Payments are Slow. Banks Don't Care. Challenges to RTP

Money moved around physically in the 70s.

Banks would work normal business hours and collect physical checks in batches to process. Hence why batch processing existed.

But obviously we have machines now, why do they need to run on human business hours?

Our rails run on a basically extinct programming language called COBOL which some banks are now not even hiring for.

The UK implemented faster payments but it was a top down push from the government.

The banks adopted Vocalink, costing pennies per transaction and taking ~15 seconds. A more recent development - TrueLayer, one of Europe's biggest open banking platforms, launched its closed loop payment product in a handful of countries. It features instant withdrawals and refunds, instant reconciliation, instant access to funds, frictionless checkout, reduced fraud (PSD2 & SCA compliant), and more.

Europe's open banking mandates and compliance networks have typically come from top down - allowing a new ecosystem of fintechs to be built leveraging faster technology and open data. The US has thousands of banks versus the UK which has hundreds -

Our severe lag in speed is because we don't really do anything top down like the UK or even SE Asia, everything comes bottoms up.

In fact, we still mostly operate on normal business hours only. Best we had a couple years ago was Popmoney by Chase but you could only send money to another Chase user. Now we have more options like Venmo, Zelle, Cash App, etc. Research does show that bank-provided solutions like Zelle are less popular than tech-provided solutions like Venmo and Cash App despite many shortcomings.

So what happened when the the UK got better? (note: fraud also skyrocketed it was not all positive! wrote a bit about it here.)

Well, the US still was thinking about building something faster too - but not instant. Because obviously that is too big of a jump.

ACH governance requires supermajority (75%) to vote yes. >50%, <75% voted for a faster payments system, citing fraud concerns and overall resistance to overhauling the system because it's too much work and why fix something if it's not crashing and burning yet right? Not only does this complaint come from inside of the Fed though, it also comes with businesses - they've build their system on old rails and migrating to new ones is also a lot of work for them.

Besides all the potential friction and costs of transitioning to a newer system, there's the concern of cannibalization - wires are actually quite fast but also expensive.

With a new system, wouldn't you just wipe out some wire money as instant payments would theoretically cost less and have great accessibility? For references, wires cost ~$30. In 2018, debit cards were the most popular US payment method and their fattest revenue line, approximately 23-44 cents per transaction in 2018. Since then the number has come down to less than half a cent.

With shitty rails, the payments ecosystem has really progressed along since there wasn't much sign of something improving.

Enter Zelle, Cash App, Venmo, etc. Even Amazon, Google, Apple. Paypal even recently hiked fees for instant transfers as usually those settle in 1-3 business days.

Around the world, RTP already exists in 20+ countries e.g. UK as I just mentioned, SE Asian countries such as Singapore and Thailand.

But finally... we may be able to enter the world of RTP aka real time payments.

Real time payments (RTP) was launched by TCH (payments consortium of 25 of the world’s largest banks and various technology companies) first in November 2017.

In fact as of February 2021, Zelle started running on RTP. Smaller banks and credit unions stayed away though, praying for the Fed to build something. In the meantime, RTP reached over half of US demand deposit accounts because the biggest banks took part in it.

And of course, the Fed promised something that it would not deliver for many, many years.

FedNow is supposed to be a 24/7 payment settlement service to launch in '23 or '24.

No more 9-5, business hours only. All day every day payments will be here. FedNow will provide access through the Fed’s FedLine® network (10,000+ financial institutions network).

The differences with TCH's RTP is that FedNow allows you to use your master accounts (those accruing interest etc.) to count towards your reserves.

RTP participants usually pre fund into an account that doesn't appreciate in value, aka remove master account liquidity.

From the banks' POV their main concerns are interoperability and sunk cost.

The big banks that invested a lot of mulla into RTP could be salty that FedNow is entering the arena. We don't know if RTP and FedNow will be interoperable. Tbh, we don't even know if FedNow will roll out when it is supposed to. Lots of things are still in the air but what is clear is that there will likely be some sort of market share war between them because we live in a capitalist society.

Thankfully, from the consumer's POV, it will just better for us because we can send money faster in reliable systems.

Hopefully our experience won't be disrupted.

And from the regulators' POV, it would be ideal to align incentive structures in favor of the best consumer experience and rails to further innovate upon.

Either way it is good to upgrade the system. It is about damn time!