November 4, 2018
Since the official launch in November 2017, The Clearing House’s RTP® (real-time payments) system has been rapidly gaining traction. Earlier this month, Mastercard announced its new offering, Bill Pay Exchange, which will utilize The Clearing House’s RTP® system to allow consumers to pay bills instantly from their bank accounts. Rick Fiorito, chief revenue officer for Transactis, recently sat down with Peter Davey, head of innovation for The Clearing House to discuss evolution of RTP® and how it’s impacting the industry shift to faster payments.
Rick: Hi Peter, thanks for joining me today to do a deep dive on The Clearing House’s real-time payments. I don't know that people know how far your story has developed, and our objective is to give you a forum to overcome the misconceptions regarding real-time payments in the market.
Peter: I really appreciate you taking the time to help clear up the confusion regarding faster payments. As we've done various outreach to banks and in the wider industry, it's a slow process to educate the market. RTP® (real-time payments) is not based on anything that's out in the market today – it's a new way of doing things so you have to build an understanding of why the change will be beneficial. My hope is that we can continue to drive that forward and we appreciate the fact that you are willing to help us do just that.
Rick: I want to start with the basics for a moment – Can you define real-time payments and how it compare with the general concept of faster payments systems?
Peter: When you talk about the difference between faster and real-time payments, faster payments is really the jumping off point moving payments and relevant information associated with them in a quicker fashion than traditional, legacy systems. Wiring services can trace their roots to the early days of the 1800s. The card networks developed in almost 100 years ago and modern systems have essentially remained the same for about 40 years. RTP® is a brand new modern infrastructure that supports the digital real-time way in which we live today. It allows for payments to be cleared and settled in seconds between two counterparties bank accounts with complete transparency plus it allows for new innovations through the use of non-dollar based messages such as Request for Payment and Acknowledgement messages.
Rick: What’s the importance and value in the marketplace for real-time payments?
Peter: One of the biggest questions I get asked is, why real-time and why now?
Ultimately, what it comes down to is the fact that we live our lives in real time and there’s a general expectation of immediacy that permeates every aspect of daily life. If you don't have immediacy throughout the technology cycle, you're basically leaving things unfinished. Current payment systems, and the banks and solution providers that use them, really only work at certain hours of the day. This causes a massive amount of inefficiency throughout the payment the process. Businesses are used to experiencing hot spots of processing activity at 6 or 7 in the evening where they have to process a batch of payment events and then have overnight posting processes for after-hours payments.
It really comes down to the fact there's a certain part of the current systems, and it doesn't matter which system are you talking about, that leave things unfinished. When you send a file of transactions out you don't have a final status on any of it until exceptions come back. The real-time payment system actually smooths out the processing cycle so there’s no hot spots of activity. It changes the equation, allowing businesses to completely finish the payment processing cycle quickly, not later on in the day.
The real-time payments’ value is providing the rails and capabilities for businesses to have a 100% assured delivery and response system which not only allows you to finish the processing but also connect the payment with all the related information associated with it. This creates rich context between the biller (business) and the payer (customer). With that data, payers and billers are able to work with their financial institutions to better understand how to leverage funds, how to appropriately take advantage of discounts, etc.
From a business perspective, the system allows you to send a request for payment, receive a credit push, then quickly gather any additional information related to that payment, and finally finish the “payment conversation” with an acknowledgement / confirmation message. This provides rich data and context for a payment. Traditionally, a good portion of this data gathering and processing had to be performed outside of the payment system. This is where solutions like Transactis’ have flourished as they have made this process easier for businesses and their customers.
In the legacy systems, the request for payment (e.g., bill) usually had to be delivered some other way, external to the payment system being used. This can be a time consuming element of the billing process. The Clearing House’s has had to solution around traditional payment systems and banking systems to deliver things like e-bills and e-invoices. The problem with this is it fractures the experience for the customer, meaning as a consumer you typically have to visit multiple portals to pay all of your bills, which is really the Biller Direct model. We’ve evolved into this because the systems the banks have attempted to consolidate this have not panned out. Now with the real-time payment rails, the biller can deliver their bills directly to the payer’s the financial institution where they really want to be able to manage and pay their bills and make sure funds are available.
An additional value point is in the process of resolving issues with payments. With real-time, when an issue arises, you don't have call or email your customer out of context. You can send a message directly through the system to the customer that sent you the payment. It essentially allows you to resolve any issues quickly.
Really to sum it up, the importance and value of the real-time payments system is about three things:
Matching the way we live our lives to the way transactions occur - which is in real time
Providing certainty and confirmation to all customers - being able to tell a payer that you've completed the transaction they've asked you to make
Creating the ability perform full cycle contextual commerce within the payment system without having to exit that area that you're engaging the payer
Rick: When you look at the contextual commerce aspect, and you mentioned discounting, are you specifically talking about actions related to the payment or actions more broadly in the relationship between the biller, possibly the bank, and the payer?
Peter: All of the above and let me give you two examples that I think will help the concept of resonate.
The first is on the payer side. About 40% of consumers have moved away from the bank aggregation model recently for three reasons. First, they can't get all of their bills there so it only allows them with the make payments, which only half of the process. This happens to be why customers are willing to go to each individual biller site – to not only pay a bill, but view the bill detail.
The second is that they don't have the ability to know whether or not the action that they asked the bank to complete was actually done. This is an incredibly important driver of payment behavior. When you send funds through an aggregated bill pay model, you assume that it's going to get there when you want it to, but with the way the money is moved through this model, you may not be able to confirm that payment by the due date. This is especially true for customers that need to pay close to the due date.
The third is the need for payment precision. While some aggregated bill pay models allow for you to be able to send a “same day” or immediate payment, it's not consistent across the entire platform and you still don't have the confirmation that the action has been taken.
So a couple of things at real-time payments does for those three things – first, it allows each participating bank the ability to deliver a request for payment with related bill-paying information directly to a payer’s bank account. Second, real-time allows payments to be made at the exact last moment a payer needs to, and still make sure that it gets there within even the last minute that the bill is due. And third, RTP® allows for a response back that confirms not only was the payment accepted by the financial institution of the biller, also that the biller has completed the transaction cycle with an acknowledgement message that the payment has been posted.
Those are the things that drive people back to the financial institution but also give them a more rich experience then any biller direct experience today because they can do it within the context of their bank account. And I think that applies not only to consumers but also to small businesses and ultimately corporates as well.
Rick: So what we’re seeing is the evolution from faster payments to real-time payments to smarter payments, with the key driver being the precision of payments.
Peter: I think it's context and precision those are the biggest points for real-time payments. Let me give a second example I think is important. Let's look it up on the corporate side because the businesses will ask, well what's in it for me?
For businesses, with this system they can now deliver a bill and have the ability to do straight through processing with all the information embedded in the payment. They can now provide their customer base with a better opportunity to make payments last minute. Let me elevate it to a corporate perspective.
One of the challenges you have today on the corporate side is when you get an invoice from another business if you’re not using a portal like Ariba, you have to take that information to transpose it to put into your payables system and hope that everything is correct. It takes a lot of time and effort to complete this process.
With RTP® you now have the ability to receive invoices and automatically debit to the payables system and in that you can also now start driving events and better behavior on the payment side. Everything is connected through the bank accounts and the information associated with the invoices and their corresponding payments. So you get rid of the manual accounting and information transfer issues as well as improving the timeliness of entering those invoices into the system.
The other thing that will be hugely valuable for finance and corporate treasury side of the world comes back to precision. As a corporate treasurer, you can now take advantage of a discount up to the last minute and with precision pay the other party and know that discount applied to your payment. This also drives people to make payments on time.
Potentially if you take discounting a little bit further, imagine a business that has a bunch of open receivables and let's say these are on 30 day terms. When the business sees an issue with a liquidity crunch, they can now send out a revised request for payment to their top customers, offering a discount if they pay within 15 days which now allows them to dynamically change the terms through the payment system. It offers the business to essentially self-serve for their liquidity needs by confidently communicating with their customers through the payment system. The smarter capabilities of what the system can do this is why companies will say yeah this is a little bit of a hurdle to go to a real-time environment and it's not what I'm used to with the batch process in place but I'm willing to do it because a lot of the other benefits. This is not just from an individual business perspective but from a corporates perspective as well. They can actually solve a lot of issues that they currently have within running their business by actually moving their entire company to a more real-time environment.
Rick: That's interesting. Where do you see the intelligence, that dynamic discounting, residing? Do you see it coming from the biller’s the system provider, the financial institution, or the Clearing House?
Peter: I think it depends on where the company does most of their business. The Clearing House acts as the rail that allows for these payment innovations to be built. These are not front-end systems that we are going to create, however, I will say that as we look at the evolution of the system, if there is the ability for us to add a field for a discount within the transaction to make sure that it was up in the other side, that's the thing that we would do on behalf of the industry to make sure that we are driving innovation forward but all of these things can happen with the way the system is being built today.
I think the real innovations are going to come from third-party system providers, companies like Transactis, being able to help their customers. I look at ERP providers; we're in conversations with many of them today, talking about how they can leverage the innovations of the system. I see them developing these capabilities or enhancing their current capabilities with better tools for real-time payment environments. I see financial institutions wanting these solutions for their customers. Think about financial institutions and the role they play for small businesses by being able to provide these tools both from a sending and receiving perspective, as well as working with third-party providers like Transactis to be able to enable your products to leverage these tools to help customers.
Rick: We touched on how real-time payments has the opportunity to bring dramatic value back to the banks bill pay service offerings. When you look at the issues payables networks have with the massive intelligence they need, would you say that real-time systems could be the rail for a successful implementation of a true payables network?
Peter: Absolutely, and what I will say is it ultimately doesn't compete with any of the networks but would create the connective tissue to make them all more valuable to the parties that use them. That's the other element of real-time payments that I absolutely love – it doesn't actually compete with the products in the marketplace, rather it enhances them. RTP® helps to alleviate some of the pain points that exist within the current infrastructure is that are out there by being able to do things on a network scale instead of doing things on an individual basis.
I think you see that not only in the payables networks but on the bill pay side as well, it isn't just about enhancing the bank bill pay experience. It's about enhancing the experience for the biller as well, and being able to offer better customer service in the best way possible. That can still be through a CSR, with a customer calling to make a payment, having that request go through immediately, having the CSR confirm the application of the payment, and closing that loop faster. It means the payer no longer has to worry about remembering to not spend that $50 used to pay for an electric bill because it won't hit the account until Monday since I'm paying this on a Friday. It closes that cycle as well. There’s a lot of different things that I think it helps to address as you look at leveraging the entire value of the system.
Rick: The lines have been blurred between receivables and payables, and this capability really eliminates the terms receivable and payable because both functions will operate within the same operational environment. It’s built upon managing the content through the Clearing House’s rails. It becomes less billers and payers and more participants because in many respects some of the payers are billers of each other. So what real-time payments and what the Clearing House offers is a platform that allows precise real-time payments with contacts to drive that consolidation that allows not only dynamic discounting but increased interaction between the participants in the network facilitating real-time commerce and the achievement of each business’ goals at the same time.
Peter: Yeah I think that's absolutely right. When it comes down to it, it's not necessarily just about real-time, although real-time and being able to manage things when you want to is important. But going back to the precision point, the reason that companies and corporates will use this is the efficiency it provides, giving them the chance to reallocate resources that currently spend a lot of time in the exceptions processing arena out to other parts of the business area. When you look at the AP and AR groups of businesses today, they really feel like different silos within those businesses. If you look at the billing groups as well, they might be another silo within the business. If I'm the CEO or the CFO of a company, I will look at real-time payments as a platform for being able to break those silos down and run a much more efficient company, and reallocate my people to where my business is actually driving revenue, which is never in any of those places.
Rick: Where do you see the participants in this payments ecosystem in terms of their readiness to deliver solutions on these faster payment rails?
Peter: I think the biggest thing is that we're still in the early days right now. We launched this in November of 2017 and while we have very aggressively been working with financial institutions, corporates, and third parties, we're still very much in that educational cycle. We’re focused on getting people to understand what real-time payments is, that it's available to every financial institution and their customers in the US, and it has the ability to be transformative to business lines to meet the needs and demands customers have today. It's not just about creating new demand – these are things that customers and billers are already asking for.
We see the network evolving fairly quickly. We will be at about 50% of deposit base by the end of this year, where our owner banks that are coming on as well as a bunch of other financial institutions that will be the first monitors of the Clearing House to leverage the network. We've been engaged with various different third parties, like Transactis and ERP systems. They are very interested in driving new products and services out of the systems as well. By mid-2019, we will actually see the system being leveraged with products out in the market continuing to do some of the deep integration possible in a real-time environment, and continue to see adoption by financial institutions grow.
We’ve already engaged 2,500 financial institutions, educating them on RTP®, and we're getting really good engagement on the marketplace in terms of interest. That will drive better adoption through service providers as well as they look for solutions that are going to help their customers in the end.
Rick: I want to touch on the faster systems of other countries. The US is not the first country putting together a real-time payment service offerings. What are the factors that have been successful in these other systems that make you optimistic that you're on the right path?
Peter: We aren't the first country to develop faster systems, and in fact I'd say the US has been fairly late to the game. Ultimately, the systems we had in place were massively efficient and were delivering value up until what I would call the true digitalization of the world, and specifically payments. I think it's pretty safe to say that almost every business is now in the digital age, and if they aren’t, they start to lose relevance with their customer base when they can't meet the digital demand.
There's a couple of differences, for example when the UK launched faster payments in 2009, they had a very long road to be able to start getting volume and network adoption. But if you remember in 2009, we were at a very different technological time then we are now. We were just starting the mobile and digital drive toward engagement and in many cases back in 2009 we still were okay with the off hours processing. We didn't have the immediacy in every aspect of our lives that we have now.
What you'll see when you look at the adoption rates of other countries that have these real-time payment solutions, they've all picked up more recently. That really has to do with the fact that the tools that are available now take advantage of real-time and immediate technologies. Customers are already using things like smartphones, so it becomes much easier to innovate.
The foreign systems are also now in the process of modernizing their entire technology stack, whether it be a financial institution or a business, which makes it easier to take advantage of these tools.
I think that the adoption in the US will come up on a faster scale based on the fact that we are already on in a much better technology environment than other countries have in the past. With that said, we've learned an immense amount from watching how other countries have evolved in the space. One of the things that we did differently within the system is to not necessarily focus in on overlay services. An overlay service is like what Zelle is on top of an ACH Network. It's really an overlay service, making up for some of the inefficiencies that the network doesn't solve for.
Well when we looked at real-time payments, we felt the system should be able to complete that entire contextual conversation which means adding request for payments and adding an acknowledgement message. Many of the other countries, when they originally created their systems, didn't include these elements because, again, the digital engagement wasn't as high.
Other countries are looking at adding these features to replace the overlay services because trying to drive everyone to a brand new way of doing things tends to be a bit much and forcing them into it using a different tool is actually more than what you can do, even a network environment. What we've done with real-time payments in the US will enable faster adoption of these technologies because we can do all of these things on the network without necessarily forcing people to do things differently than what they're doing today. Rather the system will integrate into the processes that they currently have and that makes adoption easier.
Rick: Finally, what are some of the specific use cases that you want to direct people to that would accelerate the success of the real-time payment system?
Peter: A couple of things, we look at what are the pain points that are not addressed by other networks in the environment today. I think those are the places where the financial institutions are spending a lot of time with customers, helping them to understand what you can use real-time payments for. In the bill pay space, we know that there is a massive amount of inefficiencies out there today. We know there are a lot of things that are not driving customer engagement, and being able to manage finances tends to be a nightmare given the myriad of different places you have to go in order to pay your bills. We believe in the bill pay space and really the C2B side of the equation, that tends to be a really easy win from an engagement perspective. Bill pay tends to have a fairly long tail on it because of the number of participants you had to make sure you're engaged in the system. We do feel that once people begin to drive in that direction that they will continue that direction.
The other one that is harder is B2B payments. This area tends to have a ton of inefficiencies and waste in the processes, and we feel that RTP® can help. We've been working with various different players in that space to help them to understand what are the things that need to be developed to be able to take advantage of the B2B capabilities of RTP®. So that's another use case where you'll see things hit the marketplace in the 2019 period, and it will be a fairly quick ramp up because people actually see the value in being able to take advantage of the capabilities. Another use case that is being addressed today, people are doing disbursements on some of the faster solutions today. So whether that be the Visa or MasterCard or whether they be things like Zelle, they are able to now get the information to the clearing side and to the end customer a little bit faster. That's a good thing – disbursements are a really good use case for real-time payments. We think that people will start to migrate away from the rails that only allow you to clear two rails that allow you to clear and settle.
From a financial institution perspective, the ability to de-risk yourselves because what's happening today with some of the services that do not provide for final settlement until later on and batch processing is that you start to create an immense amount of risk between the parties. Once you start to deal with large dollar amounts you start to really feel comfortable about making those available for your customers in real-time because you have to rely on the solvency of the other party at the time at which the settlement happens.
We think disbursements will start to move over fairly fast and that really will be the ability for the precision and the acknowledgement message. These two things are really important for businesses to take advantage of, but also now for the financial institution can give their customers the certainty that the settlements are actually in the accounts on time and the funds are available. We think that that will be one of the other big drivers of early volume on the network.
Rick: Thanks again for joining me today, Peter. I think we’ve shed some valuable light on the real-time payments space. Thank you so much for taking the time to speak with me today.
To learn more about The Clearing House and its real-time payments system, visit their website at theclearinghouse.org. The Clearing House is hosting its annual conference November 26th to the 28th at The Pierre in New York City. Transactis CEO will join other industry experts for the panel, Banks, Fintechs, Neo-Banks: The Drive for Constant Innovation, discussing the modernization and digitization of the financial landscape.