The nation relies on systemically important market infrastructures. As you may have guessed, these engines of economy are designed to resist change.
That’s not a bad thing. A certain amount of insulation protects us from the whims of fads and provides the cornerstones of the economy, like banking, finance and commerce — a confident foundation from which to build their systems.
However, if overprotected by market forces, regulation or a host of other reasons (which we’ll get into later) an infrastructure can become incompatible with the economy — silently creeping, unconsciously informing and passively confining the systems and opportunities built on top of it. This is the case with America’s bank transfer infrastructure today.
Called the Automated Clearing House, it looks healthy on paper. The underlying system, which exists to move money from Bank A to Bank B, processed a record $40 trillion in 2015 — continuing an upward trend of nearly 7 percent growth in transactions from the previous time in 2014.
The lack of meaningful modernization can be blamed on a host of reasons.
New systems, like Dwolla, Stripe and others, have made it faster to access, given it greater functionality and simplified end-user experiences, helping developers and businesses leverage the network and its ubiquitous low-cost payments in ways never before possible. Initiatives, like Same-Day ACH coming in 2016 and 2017, hope to make bank transfers faster than ever.
Unfortunately, the core of ACH, a 540-page operating book/guidelines, is still soundly rooted in the needs, terminology and technical considerations of the banks that formed it during an era that gave us Disco (and “DYN-O-MITE!”). When it was established, the term “information technology” wouldn’t be coined for a few more years, and the other everyday technologies, like the World Wide Web, APIs and iPhones might as well have been unicorns and hoverboards back in 1974.
Fast-forward to today and we can see how these systemic problems manifest themselves: two- to three-business-day wait times due to risk-based holds (hell, even one-day wait-times are arguably too slow), delays involved with the 80-some return and correction codes, propagation of insufficient funds and overdrafts, lack of modern abstraction and authentication, difficulty in accessing and supporting ACH operations and an over-reliance on expensive card and wire schemes, just to name a few.
Its pure usage, for the most part, has been ruled out in the online retail world, instead pigeonholing our national bank transfer system to only a handful of viable use cases (e.g. payroll, recurring payments, stored value services, etc).
The lack of meaningful modernization can be blamed on a host of reasons: over-regulation, lack of central payment authority in the U.S., incentives provided by more profitable systems and schemes, entrenched interests, scorned rivals, revenue loss, etc.
Mix in conscious, deliberate and formal standards processes — like commenting periods, road shows and votes (supramajority required, of course) — needed to change anything and you’ll find plenty of opportunities for filibustering, personalities and rabble-rousing. Until a few years ago, asking the industry folks to get together in the name of patriotic duty was like saying, “Hey, Tom and Jerry, get over it.”
That is, until about eight months ago.
At the urging of the Federal Reserve, more than 300 experts and stakeholders — from Uber to Ripple, Wells Fargo to Walmart — voluntarily stood up the Faster Payments Task Force. Call it self-preservation in the face of an evolving economy or nationalism in the name of global competitiveness, the group’s objective was to put aside its differences and identify approaches for a new and more modern payments system for the United States.
This is a watershed moment for payments in this country, but we are far from done.
Since then, those of us on the task force have spent countless hours with each other on email, in conference rooms and on phone calls, debating words, like “credit push,” “real time,” and “accessibility;” receiving history lessons on Check 21 and ACH services; and educating each other as to the new possibilities of technology (after all, new words, like APIs, cryptography and connectivity could help solve new and old problems around monetization, security and distribution).
We did this not because we were linguists, master debaters or history teachers, but because we knew that our words would help define the infrastructure that would define the rules that would define the processes that would define the technology that would define the capabilities of the next great payment system of the United States.
In eight months, we reached a milestone that hasn’t been done in more than 40 years: an approved effectiveness criteria for faster payments.
Explicitly, the 31-page, 9,500-word document: 1) represents the desires and expectations from payment stakeholders for a faster payments system, and 2) will serve as a rubric for system proposals to satisfy during the next phase of the initiative.
Implicitly, the criteria is a new lexicon for payments in the 21st century, providing a glimpse into the functionality, capability and benefits needed for economic participants (including, “you, the reader”) to confidently understand, discuss and plan for a faster payment infrastructure.
For example, this infrastructure would be much more developer-friendly with easier and more modern access and authentication scopes. For banks, it would provide a platform for value-added services and improved decision making, and would place payments back at the heart of a financial institution.
Merchants would benefit with a system rewarded for improving automation, lowering costs and fighting fraud more efficiently and effectively. Consumers would be able to engage with new business models, services and control never before possible. The improved safety, speed and efficiency offered by this new lexicon will lift all boats.
This is a watershed moment for payments in this country, but we are far from done. More than 35 nations have created or are implementing modern, real-time, low-cost, ubiquitous bank transfer systems. They’ve had the luxury of a government mandate; ours is voluntary and market-led. Our next step is to submit and evaluate the systems that satisfy this criteria. The process will go through 2016 and in 2017.
In the meantime, developers, entrepreneurs, businesses and consumers will play a powerful role in creating visibility for the existing problems and maintaining momentum. So go talk to your bank, payment provider, your mother, anyone and let them know the problems facing your platform, business model or end users. Go demand a better infrastructure.