Birdies, Bogies, and Faster Payments

I was sitting around a table last Sunday having lunch, settling my golf bets with some friends from the day’s round. While we don’t play for much, the betting is secondary to the true prize of bragging rights. Nevertheless, as is custom with our friend group, all bets must be settled right after the round.

I have played with this group of guys for years, and over the years I have noticed something. I am now the only one who reaches for his wallet when paying the tab – everyone else reaches for their phones to pay via Venmo or a similar solution.

This has become somewhat of a running joke over the years, that I am stuck in my “cash is king” mindset of our grandfather’s generation. Turns out I’m not the only one who’s been wrestling with this issue. The majority of financial service providers including nearly all the nation’s depository institutions have been grappling with this “Faster Payments” disruption. In fact, the potential impact of Faster Payments is so substantial, that the Federal Reserve has stepped in to broker standards and solutions.

Federal Reserve Faster Payments Task Force

In 2016 the Federal Reserve released the 6th issue of its payment study findings. Payment transactions and settlement processes are as core to the economy as roads and train tracks are to Infrastructure. According to the Federal Reserve Payments Study, noncash payments increased at an annual rate of 5.3 percent by number or 3.4 percent by value from 2012 to 2015, and credit card payments in particular grew at an annual rate of 8.0 percent by number or 7.4 percent by value, the largest growth rates among the payment types considered.

There are numerous reasons for this:

  • Money has been cheap
    • Federal funds rate <1% for a decade
    • Cost of borrowing money was relatively nonexistent (particularly compared to the post-recession recoveries of the late 2000s and better part of the 1990s)
    • Increased use, prevalence, and acceptance of credit cards
  • Decline in use of checks
    • The US has lagged European counterparts, with checks accounting for almost 15% of non-cash based transactions as late as 2015; whereas, in European countries such as Germany, Sweden and the UK, it is closer to 1%.
  • Increasing technology disruption and innovation
    • Particularly the rise of peer-to-peer (P2P) payments with mobile apps like Venmo, PayPal, Zelle™) .

Now while these P2P applications are fine for Sunday golf bets, the Fed established the Faster Payments Task Force (FPTF) to ensure the security and rigor of the commercial world with numerous, large and time sensitive transactions.

The FPTF is chaired by the Federal Reserve and includes over 300 participants from banking, investment services, IT, security, and many other industries. Their charge: “identify and evaluate alternative approaches for implementing safe, ubiquitous, faster payments capabilities in the United States.”

This deliberate and collaborative approach between government and industry experts in establishing Faster Payments standards is chartered around Ubiquity, Efficiency, Safety and Security, Speed, Legal, and Governance requirements. Parts one and two of the FPTF Report have been released, with the final recommended faster payment solutions pegged for 2020.

Commercial Entrants

In the meantime, there are already several fintech innovations that are taking place trying to gain market share in the less crowded Business to Business (B2B) payments arena. Many of these solutions are catered to the small and medium sized commercial market. One such innovation is, MasterCard’s “B2B Hub” announced this summer.

Mastercard B2B Hub “enables small and mid-sized businesses to optimize their invoice and payment processes with accounts payable and payment automation tools that improve the speed, ease and security of their commercial payments.” However, the real value add, and source of Wall Street’s excitement about this product, is that it can be coupled with Mastercard’s Vocalink “Fast ACH.” Fast ACH processes payments within minutes, as opposed to traditional ACH settlements, which can take days.

Likewise, Visa has also jumped into this space, and announced a forthcoming B2B solution, VISA Ready Program for Business Solutions.

Both solutions focus on payments process innovation for small and medium size businesses. They will undoubtedly be reviewed by the FPTF, and evaluated as early candidates/case studies for the final Faster Payments recommendations.

Other companies are making faster payments plays abroad including Google, whose new service offering Tez is a mobile wallet and payments platform for consumers and businesses – and was recently released in India. While Tez is an opportunity to replace cash transactions, it is also a sandbox for Google to vet new technologies including, Audio QR (AQR), which allows users to transfer money by letting phones interact using sounds.

Undoubtedly, the biggest foray into this space domestically is Zelle™. Zelle™ has been adopted by big banks (including Bank of America and Wells Fargo) and is being marketed as a service to their large customer base for P2P. According to Zelle™, “More than 50,000 consumers are enrolling daily, contributing to more than 100-million real-time person-to-person (P2P) payments, totaling $33.6 Billion, in the first half of 2017.” As consumer adoption continues, look for Zelle™ to push into the broader B2B payment market.

Considerations

  • The digital age has transformed customer expectations around utility and speed – Financial Services are not exempt
  • Federal Reserve guidance is ongoing, yet new fintech entrants and global traditional institutions are advancing P2P solutions in market
  • There are no one size fits all in this space. There will be multiple solutions stemming from the FPTF recommendations. It is critical to understand the benefits and tradeoffs associated with each and, furthermore, which technologies and business models enable your business and fit your processes
  • Business model reengineering efforts to maximize availability of funds, and enhance customer experience will continue

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Written By Dan Welsch, Senior Consultant, Financial Services