing payment rail like ACH may find less resistance because corporates are increasingly familiar with ACH payments.
Yet, according to Kramer, there is value in starting from the ground up, and building a rail that is real time from the get-go.
“We’re starting from scratch,” he said. “Especially in the U.S., a lot of payment innovation grew on top of technology that really hasn’t changed much since the ’80s.”
That’s not to say, however, that industry collaboration won’t be important. Increasingly, financial service providers and their corporate and consumer clients demand choice in the way they pay, with no single payment rail or service likely to negate the need for all others.
As such, Kramer said that Transparent Systems will embrace ecosystem collaboration to not only ease adoption for current market participants, but to acknowledge the historical path to disruption that the payments landscape has taken thus far.
“If you look at the history of how payments have changed, nothing ever really goes away,” he said. “In the U.S., we still pay each other by check in the business space, even with all of the other opportunities to pay each other. That speaks a lot to the staying power of solutions, so we see this as a market where everyone ends up working together.”