By Brandes Elitch
CrossCheck Inc.
If you work in payments, you have been hearing a lot about real-time payments, and its companion, open banking. Merchants may have even asked you about it. It turns out that there is no simple way to explain the state of real-time payments right now. It is a question of definition and scheduling.
In the current payment processing landscape, exaggerations abound, as evidenced by comments to the effect that soon:
I wouldn't bet on any of that happening soon, or ever. Just to be clear, other than the Federal Reserve Fedwire system, no real-time payments are out there now – if you go by the definition propounded by ACI/Lipis Advisors, which states, "A real time payment is posted to the beneficiaries account in under thirty seconds after initiation, and that can be sent on a 24/7/365 basis."
This definition presumes finality of payment and settlement in a bona fide bank demand deposit account, not in a closed-loop, nonbanking platform – in my opinion.
Part of the issue with this is the definitional aspect. You may know that CrossCheck is located in Wine Country in Sonoma County, Calif., and our metaphors are influenced by our proximity to the wine industry. Illustrative of this is "the pour." This refers to how much wine you get when you order wine by the glass. A standard wine bottle is 750 ml, about 25 ounces. The definition is that five glasses per bottle is standard at a restaurant.
But there is something called a "short pour," which is about four ounces. This means the restaurant gets six pours per bottle. At $12 a pour, this generates $72 in revenue versus a $12 wholesale cost for the bottle – $60 profit, a 20 percent increase. Things are not always what they seem. With real-time payments, it is all about the definition, and some of these solutions are along the lines of the short pour.
Just like the short pour, there are some behind the scenes things going on with faster payments that don't quite meet the eye. For instance, faster payments started with peer-to-peer or person-to-person (P2P) transfer facilitators like Venmo. You link your credit card, debit card or checking account to your Venmo account, and the funds are stored there. But if you want to transfer the funds back to your checking account, Venmo will charge you a 1 percent fee to do that, and the transfer will take one to three days – hardly real-time.
And Venmo charges the merchant 2.9 percent and 30 cents to get paid if funded by a credit card through the PayPal option. But Venmo was not designed for business transactions; it was designed to send and receive funds from people you know personally and trust, so it certainly could not be considered a real-time payment option tailored for merchants. In fact, Venmo is really for P2P payments. And right now it is The Clearing House that is focused on B2B payments.
Interestingly, Venmo, like Square and Zelle, runs on the Visa debit rails. Visa pushes the money into your Venmo account on the Visa debit card rails and it is supposed to post in 30 minutes or less. For a use case, take Uber. Uber drivers who want instant payments will pay 50 cents, or they can wait for an automated clearing house (ACH) credit, which might take a day (or longer if a weekend is involved).
Let's take a look at "same day payments" in the ACH world. You will recall that the ACH was originally set up as a batch, store and forward, next business day settlement process, and since banks still use batch processing, this requires additional intra-day batches. The general rule per subsection 3.3.1.1 of NACHA – The Electronic Payments Association' operating rules is: "For a credit same day entry, an RDFI must make the amount of the credit entry available to the Receiver for withdrawal no later than 5 pm in the RDFI's local time on the Settlement Date of the Entry."
Think about this for a minute. If the funds are not available before 5 p.m. your local time, you cannot really use them today, can you? Your only alternative would be to use them the next business day. Is this really a same-day payment?
NACHA rules have three same-day windows (the third one is temporarily on hold for six months). The first window says that the RDFI has to receive the posting file by noon EST. The second window states that the RDFI must receive the posting file by 4 p.m. EST. That would be 9 a.m. and 1 p.m., respectively, California time.
From a practical standpoint, who is ready to calculate their cash position at the start of the day or even a few hours later? Most people I know calculate their cash position by noon or 1 p.m. It appears that same-day ACH would work if the sender was a West Coast financial institution and the payment was made before noon, otherwise, not so much.
Payments in the United States can be cleared by the Federal Reserve or by a private organization called The Clearinghouse (TCH). Both are developing their own version of real time payments (RTP). In November 2017, TCH launched its RTP system, with 24/7 real-time clearing and settlement capabilities. Banks can connect directly or via their core processor.
TCH is a private organization owned by 25 of the largest banks in the world. They have their own rules for clearing payments between member banks and are separate and distinct from the Federal Reserve and NACHA. Here is a quote from an article by S. Heller and R. Hunter at TCH, written for the Bank Policy Institute, which argues that there is really no need for the Fed to develop a faster payments platform, because TCH has already done so, and for the Fed to compete with TCH would introduce interoperability issues that would make it difficult to get ubiquity. I am not making this up. Here is the quote:
"The U.S. payments system is complex, involving myriad participants with many different, often interrelated and interconnected market segments … Systems have already well-established formats, unique payment and messaging characteristics, established legal structures (that can vary significantly between systems) and the real-time nature of the payment introduces enormous operational and other complexity that would be difficult to overcome…a multiplicity of core infrastructure real-time payment platforms that perform settlement could cause fragmentation, forcing payment solution providers to choose between different platforms, or increase costs for such providers because of the need for redundant interconnectivity thus depriving users – for all use cases- the ability to make payments to counterparties that would no longer be on the same payments platform."
Just in case you didn't catch it, the 25 largest banks are arguing that there is really no need for the Federal Reserve to get involved in faster payments because they already have it covered. I will refrain from further comment on this approach.
There are many different players in the payments ecosystem. They all seem to have a different definition of what constitutes real-time payments, but none of them meet the definition provided at the beginning of this column. Obviously, insofar as the banks are concerned, the Federal Reserve writes the rules. NACHA, also controlled by the very largest banks that have the most DDA accounts and thus send and receive the most ACH transactions, has its own rules. TCH has its own rules.
There are many private-sector companies, such as Dwolla, Mobile Money, Wingcash, Zelle, Popmoney, Visa and Mastercard's OCT system, and other platforms such as Venmo, PayPal, and Square. All those companies want you to believe they are offering you real-time payments, but you should continue to ask if they meet the real definition here, and if not now, when and how will they?
Brandes Elitch, director of partner acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A certified cash manager and accredited ACH professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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