The birth of US real time payments

By Madhvi Mavadiya | 18 December 2015

UK based international payment systems provider, VocaLink, has agreed to work with The Clearing House (TCH) in order to develop US real time payments immediately, in a similar way to how the Faster Payments initiative was introduced in the UK. bobsguide spoke to David Yates, CEO at Vocalink and Jim Aramanda, President and CEO at The Clearing House about what to expect when the US adopts real time payments and what this means for other forms of payment.

VocaLink and The Clearing House signed a letter of intent in October that consolidated that a system would be built so that consumers and businesses could send and receive real time payments from existing accounts at financial institutions. Alongside this, the adoption of the system would mean that new innovative technologies could transform the US market for the better.

Yates highlights how although it would follow a similar programme, the US market would have to respond to this decision in a different way. “UK banks were mandated to implement Faster Payments and that hasn’t been the situation in the US. What The Clearing House has done in close collaboration with the Fed is to work with the banks across the US to encourage them to adopt a new digital commerce platform.”

Aramanda continues to explain that the UK and US market vary on a grand scale. “The US market is different and far more complicated as we have 14,000 financial institutions that will need to be serviced by this platform which will mean that all will have to be connected to the system. Businesses would see the benefit of this platform as it will be based on existing bank accounts and Yates provided the example of mobile payments to iterate how effective real time payments can be.

Mobile payments had to be built on top of the pre-existing card networks because there were no other systems in the industry and with the implementation of this technology, in addition to the ease of use, underlying costs and defects are also present. Yates explained that the real time payments system suits the mobile environment better because the payment authorisation and settlement can be completed in real time, which matters a great deal when in real time commerce.

Real time systems enable people to complete mobile billing and mobile invoicing in a way that goes back directly to the bank account, without the old fashioned nature of card systems getting in the way,” Yates said. In addition to these developments, TCH are focused on helping individual financial institutions and their service providers to integrate and adopt the new system so that their customers can retain their existing bank accounts.

Although the US is the world’s largest payment market, Aramanda commented on how despite new technology coming to the surface, the cheque and direct debit still remain prevalent modes of payment. “There are around 18 million cheques still flying around in the US, but the replacement of cash is certainly important. Also, electronic commerce is done through direct debit and consumers have to give up their banking credentials to third parties, but in the model that we are creating, control is given back to consumer and they are in charge of the system.”

In order to simplify cross-border commerce, the system will comply with the SWIFT ISO20022 standard, which is widely used for real time payments. Aramanda explained their thinking behind this choice, as “it is a far richer and robust messaging format that will allow for future innovation and strategically enable the banks to compete more effectively and provide better services for customers.

It took three years for Vocalink to implement the UK Faster Payments Scheme and an even shorter time for Singapore’s FAST payment scheme - TCH recognise that Vocalink have demonstrated their capability and speed at delivering real time payments. Since the UK service launched in 2008, over four billion payments have been securely processed which has in turn, driven further innovation and development for a wider range of systems.

Yates confirmed that the payments industry has been evolving rapidly and the global fintech firms have been pushing the traditional lenders to provide newer systems. “The financial industry is facing what I would call “disintermediation” of their customers by the non-banks and I think one of the key ways we can remediate this is by bringing this platform to the US to effectively interface, compete and retain the relationship with the customer.”