The Promise—And Threat—of Real-Time Payments

Three years ago, Mastercard shelled out big money for a U.K. technology firm. As faster payments take hold in the States, the rationale for that deal will soon be put to the test.

Back in July 2017, the Federal Reserve issued a challenge to the U.S. payments industry: create a nationwide real-time payments regime by 2020. While that challenge set many hands wringing, at least one company figured it was already set up to meet the goal.

In May last year, Mastercard Inc. had closed on its $920 million acquisition of VocaLink Holdings Ltd., a London-based software house renowned for its expertise in real-time transactions. The firm, after all, had built the network for the United Kingdom’s Faster Payments Service, which is already a decade old.

By the time it joined Mastercard, VocaLink had already gone to work on a real-time switch for The Clearing House, the New York City-based bank processor owned by 25 U.S. financial institutions, including the nation’s money-center banks. That technology went live in November 2017, processing transactions in mere seconds.

But the TCH system involves more than just fast clearing and settlement. It also includes some extra twists that could prove crucial for a wide range of applications now served by card and automated clearing house rails. By design, the system can handle data payloads as it transmits requests for payment and requests for information between parties.

That extra transmission channel may sound mundane. To TCH, it’s anything but. “We’re catching up, but in a lot of ways we’re leading the rest of the world,” says Irfan Ahmad, a former health-care expert who is senior vice president for product development at TCH.

Largely because of VocaLink’s work with TCH, real-time business-to-business and business-to-consumer volume in the United States will hit $849 billion by that crucial year, 2020, nine times the volume in 2017, according to projections by Mercator Advisory Group.

Real-Time Chops

For Mastercard, however, VocaLink’s real-time payment chops are important for reasons that go beyond meeting a Fed deadline. Indeed, the rationale may well go beyond its acquisition of a key position in faster-payments development not just in the U.S. but in other parts of the world where VocaLink is active, including Singapore and Thailand.

With this deal, Mastercard has bought insurance against a future in which card payments may not figure so prominently as they do now. “In the past, whatever the problem was, the answer was always a card,” says James Anderson, the company’s executive vice president of commercial products.

With faster—especially real-time—payments, that outlook had to change, Anderson says. “One threat [Mastercard analysts] identified was real-time payments,” he says. That’s because what VocaLink and others offered was faster payments without a card on rails that could conceivably do what card networks do.

At the stroke of a pen, the VocaLink deal “moved [Mastercard] from a card network to a payment-solution provider. That’s quite subtle but very powerful,” says Dean Wallace, practice lead for real-time and digital payments at ACI Worldwide, itself a developer of real-time payment technology.

Both Mastercard and Visa offer real-time products, but Mastercard Send and Visa Direct depend on card pipes and card rules. Both are derivatives of a protocol called the original credit transaction, which was developed in the first place to get refunds instantly to customers when they returned merchandise they had bought on a card.

“It was a threat if someone developed real-time [capability] that was not on card rails,” Anderson says. Hence, it wasn’t hard to develop a strong rationale to buy VocaLink, he says.

Also figuring into the deal was the progress Mastercard had already made in bill payments, another prime channel for faster payments. “We had a bill-pay directory. Faster payments comes along and that becomes a strategic asset,” he says.

In October, Mastercard announced a service it plans to roll out next year that will rely on TCH’s real-time engine to attack a U.S. bill-pay market the card company estimates at 15 billion annual payments totaling $4 trillion in value.

Experts see the new service taking share away from billers and the so-called biller-direct payment channel. “The U.S. is quite unusual in that lots of the billers do it directly themselves. What this is trying to do is be a single interface for all these bills,” says Gareth Lodge, a U.K.-based senior analyst for payments at the research firm Celent.

Now the question is what else Mastercard can do with its newfound real-time expertise. If the card company really wants to get beyond cards, some observers say there might be an avenue toward merchant acceptance with existing VocaLink technology, though such a move could upset a lucrative, decades-old interchange system.

Observers suggest one way this could unfold is through VocaLink technology called the Pay By Bank app, which enables fast transfers via a mobile-banking app. Designed for online checkouts, the app could be adapted to some physical-world scenarios, these observers say.

“Real-time payments at point of sale are in fact an important part of our VocaLink strategy,” says Anderson. “Following our acquisition of VocaLink, we have increased our focus on innovation around real-time payments globally. In the U.K., Pay by Bank app has been gaining momentum.”

Indeed, progress for the app seems strongest at the moment in Britain. Barclays Pingit, a mobile-transfer service, and HSBC are supporting the app or soon will, “and a significant number of the U.K.’s retailers will be offered Pay by Bank app as a new way to pay for their customers,” Anderson adds.

‘Pole Position’

A wild card for all real-time players surfaced in October when the Federal Reserve indicated it is looking into starting up a service for real-time gross settlements, including a liquidity tool. The banking regulator is taking comments on the idea through Dec. 14, but just the suggestion of its direct entry as a player in a game over which it had been presiding as a sort of umpire has set some observers’ teeth on edge.

In the view of some, indeed, the idea of a Fed service may have come at the suggestion of smaller financial institutions that are wary of what they see as big-bank dominance of TCH. “There’s an element of truth to [that],” says Eric Grover, a Minden, Nev.-based payments consultant. The Fed, he says, wants “to stay relevant with small banks.”

Indeed, small banks may see in a Fed service the sort of competition that could keep TCH from overreaching on price and other terms. Most small institutions are connecting to TCH via core processors rather than directly.

“They feel the Fed represents a choice in real-time payments,” says Sarah Grotta, director of the debit advisory service at Mercator Advisory Group, a financial-services consultancy in Maynard, Mass.

A real-time gambit from the Fed could also prove to be a golden ticket for Mastercard. “If the Fed decides to proceed, Mastercard will have an opportunity to bid. They’d almost be in pole position to win this,” notes Grover.

‘In the Dark’

For now, Anderson is content with what he sees as an unfolding trend Mastercard anticipated back when it made its move to buy VocaLink. That trend, he says, is even bigger than real-time payments.

“What we see that others didn’t see is there’s a pent-up demand to upgrade the [payments] infrastructure,” Anderson says. An opportunity that big, he adds, comes along once in a generation.

Yet, so far, he isn’t seeing much reaction out of his rivals at American Express Co., Discover Financial Services Inc., and Visa Inc. “I would be very happy,” he says, “for them to wander along in the dark.”

 

How Faster Payments Are Triggering Opportunity for Merchant Acquirers

When it comes to faster payments, merchants don’t want to be left out, and that’s creating a big opportunity for payments processors and other acquirers.

Indeed, as the payments industry shifts toward real-time and near-real-time money movement, payment processors can cash in on the value of getting good funds into merchants’ accounts instantly, processor executives say.

“Especially in the small- and medium-size business world, they’re willing to pay a premium for it,” says Henry Helgeson, head of integrated solutions at Columbus, Ga.-based Total System Services Inc. (TSYS).

Paysafe North America, the Shenandoah, Texas-based unit of London-based Paysafe Holdings U.K. Ltd., has come to the same conclusion. In September, it launched a program called “Accelerated Funding” that includes options from next-day to same-day to “Express” funding. The last choice delivers funds within hours to a linked debit card. “There are certain verticals where merchants really need the funding,” says Todd Linden, chief executive.

He agrees with Helgeson that demand is coming largely from small and medium-size merchants. Restaurants and bars, in particular, respond well to the idea of getting their funds for Saturday and Sunday sales without having to wait until Monday, he says.

Faster funds can command a premium because they incur higher risk. “We’re funding the merchant before we get paid,” says Linden. “So we charge more.” Helgeson points out that “there’s very little recourse” once the funds are disbursed. At the same time, there’s only a matter of hours to vet transactions for fraud. “So there has to be a premium,” he adds.

An example of what the market will bear for faster funding is Square Inc.’s 3-year-old Instant Deposit feature, which delivers funds to merchants within seconds for a fee of 1% of the funding amount on top of ordinary transaction fees.

The plan at TSYS is to use its ProPay unit to manage faster funding, Helgeson says. TSYS acquired ProPay, an early entrant in what is now a crowded market for payment facilitators, in 2012.

The pipes will come from Visa Inc. in the form of Visa Direct, a service that transfers money in real time via an original credit transaction, or OCT. The OCT was designed to deliver quick refunds to customers when they return merchandise to stores, but lately it has been harnessed for fast transfers to businesses, as well.

For its real-time funding service, Paysafe is relying on Alpharetta, Ga.-based Ingo Money Inc., whose technology enables push payments between accounts. Linden sees delivering faster funding as a way to get in step with a global trend toward real-time payments.

“It’s something we need to do, and we’re catching up with the rest of the world,” he says. “It seems only fair to give the merchant his money.”