Striving for ubiquity and interoperability in the US
The first Faster Payments Barometer, conducted by the US Faster Payments Council in partnership with Glenbrook, received over 700 responses with broad coverage across industry stakeholder groups such as financial institutions, core processors, payment network operators, fintechs and acquirers. The sheer count of respondents alone demonstrates that faster payments has mind share and focus in the payments industry. To put their responses in context, I will bring in the European experience – since it has implemented its instant payments scheme at a similar time frame and is of comparable size and complexity.
Reaching ubiquity targets
Lack of ubiquity has been identified as a deterrent to adoption by 53% of the respondents of the Faster Payments Barometer. This observation tracks against the European experience, where regional ubiquity was achieved by having a clear regional champion (STET in France, EBA for Tier 1 Banks, Iberipay in Spain etc) along with strong regulatory encouragement. Regional ubiquity was then extended across the continent through interoperability, which had been specified and designed before the implementation, including the rule set and the SLAs for end to end processing.
This approach recognises the reality that Europe is much more regional in its payments processing than the US – with nine National Clearing Houses (CSMs) providing instant payment services directly and another 24 providing it through TIPS. This at once illuminates the reason for faster European adoption and also highlights why a similar path is not available in the US. There are only two operators in the US (rather than 30+ in Europe), the concept of “national champion” is not applicable, and the solution from a second operator is not going to be available for several years.
Takeaway: Even with Zelle growing at over 14% per quarter, TCH RTP reportedly growing at 25% a quarter, and Visa and Mastercard already connecting to all US FIs for their push credit product, the US may well need more options in the market in order to reach ubiquity targets.
The reasons for divergence in the US
Almost 60% of the respondents do not believe that we are making enough progress toward faster payments adoption. Again, in comparison with Europe, the US is lagging behind, with SEPAinst (launched in November of 2017) already reaching almost 60% of addressable banks (see Appendix A). I see three reasons for the divergence:
1. One-time events. Headwinds in US vs. tailwinds in Europe
- Whereas SEPAinst was a natural and tactical development following on the massive investments that FIs had made to adopt SEPA and ISO 20022, in the US, FIs had to deal with the introduction of Zelle, Same Day ACH, Mastercard Send, Visa Direct, TCH RTP and digital wallets all roughly at the same time. This delayed adoption, since these initiatives were handled serially as commercial ventures and not coordinated as services in an overarching scheme.
- Whereas European Central Bank released its system into the market in 2017 to align with the CSMs (Clearing Houses) timelines, in the US, the Central Bank plans to introduce FedNow in 2023 (five-year lag).
- The structural decision of supporting correspondent banking model. Although the number of direct members between TCH RTP and EBA RT1 are comparable (low vs. mid double digits), it is the thousands of the indirect members that make the difference in Europe.
Takeaway: Although in the immediate term, the path to universal adoption in the US is by increasing the reach and utility of the network already in the market, it is clear that any new solutions that allow for quick and easy onboarding (e.g. via the indirect membership model) will radically accelerate the pace of adoption.
3. Interoperability between solutions had been designed before implementation and multiple options were available. This is also one of the strongest findings in the survey, with a resounding 78% of the respondents identifying interoperability across compatible systems as very important, as well as the need for common rules and standards (identified by 35% of the survey respondents as the risks to adoption) across multiple compatible solutions.
Takeaway: Although it is common business practice for operators in the US to defer the interoperability discussions until the market matures, the industry strongly feels that it would be highly beneficial to start reviewing potential options and integration approaches now while the market is still developing.
Disputing transactions through the faster payments system
One specific rule/standard stands out in the findings: 73% feel that end users should be able to dispute a transaction through the faster payments system (i.e. through their financial institution or payment provider). To the extent that these new capabilities introduce a shift in where liability is held and how it is resolved, much more thinking and analysis is needed.
It bears noting that in the UK (where Faster Payments have been in operation for over a decade) – this conversation is still in progress. For example, PAY.UK has just rejected the proposal by seven UK banks to levy a per-transaction fee for certain Faster Payment transactions as a means to provide a long-term, sustainable funding arrangement for the reimbursement of fraud victims.
Takeaway: Common dispute resolution approach is a thorny problem. The US would be well served not to wait a full decade to start these conversations.
In conclusion: The big themes from the report (captured in the word cloud on the right) are about getting to ubiquity quickly and the desire for interoperability (which is really a universal wish). And although there are learnings from other countries to inform the way we move forward in US, the path to these goals will be uniquely American. For many of the “how should we” type questions in the survey, the respondents backed a variety of possible approaches without a clear dominant choice. This argues for the need to have a forum to continue to identify opportunities to overcome barriers in an inclusive, transparent and effective way. Serendipitously, that is the mission of the US Faster Payments Council.
 Or as they are know in Europe: CMSs – Clearing and Settlement Mechanisms.
 Instant Payment rail of European Central Bank. https://www.europeanpaymentscouncil.eu/what-we-do/sepa-payment-scheme-management/clearing-and-settlement-mechanisms