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DT, September 2017

The Sweet 16
September 1, 2017

By Jim Daly, John Stewart, and Kevin Woodward

The Faster Payments Task Force issued a final report in July with an eye-popping goal: National, real-time payments by 2020. Here’s a guide to the 16 providers that might just do the job.

In July, the Federal Reserve-sponsored Faster Payments Task Force capped off two years of hard work with a final report that set an ambitious deadline: real-time, or near-real-time, payments in the United States by 2020.

To help make that happen, the Task Force presented a compilation of final evaluations—managed by its outside consultancy, McKinsey & Co.—of some 16 surviving faster-payments proposals. The examiners thoroughly reviewed each proposal, detailing how they would work and zeroing in on strengths and weaknesses. The evaluations included dialog with each proposer conducted between initial and final assessments.

The assessments included some 36 so-called effectiveness criteria against which the proposals were measured, ranging from “Very Effective” to “Not Effective.” The criteria are grouped under six major headings: Safety and Security, Speed, Governance, Ubiquity, Efficiency, and Legal.

Below, we present summaries of these 16 final evaluations. How faster payments will take shape over the next three years is not yet known, but it seems clear some combination of these 16 proposals will play a major role—and will have to do so quickly.

To help readers assess the quality of the proposals, Digital Transactions quantified the assessments for each one, and then tallied the results to create the rankings in a chart (see print or Digital Edition). To do this, we first assigned a value of one to each checkmark that the McKinsey & Co. assessors—the Qualified Independent Assessment Team, or QIAT—gave every proposal based on 36 effectiveness criteria. Each criterion could get just one of four assessments: “very effective,” “effective,” “somewhat effective,” and “not effective.”

Then, we converted the total number of checkmarks for a proposer into a percentage of the total possible score (36 for each of the four effectiveness ratings), and finally ranked them by the sum of their “very effective” and “effective” percentages. Thus, the two highest-ranked proposers, The Clearing House/FIS, and WingCash, both achieved 100% scores based on their identical scores of 83.3% very effective and 16.7% effective.

Readers should keep in mind that these scores were conceived and calculated by Digital Transactions, not McKinsey or the Faster Payments Task Force. Assessing proposals to improve U.S. payments is an often qualitative and subjective task.

For example, as at least one Task Force member noted, each criterion is given equal weight. That means, for example, that an “effective” for inclusive governance in the Governance category counts the same as an “effective” for risk management in the Safety and Security category. Making an apples-to-apples comparison of two such differing categories is difficult, if not impossible.


Dwolla Inc.

Des Moines, Iowa

Notes Dwolla, a long-time faster-payments innovator, proposes a system involving a so-called scheme owner/operator that would operate the clearing-and-settlement function, with real-time clearing and deferred net settlement through the Fed’s National Settlement Service. The Fed, indeed, is seen in this proposal to be the system’s regulator. Members of the system would be depository institutions, though third-party providers could deliver the service to end users via products, services, or application programming interfaces (APIs). The scheme would include a directory allowing parties to send and receive payments using an email address or phone number. The system operator would operate a so-called fraud-sharing service, as it would be able to collect and analyze data across the system to identify risky behavior. According to the reviewers, strengths of the proposal include: competition among third-party providers for end users; interoperability stemming from the scheme’s messaging format; and speed, as payments are seen being approved and cleared within two seconds. Weaknesses: reliance on the NSS without extending its time of operation to include all day and weekends; and absence of any process addressing cases where the payee refuses to return disputed payments. At 91.7%, the proposal ranks third for effectiveness, tied with nanoPay, according to DT’s calculation.


Hub Culture/ECCHO/Xalgorithms

Hamilton, Bermuda

Notes This proposal envisions a Real-Time Asset Interchange Network (RAIN) and a Real-Time Asset Interchange Ledger (RAIL) that would enable real-time exchange of fiat currency, digital assets, and checks, among other assets. RAIL relies on a distributed ledger based on blockchain technology. Each RAIN participant would be assigned a tokenized identifier called a Unique Synchronized Identity (USI), which is used for transaction routing. Value exchange relies on a so-called Master Base Asset (MBA), which enables instant, irrevocable payments. MBA can be converted into dollars or any other asset according to real-time exchange rates. RAIL, meanwhile, functions as a distributed audit ledger recording transaction details as they occur and storing so-called smart contracts governing transactions. The evaluators credit the solution with being open and inclusive and with potentially reducing transaction cost “drastically.” Also, it promotes “adequate” privacy through the USIs. Needing further work are: an understanding of how risk will be measured and managed; detail about how disputes are to be handled; and a clear plan for how entities will be recruited to provide conversion from MBA to other assets. The plan ranks eighth for effectiveness, at 58.3%, below the group average of 71.9%.


InterComputer Corp.

Fullerton, Calif.

Notes InterComputer’s solution, which enables irrevocable credit-push payments, relies on the InterComputer Network, (ICN), which relies on Internet Protocol but is a closed system not reachable via the World Wide Web. Consumers access the network via Private Line, an application they can use from a smart phone, tablet, or PC. Participating banks must contract with both end users and with the network, and install both ICN and its Trusted Settlement System app. Users are protected with authentication that includes user name and password, digital certificate, and biometric validation. Payments are expected to be validated, cleared, and settled within 15 seconds. According to the McKinsey reviewers, strengths include: a high level of security stemming from the private network and multifactor authentication, and flexibility resulting from an API that allows the system to work with a variety of treasury-management and accounting systems. Among weaknesses cited by the review: a “quite burdensome” customer experience, including the need for consumers to receive in the mail a CD or USB stick with the Private Line app, and a failure to address exceptions and dispute handling. In all, InterComputer’s proposal finished with a 61.1% effectiveness score, good for eighth place.


Kalypton Group Ltd./ECCHO

Redhill, United Kingdom

Notes The evaluators note that full details of Kalypton’s solution were not available for consideration as the company was undertaking patent applications. In brief, the company proposes to use its Tereon engine to provide a so-called central core that would integrate with the banking system. Tereon would move money in real time using Internet sessions or mobile-data networks, and is available to both bank and non-bank providers. Kalypton is in the process of deploying the first Tereon installation in Central America, the evaluation indicates. Notable strengths include: Ability to support multiple currencies as well as banked and unbanked customers; and security, with device and user authentication. Areas that need improvement or clarification include: definition of transaction information shared between Tereon servers and banks; details about the flow of information within and between providers; details about the needed infrastructure or the accounts providers must create. Kalypton’s proposal scores quite high, finishing second for effectiveness at 97.2%.


Mobile Money Corp.

New York City

Notes Targeted at the unbanked, the cash-based, closed-loop MoMo solution allows users to pay bills, send money to other MoMo users, withdraw cash from an agent location, and buy at locations accepting MoMo payments. The system depends on a network of agents to register users and provide capability for cash in and cash out. Approval, clearing, and settlement between accounts take place in less than a second, with both payers and payees receiving notification. Consumer payments are routed using the Mobile Station International Subscriber Directory Number, which is used to identify a mobile phone number globally. Business and government transactions are routed using a business ID. Transactions will be approved only if money is available in the MoMo system. MoMo has been deployed in El Salvador and is looking to install its system in Columbia. Strengths, according to the reviewers, include: money is nearly instantly available in MoMo accounts; a focus on the unbanked and underbanked; and a “simple settlement mechanism” involving settlement accounts at the Fed. Notable weaknesses: while transfers between accounts are nearly instant, the solution depends on legacy infrastructure to move funds into a MoMo account; MoMo plans a network of 450,000 U.S. agents within five years, but leaves unclear whether the solution can support a network that big and guarantee agents will keep pricing low; authentication depends on a PIN, with no detail about adding other methods. The proposal scores an effectiveness score of 88.9% by DT’s calculation, good for fourth place.


North American Banking Co./ICBA

Roseville, Minn.

Notes This solution proposes a front end accessing the automated clearing house network to use same-day ACH credit push transactions. It envisions two apps, a mobile app for users that financial institutions can white label and offer to customers, and a payments directory. Users who try to pay someone using a different faster-payment solution can rely on the payments directory to connect to the other party. Upsides to the solution include: fast adoption and ubiquity because of reliance on the ACH; a directory that, once compiled, would enable payments with just an email address or mobile number; a standard mobile app with a predictable user experience. Weaknesses: Reliance on the ACH means the system will not deliver fast clearing, settlement, or prompt visibility into payment status; the solution does not deliver fast funds but rather depends on financial institutions to do that; it’s not clear whether the solution would be online and available all day every day. The system scores 58.3% for effectiveness, tied with Hub Culture for ninth place.


nanoPay Corp.

Toronto, Ontario

Notes The nanoPay MintChip proposal depends on digital wallets that store cash or other existing assets and operate on a single platform within a closed-loop system. MintChip started out as a creation of the Royal Canadian Mint, and has been in limited deployment in Canada. The system participants include: an originator that manages creation of MintChip value and digital wallets; a technology provider that provides system components, system support, and software enhancements; a platform operator that deploys and operates the MintChip platform and administers operating rules, standards, and protocols; and a broker, which is a financial institution or regulated non-bank account provider that buys and sells MintChip value from and to the originator, enrolls users, and offers means by which users can buy and sell MintChip value. The McKinsey reviewers saw several strengths in the proposal, including: ubiquity stemming from the need for only a MintChip identifier and a mobile device or Internet connection; real-time funds availability and immediate settlement; no settlement risk, since the solution relies on prepaid funds. Noted weaknesses include: dependence on confidence in the asset manager that protects pooled funds to collateralize the digital cash; and ambiguity about dispute scenarios. The nanoPay proposal ranks high, scoring an effectiveness rating of 91.7% to tie Dwolla for third place.


Ripple Labs Inc.

San Francisco

Notes Distributed-ledger technology developer Ripple is proposing a cross-border payment service that would remove the intermediaries involved in today’s international payments. Settlements would occur in under a second, with the full process to take less than five seconds, plus whatever time a bank takes to complete its own compliance requirements. In contrast, cross-border settlements today can take two to four days, Ripple says. Ripple’s system would enable payers to know the full cost of the payment before authorization. Banks would license the Ripple Connect software module, and Ripple would provide more foreign-exchange liquidity services than are typically available today through correspondent banks. Ripple is proposing a potentially very fast, transparent, and technologically flexible system, according to the McKinsey assessors. The plan, however, ranks only 14th among the 16 entries for effectiveness, according to Digital Transactions’ calculations. The company does not address common standards and processes across financial institutions, which could affect its ability to deliver promised speeds and user experiences, and it needs more detail about cross-border differences in messaging formats, regulations, and related items, reviewers said. In addition, Ripple itself could not access transaction data, which promotes privacy but prevents networkwide fraud monitoring unless banks voluntarily participate. Nor are dispute-handling rules spelled out, the reviewers note.


Shazam Inc.

Johnston, Iowa

Notes Shazam, a debit network, merchant acquirer, and payment processor, is proposing less a new technological solution for faster and more secure payments than a series of changes to existing systems that would improve operations and provide, in Shazam’s words, “some small, practical tweaks in governance that can help ensure collaboration and deliver an extremely high level of inclusivity and interoperability.” The proposal would leverage debit-network infrastructure and use tokenization to mask card numbers. Shazam would broaden the definition of “network” to include as few as two banks directly exchanging transactions. Enhanced information sharing among the parties and debit-network interoperability would be required. Existing networks would continue to operate as they do today, but they would also be required to support additional out-of-network transactions. “Essentially, this proposal is a call for networks to share transactions,” the McKinsey assessors wrote. The plan ranks 12th in DT’s effectiveness calculations.


SwapsTech Inc

Charlotte, N.C.

Notes SwapsTech, a banking technology provider, is proposing a payment network in which an end user could create StarNet account-identification credentials by simply registering with a participating bank or non-bank provider an email address, phone number, or other ID with instructions to link to a bank account for deposits. Instructions would be maintained by a central Global Instructions (GIN) repository. When a payment request is received, StarNet initiates a fraud check, credits the receiver’s bank account, and informs both the sender and receiver bank about the finality of payment. StarNet would guarantee that transactions would be processed in under 15 seconds, but would allow the payer’s provider up to 30 minutes for a fraud check. The system assumes blockchain technology could be used as a general ledger, but, in contrast to typical blockchain usage, the ledger would not be made public. In total effectiveness, DT calculates SwapsTech’s plan at 75%, above the group average of 72%. Reviewers said strengths include a payer being able to initiate payment with only limited information about the payee, and that end users—businesses and consumers—can update payment accounts at any time by changing the GIN through their provider, rather than calling vendors and billers to update accounts. Reviewers said the plan needs more details about participation requirements, pre-funded accounts, and other aspects.


The Clearing House/FIS

New York City

Notes Working with processor Fidelity National Information Services Inc. (FIS), The Clearing House has created what it dubs its Real Time Payments (RTP) system, an interbank real-time clearing and settlement network designed to link all U.S. financial institutions. The companies’ plan is tied for No. 1 in effectiveness, according to DT’s calculations. Banks and credit unions can connect directly to the RTP system, or through processors such as FIS, Jack Henry, and D+H, with more to come. The system is based on technology from Vocalink, which built the United Kingdom’s Faster Payments Service and recently was acquired by Mastercard Inc. The proposal’s strengths, according to McKinsey reviewers, include speed. Settlements are expected to occur in less than two seconds, though the system’s technical specifications permit up to 10 seconds, and payment status can be tracked in real time. Other positives include its use of the ISO 20022 standard to enable enhanced messaging with payments, and, in contrast to some other faster-payments proposals, it can monitor fraud at the network level. Areas for improvement are: no current capability for cross-border payments, and direct availability only to financial institutions. Payment-service providers must pair up with a bank or credit union to participate.


Thought Matrix Consulting LLC

Reston, Va.

Notes Thought Matrix Consulting, doing business as Pencanarts, is proposing an electronic currency called Money Modules, a system of software, electronic wallets, and data modules. Central banks would issue the currency, which McKinsey reviewers said would increase public confidence in the system. The electronic wallets could become portable bank accounts for the unbanked, McKinsey said. Accounts could be obtained at any bank or distributor, and redeemed at any bank or non-bank participant. Payment validation would occur in 400 milliseconds. The system’s so-called fundamental Money Module is a blockchain of records that contain the currency’s issuer, assigns unique transaction identifiers, and lists fiat currency types, date of issuance, and amount. While the system assigns a critical role to central banks, Pencanarts’ proposal “does not outline a plan for gaining central-bank support or for encouraging broad end-user support,” McKinsey’s assessment notes. Adoption by financial institutions and other commercial firms also could be hard to win, unless central banks mandate acceptance of Money Modules as legal tender, because they’d be giving up revenue they get from current payment systems. DT’s calculations put the Pencanarts plan at the bottom of 16 proposers’ rankings.


Token Inc.

Redwood City, Calif.

Notes Token proposes a digital-payment network capable of processing payment requests in milliseconds. Instead of using consumer names, passwords, and payment card numbers for authentication, Token would use digital signatures and certificates based on the Ed25519 public-key signature standard. Payers and payees would access the system through application programming interfaces (APIs) that would enable third-party software developers to integrate Token into their own programs. Tokens, or digital identifiers, created by the system and managed by a third party, such as the Federal Reserve, would map back to a consumer’s financial information but have no value on their own. Settlement would be conducted on a shared ledger run by the operator—a large global bank. Token’s participating banks would open accounts at that bank. McKinsey assessors said the proposal uses “innovative, leading-edge security.” Weaknesses, however, include the risks presented by the participating banks to the global operating bank, as well as a lack of rules, governance systems, and dispute and error-resolution procedures. The proposal ranks 13th for effectiveness, according to DT’s calculations.


University Bank

Ann Arbor, Mich.

Notes University Bank’s PayThat would issue licenses to eight to 12 clearing banks to implement a peer-to-peer system that uses any email or text-messaging platform to transmit payment data securely, even when using the inherently insecure Internet. Using a so-called cash purse, the system would push payments from one user’s account to another’s, provide real-time settlements, and employ end-to-end encryption. PayThat could be used for irrepudiatable transactions as small as a fraction of a penny, or any larger amount. The McKinsey assessors said PayThat is a low-cost, “highly secure solution” with strong authentication of both the device involved in the payment and the end user. But reviewers also noted the proposal relies on existing rails, such as the ACH or FedWire, and that a rollout depends on PayThat’s ability to enlist clearing banks, the business case for whose participation is unclear. Plus, the customer-registration process could prove to be “overly complex,” affecting adoption. DT calculates PayThat’s effectiveness score at 72%, a fraction of a point above the group average.


WingCash LLC

Highland, Utah

Notes Envisioned as a public and private partnership, the Faster Payments Network from WingCash proposes the creation of digital notes under the Federal Reserve’s control while allowing individuals and businesses to hold them, transfer possession of them, and make deposits with them. Some features of the network include the ability to make in-person transfers and remote payments using the so-called Fed notes, and the ability for businesses to issue closed-loop notes, also called brand cash. Fed-notes activity would be recorded as it happens. By providing a fiat digital currency, the Federal Reserve will be providing a faster-payments service that it is uniquely positioned to enable, which also will “facilitate clear public benefits through broad-based, non-discriminatory access to an efficient and effective means of electronic commerce and that will enable the Federal Reserve to continue to perform its core responsibilities in managing the money supply,” WingCash writes. Among the proposal’s major strengths are its reliance on digital currency, the brand-cash feature, real-time funds availability, and immediate settlement that minimizes risk and liquidity risk, says evaluator McKinsey & Co. A challenge may be the willingness of the Federal Reserve to own and operate the Faster Payments Network, requiring creation of a new monetary policy. Altogether, WingCash comes in tied for first place with TCH for total effectiveness.


World Currency USA Inc.

Marlton, N.J.

Notes World Currency USA’s proposal calls for participants, like financial institutions, to connect with each other through a Web-based, front-end platform to clear and settle payments through a service dubbed FAST. That service proposes to consolidate the automated clearing house network and wire payments into one service for domestic and cross-border payments. A FAST Network Central Authority would oversee the service, including vetting members and enforcing rules. World Currency USA proposes the Fed run the authority. “The solution promotes a fundamental shift in the way that payments are handled, allowing a single common system to integrate foreign and domestic payments with simplicity for the endpoint bank,” World Currency USA writes in its proposal. Among the proposal’s strengths is the consolidation of various payment methods—wire transfer, ACH, and faster payments—into one service. The proposal also advocates a least-cost-routing approach that uses the ACH to reach payees that are not part of the FAST network. Areas to address include an unclear explanation of the proposal’s advantages over existing networks, notes McKinsey. The proposal’s bank focus also could make it less accessible to entities that are not banks. World Currency USA comes in tied for second-to-last place in DT’s effectiveness ranking, at 52.8%.

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