By Patti Murphy
The transition to real-time payments for consumers and businesses is well underway in the United States. The Clearing House, owned by many of the largest U.S. banks, has been inking agreements with financial technology companies on a real-time payment system that's expected to launch later this year.
And TCH is not alone. Early Warning Services LLC, which is owned by many of those same banks, disclosed on March 9, 2016, that it was actively processing real-time, person-to-person payments via clearXchange. A person-to-person payment network, clearXchange was created by a handful of banks as an alternative to PayPal Inc. Several of those banks also hold ownership interests in Early Warning, which acquired clearXchange in January 2016.
Bank of America and U.S. Bank are the first to offer the new service, which is designed for online and mobile access. "We're focused on creating a simple, straightforward person-to-person payments experience that lets our customers pay anyone with a couple of easy intuitive steps," said Thong Nguyen, President of Retail Banking at BofA.
Meanwhile, MasterCard Worldwide is said to be mulling over a takeover bid for VocaLink Ltd., a payment company based in the United Kingdom that provides the technology platform for that nation's real-time payments service.
VocaLink, which is owned by the U.K.'s leading banks, signed on in 2015 to help TCH build its real-time payments network. More recently, the company has come under fire from the U.K.'s payment system watchdog (the Payments System Regulator) which asserts big-bank ownership of the network is stifling competition in the countries comprising the U.K.: England, Scotland, Wales and Northern Ireland.
VocaLink is said to move consumer and business payments totaling £6 trillion a year. It also provides the network underlying the Immediate Payments System in Singapore. In 2015, VocaLink introduced to the U.K. a mobile payment service, Zapp, which supports real-time, cardless merchant payments. With Zapp, payments originate directly from consumer bank accounts.
The introduction of real-time payments (particularly mobile payments) could well shake up the merchant acquiring space. "It's a radically different charging model," said Daren Wedge, Head of Consumer Banking, Europe, at ACI Worldwide Inc. Many merchants, searching for ways to cut costs, will seize upon the opportunity to eliminate interchange with a VocaLink-type option ‒ but not necessarily to the exclusion of other methods, such as card and the automated clearing house (ACH) payments.
"The winners [among acquiring organizations] will be the ones that are able to offer this type of service as well as other services," Wedge said. "They need to address the retailers' pain points."
The ACH network, originally developed as an electronic alternative to the check payment system, is also undergoing significant changes. Rule changes recently adopted by NACHA ‒ The Electronic Payments Association, the private sector group that handles ACH rulemaking, and the Federal Reserve, which operates the largest ACH network in the United States, will phase in same-day settlement of ACH payments beginning later this year.
First up: ACH credit transactions, which will be eligible for same-day settlement beginning in September. The second phase of the transition plan provides for same-day settlement for ACH debits. Shortly thereafter financial institutions receiving same-day ACH credits will be required to start making funds from same-day ACH credits available to recipients by no later than 5 p.m. in the Receiving Depository Financial Institution's local time. Virtually all types of ACH payments will qualify for same-day settlement, with two possible submission deadlines (10:30 a.m. and 2:45 p.m., Eastern time); only international transfers in excess of $25,000 are excluded.
In January, the Fed stated it had selected IBM Corp. to help upgrade its processing platforms to keep up with same-day ACH and other evolving requirements. Brian Egan, Senior Vice President of the Fed's Retail Payments Office, which operates out of the Atlanta Federal Reserve Bank, said the technology upgrade will benefit not only the move to same-day ACH, but also faster check clearing.
"This will enable us to process payments more cost effectively and position us to more quickly adapt to changes in the ACH and electronic check environments," Egan said. "Both of these outcomes are consistent with our strategies to continue to provide financial institutions with high quality and cost effective ACH and electronic check clearing services."
NACHA's leadership characterized the new same-day processing schedule as an interim step toward real-time payments. In describing the move, Janet O. Estep, NACHA President and Chief Executive Officer, said, "Same-day ACH serves as an immediate action the industry has undertaken to modernize the payment system, and creates a building block for a variety of products and services."
The promise of faster funds availability with a new intra-day ACH processing schedule was overwhelmingly supported by NACHA's membership (which consists of financial institutions and large corporations). But it isn't a big draw for all merchants.
The National Association of Convenience Stores has been especially vocal in its opposition, challenging a new fixed 5.2 cent fee paid to the financial institution receiving a same-day ACH to cover the originating institution's cost of processing and posting payment – a fee that is likely to get passed along to originating customers. In a letter submitted to the Fed last year, the NACS complained that the proposed new fee "appears to undermine the potential for ACH transactions to remain a valuable low-cost alternative to payment card transactions."
The NACS also raised the specter of anti-trust litigation – something that has plagued credit card companies for years. Setting an interbank fee for same-day ACH settlement "will impair competition in the ACH marketplace," NACS stated. Plus the group expressed concern that "this fee will increase over time, in part because the structure of the fee-setting creates economic inefficiencies that will be free from market forces."
Rather than changing operating rules and schedules to accommodate same-day ACH, the NACS said the Fed should focus on moving the United States to real-time payments.
The Fed is a leading champion of real-time payments, and in 2015 created a set of task forces consisting of public and private sector experts focused on facilitating faster and more secure payments for the United States. "The Federal Reserve is in a unique position to bring people together and let them come up with solutions," Federal Reserve Board Governor Jerome Powell said during a recent online interview. Esther George, President and CEO of the Federal Reserve Bank of Kansas City, added, "What we want to accomplish is to make sure that there is a payment system that the public can trust and have confidence in and that supports economic improvements.
To not do so is to risk competitive disadvantage for U.S. firms in international markets, the two Fed officials agreed. "If we don't do this we risk handicapping U.S. businesses and falling behind the rest of the world," Powell warned.
More than 500 organizations – banks, merchants, technology companies, industry associations among them – have signed on for one or both of the Fed's new task forces. Participants include a diversity of organizations and individuals. Among them: ACI, Dwolla Inc., Hard Rock Café, Ingo Money Inc., Integrity Payment Systems, Netflix Inc., Starbucks Corp., Square Inc., TCH, Total System Services Inc. (TSYS), Uber Technologies Inc., Verifone Inc., Wal-Mart Stores Inc., various federal regulators, and scores of individual banks and credit unions.
As task forces go, the Fed's Faster Payments and Secure Payments task forces have made notable progress, approving in just eight months a set of criteria for developing faster payment networks. Now it is soliciting proposed solutions for faster payments with a goal of publishing assessments of each early in 2017. Fed officials said they see their role as facilitating industry investments, not dictating any one approach.
"This is a watershed moment for payments in this country," Jordan Lampe, Director of Communications at Dwolla who serves as that company's representative on the Faster Payments Task Force, said of the published criteria. Lampe said he is hopeful that the new payments infrastructure the Fed is trying to advance will be more "developer friendly" than existing networks.
Dwolla was founded in 2008 by an online merchant looking to sidestep credit and debit card interchange. Today Dwolla handles web and mobile payments, transferring funds between accounts, with next-day availability via the ACH, as well as a real-time option that bypasses the ACH. (Presently, real-time, account-to-account payments are available through just two financial institutions: BBVA Compass Bancshares Inc., headquartered in Texas, and Iowa-based Veridian Credit Union.)
Mobile technology, and in particular the proliferation of smartphones, is a driving force behind the campaign for faster payments. But the reality is that consumers are more apt to use their smartphones and tablets for financial activities other than payments.
A 2015 study of consumer payment choices, conducted by TSYS, revealed that 86 percent of consumers using mobile banking apps do so to view account balances, while 70 percent use the apps to verify recent transactions; fewer than half transfer funds or pay bills using their smart phones. Regarding select specific features that could enhance the value of a payment program, the ability to make payments via a smartphone ranked tenth among respondents, followed by various cash-back and discount programs, alerts, and online chat access to customer service agents.
First Annapolis Consulting recently reported that one in eight U.S. consumers with Android phones have used Android/Samsung Pay at least once, but just 2 percent do so at least twice a month. Among iPhone 6 owners, 20 percent have used Apple Pay at least once, while just 3 percent use the devices to make payments two or more times a month.
According to an analysis by Hugh Gallagher, Principal at First Annapolis, Android owners load an average 1.9 cards onto their mobile wallets; Apple Pay users load an average 2.3 cards. However, iPhone users are more apt to use mobile payments. "At this point in time, the typical financial institution can expect 1 percent to 2 percent of cardholders to use Apple Pay two or more times [a month]," Gallagher said. "This represents positive momentum for the evolution of the U.S. mobile payments market, but it also suggests a long adoption curve."
Apple Pay and its Android equivalents rely on near field communication technology to effect payments. A merchant-backed mobile wallet initiative, called CurrentC that relies instead on quick response code technology, has been slow to take off. However, one of the nation's largest retailers, Wal-Mart, recently added payment functionality to its hugely popular mobile app. That new functionality, known as Walmart Pay, works with both Apple and Android devices.
Wal-Mart claims that 22 million consumers are active users of its app, which customers had already been using to locate store items, order prescription refills and complete online orders. The app is said to rank among the top three retail apps in both the Google Play Store and Apple Inc.'s App Store.
Concerns about security – among retailers and consumers – represent a significant barrier to broader adoption of mobile payments. A survey last fall of American consumers by the French security firm Inside Secure found that 70 percent of smartphone users who weren't planning to use the devices for shopping cited concerns about fraud and identity theft. More recently, when ACI queried retailers at the National Retail Federation's annual convention, payment security emerged as a core area of concern. It was the top feature desired in mobile apps, followed closely by loyalty options, ACI reported.
According to the TSYS study, regardless of form factor, debit cards are Americans' preferred electronic payment method. Checks and cash, however, continue to dominate the payments pie, based on data collected regularly by the Fed.
Forty-one percent of consumers surveyed by TSYS in 2015 said they prefer to pay with debit cards; 35 percent prefer credit cards. The preference for debit has been falling, however. In 2013, 49 percent of consumers surveyed said they preferred to pay with debit cards. The preference for credit cards has remained constant at 35 percent.
A report published in 2015 by Mercator Advisory Group suggested that while overall debit card usage in the United States is holding steady, young adults and high-income households are shifting away from debit cards. Usage by both demographic segments declined to a seven-year low in 2015, Mercator said.
Prepaid debit card usage, meanwhile, continues to grow. A Pew Charitable Trusts-commissioned study, published in 2015, revealed that prepaid card use jumped 50 percent between 2012 and 2014, driven primarily by increased adoption among consumers with bank accounts. (Unbanked consumers were early adopters of prepaid debit, and many continue to use the cards as checking account substitutes, Pew noted.)
A 2015 survey of consumers by TD Bank N.A., suggests millennials are leading the way in prepaid card adoption. It found that 25 percent of U.S. consumers either use reloadable prepaid debit cards now or have used them in the past two years, but among millennials it's 33 percent. Among consumers who use or have used prepaid cards, the most popular reason is for day-to-day purchases (61 percent), followed by online shopping (56 percent) and discretionary spending (52 percent).
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