What does clearXchange tell us about the battle to rule instant payments?

Seven major US banks – including JPMorgan Chase, Bank of America Corp, Wells Fargo & Co and Bancorp – are collaborating on a jointly owned system that will speed up and simplify person-to-person transfers and other instant payments services. Known as clearXchange, the system will allow customers to transfer funds between accounts instantly with use cases ranging from splitting dinner checks, rent payments and travel expenses.  So far, Bancorp and Bank of America are among the first ones to go live with clearXchange, but others are also expected to launch later this year.

The ‘special weapon’ in the fight against fintech

The initiative is the latest play by banks in their battle against fintechs hell bent on disrupting the status quo, and eyeing payments in particular. A recent PwC report revealed that 544 top management personnel in financial services companies believe that fintech companies could take as much as 33% of the business from the legacy financial system.

In particular respondents from the payments industry anticipate that in the next five years they could lose up to 28% of their market share to standalone fintech companies – the highest of any subsector. And Fintech companies are even more bullish, believing they could capture a third of incumbents’ business.

With the likes of TransferWise, PayPal’s Venmo and Facebook Payments it is clear that payments will be a key battleground with instant transfers the ‘special weapon’. One of the attractions of services like Venmo is that it is instant, functional and user-friendly. If clearXchange can replicate this experience it presents a significant opportunity for banks to catch up in the race against fintechs and gain popularity among younger generations.

The race to real-time

For those of us in the UK which has had instant payments for a number of years, the idea of a race may seem baffling.

However, when we take a global view slow, batch based settlement which takes days not minutes remains the norm. There are at least 21 domestic instant payments systems live globally, with a host of systems in development.

As momentum behind real-time builds – albeit slowly – two approaches are emerging: market-led and standards-led.

Market-led or standards-led?

The history of the development of payment systems indicates that there are two fundamental approaches: market-led where proprietary systems are developed by one or more organisations such as Visa, PayPal or Apple; and standards-led where an industry body or regulator stipulates a particular system and sets a deadline for implementation such as Faster Payments in the UK or SEPA in the Eurozone.

Similarly the shift to instant payments is also divided with proprietary systems like clearXchange on one side, and the European Payments Council (EPC) pan-European instant payment scheme SCTinst on the other.

Both approaches have their advantages and disadvantages:

Market-led

• Reach: The usability of a payment system depends on the number of users – active (for sending) and “addressable” (for receiving). A proprietary system with limited coverage may fail simply because users try it once or twice, find the intended recipient is not on the network, and give up on the service.
• Commercial: If participants are financially incentivised stakeholders the service is much more likely to be pushed more aggressively and invested in. Conversely, fees that are set too high to increase margins may deter counterparties.
• Fragmentation: One of the big issues with instant payments, and payments in general, is scale. Proprietary payment systems can increase reach via interoperability with other systems, but that adds cost and complexity and may result in an inconsistent user experience and service level.

Standards-led

• Reach: Regulatory initiatives can ensure near-universal adoption of the new system, and reachability of the majority of accounts has proven to be a major success factor.
• Standards: Standardisation should ensure interoperability and drive down costs by encouraging competition, thus driving scale and rapid adoption. However the reality is often different to the theory as evidenced by the slow adoption and national interpretations of SEPA.
• Regulation: Rules may bring everyone in-line but that doesn’t necessarily correlate with success. For every big hit like Faster Payments there is a disappointment like the Current Account Switching Service that fails to gain traction.

Who will take the crown?

Whether instant payments is implemented as part of a massive SEPA-like project, or as a network of national instant payment systems, or through proprietary efforts the direction of travel is clear: instant is coming.

Whether market-led or industry-led one thing is clear: banks – especially global or pan-regional players – need to deliver on instant payments before their competitors do – whether those competitors are banks, fintechs or new entrants in the payments space. The number one challenge for banks will be to connect and integrate the many and varied instant payment systems that are popping up around the globe. And as history tells us it will be the ones that move quickly and decisively to deliver at scale that will take the crown.