Optimising the path to digital payments in the US

By Carl Slabicki, head of strategic payment solutions, BNY Mellon Treasury Services

29 July 2020

The US payments landscape is in the midst of significant change. A spark of new capabilities – comprising existing payment rails introducing new developments, the dawn of real-time payments and the emergence of innovative overlay services – is transforming the entire payments ecosystem. What’s more, with the current challenging environment that is causing unprecedented disruption to manual processes, the value of moving away from paper-based payments towards faster, more streamlined digital alternatives has never been more apparent. With the stage set for the transition to digital, banks are being presented with the opportunity to revolutionise both payables and receivables for their clients.

Reinvigorating the rails
The ACH network, which has been the stalwart next-day batch settlements system in the US for over 45 years, continues to modernise and fuel growth, with latest figures showing an increase in transaction volumes of 7.1 percent in Q1 2020. This has mainly been attributed to the recent introduction of Same Day ACH (SDA), which has brought enhanced convenience to ACH payments, further driven by the increased SDA transaction limit, which rose from $25,000 to $100,000 in March 2020. There are also future plans to settle more frequently and later into each day, providing more flexibility and value to clients.

Meanwhile, entirely new rails are emerging that are aiming to leapfrog legacy capabilities. RTP, the US’s real-time payments network, was launched by The Clearing House in 2017. Both settlement and rich messaging capabilities occur in real-time, providing enhanced speed, efficiency, convenience and transparency. And, further shaking up the nascent real-time payments landscape, is the announcement by the Federal Reserve of its new FedNow Service, which aims to provide a real-time payments capability to further support the growth of faster payments in the US. It is expected to launch in 2023 or 2024.

Driving digital payments
In addition to innovation to the payment rails themselves, an array of overlay services is also coming to the fore, equipping banks with the tools to help address historical challenges in the market and drive the transition away from paper.

Migrating from checks to electronic payments has remained a perpetual problem for cash managers in the US. Despite the risk of fraud and the manual processes involved, check payments persist largely because businesses often simply do not maintain the information required to send or request a payment digitally – having access to only a name and address.

To help overcome such issues, directories – which allow payees to securely register their payment details and identities electronically – are increasingly emerging across the globe. One such directory is Zelle, which is owned by a consortium of US banks. The directory holds and has access to a vast amount of data, with users registering identifiers (such as an email address or mobile phone number – referred to as “tokens”), which can then be used to make electronic payments without beneficiaries needing to disclose sensitive bank information. Furthermore, as email addresses and phone numbers are more accessible and easier to recollect than bank details, beneficiaries are far more likely to provide these details, equipping businesses with the information they need to make an electronic payment.

Banks then leverage the directory to pull that token – validated to that specific beneficiary – to find out where that beneficiary banks, and then use ACH or the card network to carry out the settlement.

Prior to a payment being made, Zelle has undertaken thorough authentication, utilising streams of data to validate a person’s identity and confirm ownership of an email or mobile phone number, and, ultimately, ownership of the account. Such an approach is considerably more secure than the check process, with pre-validation – ie, confirmation that a payee is the legitimate party prior to a payment being sent – regarded as a particularly effective form of risk mitigation in payments. Having such a directory with that degree of data is very powerful, and is helping to expedite the transition across the US from paper payments and invoices to digital payments.

Certainly, the security that pre-validation allows is particularly pertinent at present due to heightened fraud concerns, a persistent problem made more prevalent in the current challenging environment characterized by increased remote working. The need to verify that an individual is authorised to transact on a paying or receiving account is therefore becoming all the more important, and other secured, trusted databases, such as Early Warning’s National Shared Database, are also being utilised by market leading banks to enable real-time pre-validation. This increases security and risk mitigation, reduces fraud losses, and helps bring down the costs and processes associated with checks and other legacy payment systems.

The payments toolkit
With a considerable degree of change taking place in the industry, and with different businesses at different stages of their digital journey, it is important that banks are equipped with a holistic solution – a variety of tools and channels to help clients effectively manage and optimise their payable and receivable transactions and their working capital. That means continuing to provide effective, efficient traditional capabilities – such as check processing, ACH and cash management services – and alongside this, delivering new, state of the art real-time solutions; all the while offering support and guidance to individual clients to ease their transition to digital – ultimately enabling payments to be more efficient, secure and streamlined.

Indeed, different clients have different needs, and there is no one solution capable of meeting all payment requirements. As clients increasingly look to venture into the world of digital – leveraging tools including APIs, real-time payment capabilities and pre-validation technologies that are entering the market – it is up to banks to ensure that they can support the full breadth of client requirements.

With the current environment spotlighting key challenges of paper-based processes – including paper transactions evolving from being regarded as simply costly and inconvenient, to representing real operational risk – the value of digital has been brought to the fore. It is therefore becoming increasingly urgent for banks to have the flexibility to cater to clients’ evolving needs, and support their digital payments journey.

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