Experts Weigh In On Payment Rails — New And Old

Technology underpins everything these days. Ever more so this is the case with payments and specifically the conduits that get payments from party A to party B.

In a panel at Innovation Project 2017 moderated by Global Economics Group’s Founder and economist David Evans, a trio of payments professionals, including Jan Estep, president and CEO of NACHA, Sandeep Malhotra, SVP of ACH Systems, Mastercard, and Debbie Gamble, head of digital strategy at Canada’s Interac, debated what it means to have payment rails in place — and what it means to have modern rails functioning within a country or across the globe.

The big question: Can the existing payment rails support the innovation that is needed? Said NACHA’s Estep, “the answer depends on what type of innovation you are talking about, and then what type of a payments system you are talking about.” Against that backdrop, “innovation means many different things to different players.”

From an ACH networks standpoint, noted Estep, innovation may be “skinny,” but operations are ubiquitous, connecting all the bank accounts in the United States. This allows for innovation to be done on top of the ACH rails. “To the extent that a payment rail allows others to innovate, it does support innovation,” said Estep. The ACH network also has evolved and is innovative relative to now having settlements in bank accounts” twice daily, which can be seen as an “internal type of innovation.”

Broadly speaking, incremental innovation is possible; “innovation in layers is possible, but that is very different than saying that it is a totally new rail,” she surmised. Innovation that rides on top of the rails can come from originators and receivers and software companies as well, said Estep.

Mastercard’s Malhotra said that as the card networks work, “we actually make these payments process within the blink of an eye.” But speed is not enough, he added, as payment rails also need to include better data and widespread availability around the clock and interoperability that can support open use cases.

Safety and security are also key concerns, he added, in order to identify suspicious activity and stop fraud.  There’s also the need to submit messages asking payors or corporates to pay “with the appropriate associated data,” which makes the receivables side of the equation much more efficient, he said. Writ large, the goal is to create “world-class ecosystems” around the “world-class technologies” that allow people to pay with safety and convenience.

But in getting to that world-class status, queried Evans, might there be gaps in the rails that cannot be filled due to the software and architecture that they have been built upon? What if they just can’t accommodate the changes that are needed to support innovation?

Interac’s Gamble said mobile has been responsible for helping deliver what she called “richer” experiences in peer-to-peer and commercial transactions. Ubiquity and scale and standards, such as ISO 20022, are necessary to move money. Within Canada, she said, data is also crucial, “especially when you start to talk about security challenges,” and so users must provide an email address or telephone number.

Also paramount to innovation within the industry, at least within Canada, is collaboration and openness. Allowing third parties and developers to interact with Interac’s capabilities will give rise to new ways to deliver funds, stated Gamble.

Evans put before the panel the notion of “past dependency” for rail operators. “We would be foolish to think that the past does not impact the future,” said Estep. Change is harder to effect, she noted, when you are dealing with 12,000 financial institutions, as is the case in the United States — “any time there is a change, they also have to do it on exactly … the same day.”

That stands in stark contrast to other innovators in payments that are in effect starting with “a blank slate … with a new system or a new capability.” Speaking to Malhotra’s earlier exploration of a request for payment, Estep noted that the same function exists on the ACH network in the United States but is not ubiquitous, so the question remains of how to make that available to everyone participating in the network. “Technology both hinders and offers paths into the future,” she noted.

Said Mastercard’s Malhotra, “The system was designed to do the basic job … to move money … whether it is a new system or old system,” the functionality in place will move money from point A to point B and move messages between points too.

Even in embracing digital, he said, “you keep the core constant and then you put layers on top.” For Mastercard, “we apply value-added services in milliseconds,” with innovation brought at the application level.

In an age where Mastercard bought Vocalink, regulators and other stakeholders, he said, are the ones mandating to “convert cash into electronics.” This means modernizing the financial system.

To modernize the financial system, there must be 24/7 availability of payments. Within that framework exists instant payments, and he noted that 45 percent of transactions — across bill payments, for example — are “already live” and ready to be done as instant interactions. The remaining transaction types, he continued, will be live within the next three years. Thus, the Vocalink deal gives access for Mastercard to work with those wide sets of payment flows in Singapore “as well as in the U.K. … and soon it will be launched in the U.S.”

Opportunities exist on the consumer side of transactions too, he continued, as consumers look for choice and for convenience at the point of interaction — something Mastercard aims to do whether “it is retail payments, transmission payments … and they can choose between a card account and a bank account.”

Speaking to changing the way payments rails function, said NACHA’s Estep, the questions revolve not around “can you do it … but who needs it and what will they do with [those technology-driven changes] once it is in their hands.”

By way of example, she proffered that businesses can attach “voluminous” data — thousands of pieces of information, in fact — along with their payments.

Such a service is not used by every business, but the use cases are growing dramatically. “But it has not replaced checks,” she noted, “and that is because you have AR and AP systems, you have internal technologies that need to catch up with that.” So even though the rails can adopt to, and adapt to, new technologies, “you do have to realize the impact to all of the players throughout the ecosystem … part of that is calibrating what changes you make and where do you make them and what tangential changes also need to be made.”

Information is one of the things that changes with payments, said Estep, and speed is another. Transitions will happen over time, she said, but will vary per use case and even the immediacy of funds themselves.