The Future of Payments

Article Title Goes Here 12 BANKING PERSPECTIVES QUARTER 4 2018 H istorians may look back at 2018 as a pivot point for the U.S. banking system. Just a decade after the nadir of the 2008 financial crisis, this year will likely be remembered as the beginning of a new era in payments and customers’ control of their financial data, as well as a year in which banks began to take on a new role as trusted stewards of data security and privacy. It is no exaggeration to say that these changes are the culmination of years of effort, development, and technological investment in tools and systems that will serve as the foundation of American commerce for generations. And remarkably, these efforts are driven by a partnership between the public and private sectors rather than government mandates. One of the most potentially transformational changes to the U.S. financial landscape has been the late-2017 launch of the RTP network, the real-time payments platform fromThe Clearing House (TCH). After years of discussion, real-time payments in the U.S. are now a reality. With payments occurring in seconds and accompanied by rich data, the RTP network – the first completely new payment system deployed in the U.S. in 40 years – is poised to move the nation’s payment system toward faster payments by 2020, the stated goal of the Federal Reserve’s Faster Payments Task Force. While some have argued that existing batch-oriented ACH networks that settle payments over a one- to three-day window could be adapted to help move the industry toward this goal, these networks are over 40 years old and not functionally equipped to handle the rich data that is associated with secure faster payments. The rapidly expanding RTP network, however, can meet this objective handily. Additionally, as part of the task force, RTP was evaluated against many other existing payment systems and FinTech applications, and RTP was found to have the best combination of speed, functionality, and security across all evaluated options. Meanwhile, after more than a decade of high-profile data breaches that compromised millions of accounts, along with ongoing debate in the media about various approaches for controlling and protecting financial data, the use of consumer financial data is poised for a major shift. With “open banking” regulations such as Europe’s PSD2 requiring banks to enable application programming interface (API) access to consumer bank account data, and voluntary industry-led efforts in the U.S., the control of financial data is quickly becoming a consumer-driven exercise – rather than bank- or FinTech- driven. With or without regulation to require it, the combination of APIs and tokenization, a technology that masks financial data for every transaction, will have a profound change on the privacy and security landscape. FASTER PAYMENTS TODAY Faster payment systems are proliferating rapidly all over the globe. As of September, 40 faster-payment systems had been implemented worldwide, up from 25 only a year ago. 1 Five more programs are under development, and another 16 are expected to go live within the next year and a half. Many countries have gotten a head start in the march toward real-time payments thanks to nationwide government mandates. The U.S. has no such mandate – in fact, the Federal Reserve lacks the authority to enact one – but the Fed has pushed for change through its Payment System Improvement project, 2 which officially began in 2015. The project has convened a wide swath of industry stakeholders – banks of all sizes, processors, vendors, FinTechs, and more – to come up with ideas for a faster, more secure payment system in the U.S., with a goal of nationwide, ubiquitous service by 2020. TCH’S RTP: ONE YEAR LATER The Clearing House and its owner-banks foresaw the need for real-time payments and began to develop the RTP network in 2014. The new system has clearly tapped into considerable pent-up demand. The RTP network, which is open to all banks, currently includes eight banks, accounting for 25% of U.S. transaction accounts. By year’s end, 14 banks will be on the RTP network, which will reach almost 50% of U.S. transaction accounts. That number is expected to balloon quickly as core providers such as Jack Henry and FIS go live with their interface to the RTP network in the second half of 2019, providing a means for their customers (thousands of smaller financial institutions) to join the RTP system. Additionally, TCH is actively working with bankers’ banks and corporate credit unions to explore ways in which these entities can provide services to smaller institutions to help them use the RTP network. The RTP network is on track to meet the ultimate goal of reaching nearly all endpoints – ubiquity – by the 2020 target. RTGS: A NEW CONTENDER FROM THE FEDERAL RESERVE? In October, the Federal Reserve issued a request for comment on two potential new Fed services. 3 The first, a tool for financial Speed and Information: The Future of Payments LEADER