Aging payment rails is not a new problem for the U.S. banking infrastructure, but Silicon Valley Bank’s collapse put it in the spotlight, especially for payment companies that had their payment rails with the bank.
A payment rail is a network for how payments move from the payer to the payee. We’ve seen newer rails emerge in recent years, for example, the blockchain, and within the consumer realm with peer-to-peer payments via apps like PayPal, Venmo and Zelle. Most of the payments occur in real time.
Airbase was one of those fintech companies that had its payment rails with SVB. CEO Thejo Kote told TechCrunch+ that the company had to scramble to help customers make sure their payroll and vendor payments were able to resume and also remain secure.
Current payment rails, particularly in the U.S., are decades old, created long before digital payments became a way of life. In recent years, financial technology companies have built rails on top of existing infrastructure, for example Stripe, Plaid and the like, but it takes years and millions of dollars to do it. Visa, too, recently partnered with PayPal, which also owns Venmo, and others to help people make digital payments regardless of which app you use.
But even with this technology, some fintech founders say decentralized finance rails built on the blockchain could be a better answer. Especially as building on the current aging payment rails is expected to increasingly be a problem. This Finextra article notes, “as time goes by and the payments industry moves increasingly to micro, international, immediate payments with volumes that will be orders of magnitude greater than today, these problems will get a lot more visible.”
“It’s definitely archaic at this point, and it is a pretty slow kind of method of moving money, but it is also the most prevalent and popular kind of payment network in the U.S. when you’re moving money from bank to bank. There is a bunch of innovation happening right now, so there is a real-time payment craze coming up,” Kote said, referencing the Federal Reserve’s new FedNow Service. It’s set to launch in July and promises faster payment rails for financial institutions.
FedNow is an instant payment infrastructure providing payments in real time, 24-7, every day of the year with immediate access to funds. This change won’t be immediate, however, because it will take time for a “network effect” to take place, Kote said.
“Banks on both the receiving end and the sending end have to be able to support these new protocols and this new kind of rails, and that’s a slow process,” he said. “I’m optimistic that over the next few years, the coverage will continue to get much better. However, in the here-and-now, the vast majority of dollars are still flowing through the Automated Clearing House network, and that has a whole host of challenges that you have to work [with].”
A banking maze
Indeed, more than 60% of payments in the U.S. are still being sent between banks over the ACH network, which takes about three days to clear. After all, it was invented over 40 years ago.
Lightspark CEO David Marcus likened it to “still using paper maps when Google Maps is available.”
“The correspondent banking system is a maze of different banks that have accounts with one another with sleeping liquidity to enable other banks to move money on behalf of their clients through a fairly antiquated messaging system,” Marcus told TechCrunch+.
Lightspark is working on automated tools and services for decentralized network Lightning, which provides instant payments. But it’s not without its drawbacks, which include high payment rate failures and slow transactions.
Earlier this month, Lightspark shipped three offerings for Lightning participants, including Lightspark Connect, a way to send and receive payments and move bitcoin; Lightspark Predict, which predicts the best-performing nodes for routing transactions; and APIs and software development kits for faster integration and instant bitcoin transactions.
“It’s good to have more real-time systems, but it’s even better if there’s a version of that that is global, open 24-7, and not only to banks, but to everyone,” said Marcus, who previously was the president of PayPal. “Everything we are building on the Lightspark front will make it really easy.”
Reimagine all the payment rails
Meanwhile, globally, infrastructure like Pix in Brazil and Single Euro Payments Area (SEPA) in Europe have seen success in enabling real-time payments, Marcus said. However, both of those are only available in those regions, not systems that are interconnected with each other. Marcus put it this way: It’s like using Gmail and not being able to email someone using Yahoo (yes, he likes analogies).
Most of the world doesn’t have access to digital forms of money or inexpensive real-time, cross-border payments. Marcus pointed out that these people end up paying exorbitant fees to send money to their home countries, even when they can send “super high-definition 4K video that they filmed on their phone via WhatsApp for free.”
“That’s the way money moves today, but we’re in 2023, so it’s actually preposterous,” Marcus said. “It makes no sense because if it’s digitized it should travel the same way that everything else on the internet travels.”
To get money moving more easily, Marcus and others think the solution lies with a decentralized financial infrastructure. Paystand, for example, uses the Ethereum blockchain as the engine for its Paystand Bank Network, which enables business-to-business payments with zero fees.
Paystand CEO Jeremy Almond told TechCrunch+ via email that if one entity goes down, for example, Silicon Valley Bank, bank customers should still be able to access their deposits and keep the economy flowing.
“The fintech industry has for too long been just a pretty UI or an API built on the same tired central banks and networks,” Almond said. “SVB’s, Signature’s and Credit Suisse’s failure could be for the fintech industry what Fannie Mae, Freddie Mac and Lehman’s failure was for the housing industry: A catastrophic harbinger of a system too big to fail, but too brittle, too full of risk and too centralized to not fail. I know blockchain, bitcoin and decentralized finance networks have their share of problems, but they represent a fundamental shift away from the same central banking system that’s been in place since the 1930s.”