Reed Luhtanen, Executive Director of the US Faster Payments Council (FPC), joined Bruce Parker, Modo CEO, on the #PaymentsGeek Roundtable to answer a barrage of questions submitted by #paymentsgeeks about faster payments. Follow along with the answers by watching the full webinar, or get a rundown of some of our favorite questions and answers below. And beware - you might get schooled in faster payments!
Click the question to reveal Reed Luhtanen's answer
Q1: What is the role of the US Faster Payments Council?
This is, not surprisingly, a question I get a lot. The US Faster Payments Council was created by a cross-industry group called the Governance Framework Formation Team that was convened by the Federal Reserve. Our purpose is to bring together all the different stakeholder groups who are interested in payments. That includes business end-users, financial institutions, technology providers, network providers, trade associations, and consultancies. Pretty much anybody who is interested in payments is welcome to join the Faster Payments Council. Our mission is to advance the ubiquity and usability of faster payments, to make it easier for folks who haven’t yet adopted faster payments to do so, and to make it easier for folks to use the faster payment systems that are available to them whether that’s consumers or businesses.
Q2: The Clearing House claims that well over half of the DDAs in the United States can now receive a real time payment, but the flipside of that is the other half can’t. How do we get the 5,000 credit unions and 4,000 community banks who hold the rest of those accounts to adopt RTP or at least put RTP in their strategic plans?
RTP is a trademark that is owned by The Clearing House, and it refers specifically to their particular real time payments system. When I’m talking about instant payments or faster payments, I am talking much more broadly that just that one single offering. Certainly, different financial institutions have adopted Zelle, Visa Direct, or Mastercard Send, and those all add to the potential options that are available in the marketplace for those who are interested in doing faster payments. Regardless, what is really important, whether you intend to implement faster payments very quickly or even 2, 3, or 4 years down the road, is that now is the time where it’s critical that you get out there, learn what you need to do, and develop your strategy based on accurate information. Those are some of the things that we’re really focusing on at the Faster Payments Council - making sure that the information is available for folks so they can make informed decisions on when and how and with whom they develop their faster payments strategy.
Q3: If NACHA becomes the interoperability rules body, as some expect, then does the FPC continue to exist in perpetuity? If yes, what would the expected / intended purpose be?
NACHA is a member of the Faster Payments Council. We don’t view them as a competitor in the space, and have a very good relationship with NACHA. In fact, we’re collaborating on a faster payments playbook which you can access here.
In terms of the interoperability question, I’ll be honest. I don’t honestly see a path right now for any third party to force themselves into the space of being a rules-making body to force interoperability on the Fed or The Clearing House in the near or medium term. Obviously, that would require that those companies consent to it. They’re busy building out their system - making it something that people can use, delivering the products that are necessary in the marketplace, and working with folks like the Faster Payments Council and NACHA to figure out what it is that’s needed in the market.
I think the theoretical conversation about rules is an interesting one, but it’s also one that isn’t necessarily required on day one when you’re talking about building out new rails for the first time in 50 years. That being said, the FPC was not created specifically to create and cause network level interoperability to occur - that’s not one of the foundational things that we’re working on. There are lots of different types of interoperability models that exist that don't necessarily require there to be network-level interoperability. If you really want to nerd out, there is an interoperability whitepaper that the Faster Payments Council published available here.
Q4: There is a whole infrastructure around credit and debit payments - contact centers, specialized departments that handle disputes, specialized departments that track and manage fraud - similar, but different, systems and departments need to be built for this new form of payments. Is this something that the Faster Payments Council is doing anything about?
Absolutely. This is exactly the sort of thing that we all need to be working on together. There is no reason for each individual business figuring out how to implement faster payments to go through the pain of sifting through all these different processes that exist.
One of the nice things about faster payments is that you’re entering into a more one-on-one relationship with your customer through the direct bank payment methods that are becoming available. It’s beautiful in a lot of ways. It removes some friction between your customer and you.
On the flipside, that means that there is a need for banks to build out the suite of tools that are needed to reconcile and handle disputes and erroneous payments. That’s exactly the sweet spot of how the FPC can help. We bring together the financial institutions who are going to be delivering the payment options to their customers through their bank apps, the technology providers who you work with already as a merchant like FIS, Fiserv, the different payment service providers, and then also the payment networks too. The value of the FPC is causing collaboration to happen.
Q5: Can you discuss the compliance and fraud control including payment rollbacks complexities in faster payments?
Faster payments doesn’t necessarily mean one particular network or one particular offering. There are going to be varied answers depending on what network you have, who you’re working with, and what their rules are. So the initial answer is “it depends.”
There is a ton of work going on around fraud. The Federal Reserve just put out a really interesting piece of work on defining the different types of fraud. There are a lot of fraud vectors that are emerging specifically around what’s happening today with covid-19 and taking advantage of people’s fears. We’re doing some work to get the word out in some of those vectors that are out there.
When it comes to compliance, we’re never going to be in a position to be providing folks with the legal advice that an actual real lawyer would deliver to them, but we are in the process of putting together some really good educational material to help you get oriented around the different regulations and laws that are potentially applicable in a faster payments environment.
Q6: How is the US Faster Payments Council making real time payments more competitive given The Clearing House with RTP as being the only solution that’s available now, and then FedNow coming online in 4 years? How is the Faster Payments Council working with smaller startups as they create solutions to help them validate and grow?
First off, I would like to mention that both the Fed and Clearing House are members of the Faster Payments Council. Secondly, this is the United States. We love to have options in terms of what we’re going to be doing, we love to have the choice of who we want to do business with, and love to force competition to create efficiency and better solutions for everybody. The emergence of the Fed I view as a good thing. I think moving forward our focus is 100% helping all of these providers.
This leads into the second part of that question about startups interested in getting into this space. There is room for competition here. There are plenty of folks who are established who are building solutions. And there are plenty of folks who are startups and have joined our membership and are looking to demonstrate what they can do in terms of building out a tech solution. Whether that ultimately is in service to making it easier for folks to engage and use FedNow, The Clearing House’s RTP, or any of the other myriad of faster payment solutions out there, can be something that folks are still interested in layering onto. Competition is the thing that will spur the innovation.
Q7: Which payment flows are permitted with RTP? Is it just for B2B or P2P flows?
It is definitely not just for P2P or B2B. The networks were built to process the transactions that their customers want to process. If you are a financial institution and you want to enable customers to use RTP or Zelle or any of these other payment systems for various use cases that aren’t specifically B2B or P2P, that is what they’re there for. We’re doing a lot of work looking at the bill pay use case - figuring out how we can make it a better experience for the bank customers, but also for the customers of the billers to pay their bills using online banking. About 20% of Americans today use online banking to pay their bills. The other 80% go directly to the biller. There is a big group of people out there, and there is an opportunity to serve them better. I think all sides are interested, and I think there are lots of use cases where there are different ways we could serve people better. That’s ultimately what we’re trying to do.
Q8: Can you do RTP at physical point-of-sale?
Yes, absolutely! In fact, we are currently working on a QR code interface that would make it even easier. Today, I don’t know that there are any live, in-market point-of-sale RTP solutions, but it’s on the roadmap for there to be. Thinking about QR codes, it’s been widely adopted as the technology of preference in other markets where faster, real-time or instant payments have been very successful. Look at India, look at China, look at lots of markets around the world. The reason for that is that it’s really easy for folks to implement on the acceptance side. You can pretty easily adopt a QR code. In fact, if you Google it, you can find pictures of vendors in India with QR codes taped to their cart on the side of the street and people can scan that with their app and push a payment directly to that vendor. It’s kind of an ultimate low-tech meets high-tech when needed solution, but it can also be very high-tech with screens displaying QRs that are dynamic and implementations that integrate well with existing mobile banking apps.
Q9: Why would banks support RTP at retail point-of-sale given the interchange model and consumers preference for rewards with their cards?
This is a good question. It’s one that I’ve been thinking about myself. It’s not for me to question the motives behind why they’re doing what they’re doing, but what I will say is when you look at the very largest financial institutions (FIs) in the United States they’re also the folks who are the owners of The Clearing House. They’re the ones that made the decision years ago to develop the RTP system. They invested literally billions of dollars to make that happen. It doesn’t make sense for me that they would do that if they didn’t intend to ultimately be used to its fullest extent.
Q10: How do you solve for liquidity in a real time payments framework?
When the Fed was going through the decision making process that led to their FedNow announcement, there was that lesser focused on, but equally important, question about how banks manage their liquidity to ensure their cash positions are sufficient to cover themselves in a 24/7 environment. I think it’s going to require a lot of rethinking by folks in terms of how they’re going to do that. And part of that is going to likely be the Fed’s liquidity management tool that they announced along with their announcement of FedNow. I think it’ll be up to each FI to make that work for themselves in concert with their providers. But that is something that is definitely underway and is something that people are looking at.
Q11: Does RTP expose my bank account to fraud?
To the extent you’re comfortable with the fraud solutions that your bank has in place to protect your mobile banking app and your online banking portal, it would be unlikely that RTP would significantly add to your risk profile. That being said, there are some different vectors and ways that fraudsters are using to exploit the real time nature of certain payment rails.
Ultimately, when you’re talking about instant payments and what FedNow is going to deliver versus some of the other payment systems that are a little less final and a little less immediate, part of the nature of that is that it’s essentially like handing somebody a $100 bill if you send them $100 through RTP. You are taking that money out of your account and putting it in their account in real time. There’s lots of value behind that finality and immediacy both on the sender and on the receiving end, but there’s also risk associated with that. You need to make sure the person you’re sending the money to is the person you’re intending on sending the money to and that it’s a legitimate payment.
Q12: Does international interoperability fall into the Faster Payment Council’s mandate? And if so, how would you prioritize international alignment or ability for real time payment success with both FedNow and The Clearing House? Is that a 1-2 year thing, a 2-5 year thing, a 5-10 year thing, or 10+ year?
It’s part of our remit to look at that space and figure out how we can assist the market in terms of cross border. I’ll use the term “cross border” instead of “international interoperability.” When you’re talking about cross border, there are a whole host of issues that are even layered on top of the issues we haven’t solved when it comes to domestic cross connectivity and interoperability of networks. We do have a workgroup that recently launched that is beginning to do the work of unpacking all things cross border and how we would make cross border transactions successful for faster payments solutions.
I think in terms of timeline, I’ll take 5-10 years. If you’re talking about there being cross border payments initiated through what we’re calling faster payments, probably, yeah. There are going to be people who need that to happen, and they’re going to figure that out. That’s one of the beauties of having a lot of different folks in the space working on this and trying to figure out the solutions. We’ve got some creative members of the FPC who are walking in on this and would probably say that they’re already doing cross border faster payments. It’s something that we need to be focused on as an industry and we need all the voices from the different parts of the industry at the table to figure this stuff out to make sure that, ultimately, what we arrive at is something that works for our merchants, financial institutions, and the technology providers in between.
Q13: Regarding RTP, do you feel like it will be offered as a payment method in different channels, especially online and mobile?
I think there are all kinds of use cases that the providers and the financial institutions that are offering them are open to enabling. Banks need to be providing to their customers the services that their customers are demanding in the marketplace. Otherwise, somebody else is going to offer that, and their customers are going to go to that “somebody else.” There is a real threat to financial institutions from emerging fintechs and challenger banks that they’re starting to understand. The way to respond to that threat is by becoming more digital, more tech-forward, offering solutions that encourage customers to use their app and keep their deposits in that bank, rather than turning those deposits over to another bank or to a fintech who would then control a pool of deposits and decide where they’re put. If you don’t have deposits or customers, it doesn’t really matter if you would get interchange income.
Q14: Why is it called the Faster Payments Council? One could argue that the U.S. is already very fast behind in faster payments adoption. Rather than focus on faster payments generically, we need a hard push to focus on Real Time Payments specifically and stop worrying about ACH and others who can find their own place. What will drive mass adoption?
There will be a place for all these different payment types. There are still millions and millions of people writing checks and using cash. All these different “outdated” methods of payments are still widely used. Part of the reason for that is that they’re truly ubiquitous in ways that no “21st century” payment system yet has achieved. It’s going to be a long time before we shove ACH to the side. My initial reaction is to say that it’s wrong that we should be ignoring the ACHs and things like that in favor of the more modern payment systems.
That being said, I do agree that we need to be leaning in heavily and getting the right voices at the table to build out these solutions and have a full suite that meets the needs of the folks trying to use them. Building out the QR codes, the APIs, the different messaging protocols that allow for standing order payments, and making sure that the right fraud controls are in place for the different use cases are critical. That’s the kind of work that we’re trying to do at the Faster Payments Council.
Q15: Which value added and overlay services are Faster Payments Council members most interested in developing on top of the RTP infrastructure?
There are a number of different things that folks are focused on, and frankly it depends on which segment of our membership they’re coming from.
There’s a lot of energy around the QR code concept. Answering the question of how we come up with an approach that can be used commonly across many use cases and across many tech platforms, in terms of being agnostic as to whether it’s an IOS or Android or any other operating system, as long as it’s a device that can scan a QR code. That’s one that’s getting a lot of traction.
I’m hearing some chatter about APIs - the ability to link together the experience you have through a customer facing retail or service or hospitality app and the mobile banking app that’s also present on the phone and connecting those to create a seamless experience that allows for the customer to do what they want to do efficiently.
Things like standing order payments - we’re all using Netflix and have all of these subscriptions now that we’re never leaving our homes. Every month $9.95 goes out of your account. Obviously today, a lot of those are supported by credit and debit cards and that’s great, but there’s an opportunity there for more folks, potentially, to get onboarded onto those services if faster payments could support a standing order.
I also want to mention the idea around point of origination - how do we flesh out the discussion around some of these overlay services that are in the market, like Zelle, and help folks understand these different overlays that are out there and how they can help support interoperability of faster payments? Different services and add-ons that would help support the security of the transactions and the apps to make sure that ultimately faster payments doesn’t mean faster fraud.
We’d love to chat payments interoperability with you. Reach out to Modo at www.modopayments.com/contact!