The effort to bring faster payment settlement to the United States gained momentum this week with an announcement by The Clearing House Payments Co. LLC that it plans to build what it calls a “real-time payment system.” The New York City-based organization, which is owned by the largest financial institutions in the country, said late on Wednesday the effort will be a “multiyear” endeavor involving its member banks.
“The real-time payment system will be designed to address gaps in payment processing and will enable consumers and businesses to securely send and receive immediate payments directly from their accounts at financial institutions,” the company said in a release, which does not lay out details of the planned system. Officials at The Clearing House, which processes check images and also acts as one of two network operators for the automated clearing house, were not available Thursday for comment.
The Clearing House listed a number of features it says the new system will offer, including: direct person-to-person payments from and to existing accounts using online or mobile banking; tokens masking actual bank-account credentials; immediate good-funds verification by sending banks and messaging to parties to the transaction; and authentication of sending and receiving parties by their banks.
The company stressed, however, that the new system will not come together any time soon. “Implementing ubiquitous real-time payments is a comprehensive multiyear endeavor, requiring coordination among financial institutions of all sizes and their service and technology providers,” it said in the release.
The announcement follows efforts from both the Federal Reserve and NACHA, the regulatory body for the ACH, to speed up payments flows. The Fed plans to present a plan for a so-called near-real-time payments system within the next two months. NACHA earlier this year revived an effort to enable same-day settlement for ACH credits and debits, following a similar plan that fell short of member approval in 2012.
The new plan from The Clearing House also comes nearly 16 months after it began working on tokenization technology aimed at masking account numbers for credit and debit card transactions. This system, called Secure Token Exchange, may apply to routing and account numbers for ACH payments as well, an official with the company said this spring.
This isn’t the first time The Clearing House has looked into the notion of tokenizing data. Indeed, in 2002 it introduced codes that mask routing and account numbers for commercial payments. The tokens, created under a protocol known as the Universal Payment Identification Code (UPIC), apply to ACH credits only, meaning payments intended by a payor to pay another party. They have also not been extended to consumer payments.
Expert observers generally applaud the new real-time effort by The Clearing House but question the cost it might entail and the time it will likely take to recruit financial institutions to support it. “The Clearing House is to be commended for moving forward and keeping the pressure on the financial industry to accelerate the speed with which payments are made in the U.S.,” says Rene Pelegero, in an email message. A former PayPal Inc. and Amazon.com Inc. executive, Pelegero is president of Retail Payments Global Consulting Group, Woodinville, Wash.
But, while consumers and businesses might be willing to pay for faster payments, it’s far from certain they’ll pay enough to generate a sufficient return for banks, says Eric Grover, principal at Intrepid Ventures, a payments consultancy in Minden, Nev. Grover estimates The Clearing House effort will cost “realistically well north of a hundred million” dollars. “Even that’s probably low,” he says in an email.
Much cost and effort will likely be tied up in building the core hub or in licensing software from groups overseas that have already implemented real-time systems, these observers say. Then there’s the work of tying in thousands of banks. “There will be years of effort integrating with and upgrading banks’ internal banking platforms and at third-party processors,” says Grover.
Recovering those costs could be a question mark for the banks, some observers say. “The trick with this one is the economics, of course,” says Steve Mott, principal at BetterBuyDesign, a payments consultancy in Stamford Conn., in an email. “Let\'s say the cost is a few hundred million, those costs need to be recovered in some way, and after that, operating costs need to be fairly compensated, as well.”
While the new system will offer the security of tokens, its ability to enlist most if not all of the country’s banks will also be critical, observers say. “Although it could be a competitive advantage for some banks to offer real-time payments, it would be very frustrating to consumers to have a fragmented environment where some banks do real-time payments and some do not,” says Pelegero.