Exclusive interview with Jim Colassano, SVP Product Development, The Clearing House: “You shouldn’t have to wait days to see money leave one account and into another”

Jim Colassano, The Clearing House
With banks all over the globe riding the digital transformation wave, The Clearing House, owner and operator of the RTP Network in the US, believes real-time payments are a surefire way for financial institutions to stay ahead in the game.
The Digital Banker sat down for a chat with Jim Colassano, SVP of Product Development at The Clearing House, for a discussion on why real-time payments are a crucial innovation and offering for community banks and credit unions.

The Digital Banker: What are real time payments? How does the RTP Network work?

Jim Colassano, The Clearing House: Real time payments are essentially instantaneous clearing and settlement transactions. So for the most part, most transactions, at least in the US, are cleared and settled over one of the existing payment rails which would be wire or high value system, or ACH or low value system and they’re cleared in batches. These systems have been around for about over 50 years, and the real time payment system that we launched a little over six years ago processes transactions, clears and settles them instantaneously. The money moves between banks in the US within five seconds.

So if you send a transaction, you do not have to wait for a day for that transaction to settle. And these are final and irrevocable transactions. Very, very different from the way payments have been processed historically, and aligns very much with the way many of the global networks operate today – such as Faster Payments in the UK. They clear individually, they settle instantaneously in good and final funds, irrespective of the dollar value of that transaction.

What is real time payments looking to solve? What were the problems in ACH that demands a faster network such as RTP?

There is a misconception that the only thing that you get with real time payments is speed. These days, the RTP network operates 24/7 so you’re no longer constrained by traditional banking hours, meaning you can send and receive a transaction 24 hours a day, seven days a week, which is a problem that other networks have been dealing with for years.

After banking hours, you have to wait for the next banking day in order to originate a transaction and that is not consistent with the way commerce operates today.

Commerce operates 24/7. People are buying and selling all day long, be it weekends and nights, and do not want to be constrained by the systems that are in place today. So the speed – the instantaneous component of it – is important.

Most of the current systems that are in place today do not actually settle until a day later or in some instances several days later. And in some instances, especially for the ACH side, you have the right to recall those transactions for a longer period than that. So settlement finality is another thing that’s extraordinarily important.

The final point is that the current systems don’t really provide payment transparency. Early on, when we were first launching the network and talking to business clients, I asked several of them, “How do the existing payment systems work today?”.

The response I got from one of them is very illustrative: “They work perfectly except when they don’t.”

And the problem is you never know which one did not work, because the only way you can find out if the party that you’re sending the transaction to actually received the money is if you call them and ask.

In instant payment systems, not only do these operate 24/7, not only do the funds move instantaneously, but also the sender of the transaction gets an instant notification that the money has actually been received by the beneficiary. These are the types of capabilities that the network offers, solving for pain points that exist today.

Payment transparency is another piece that is extremely important, especially if you’re a business and you need to make a payment on a very specific day, at a specific time of day, or if you’re trying to get an early payment discount, coupled with the finality of the transaction.

The 24-hour experience that we’re talking about also really aligns with consumer expectations today. They expect everything to happen instantaneously, waiting even a few seconds for every transaction to settle is incongruent with the way people are doing business in their personal lives.

How many banks have implemented RTP in the US already?

We currently have 600 banks connected to the network, with the majority of those banks being community banks and credit unions.

Just for reference, The Clearing House is owned by 24 of the largest banks in the US. But the system that we put in place for RTP is designed to support the entire industry, and those numbers are increasing every day. So we do expect to be well over 1000 by year end, and the pace of banks joining the network is increasing on a monthly basis.

By calculating how many households in the US we reach through the RTP network, currently we estimate our reach to be approximately 67% of the households in the US. We have about 235,000 individual businesses that are sending transactions on the network on a monthly basis. We also have over 5 million individual consumers who are sending transactions on the network.

We surpassed half a billion transactions on the network last July and it took us several years to get to that point and now we are looking to double that by the next month. Interestingly enough, we are starting to actually see a steepening of the growth curve in terms of the applications and the uses that we’re seeing on the market.

We are seeing the breadth and the depth of RTP, which was started six years ago, and so far, we are very pleased with the adoption levels that we’ve seen both on the banking side as well as the usage numbers we’re seeing from consumers and businesses.

What feedback have you received from users so far?

It’s been incredibly positive.

When you look at payments and online businesses, the biggest problem they had was shopping cart abandonment because they couldn’t get the payment experience to match the online digital experience.

What we’re seeing right now is since you have a digitally aligned network that clears and settles every transaction within a few seconds and with finality, these are the types of transactions that consumers and businesses expect to see. And now, we’re starting to meet the expectations of consumers and of businesses in terms of the way a modern payment network should actually operate.

You shouldn’t have to wait days to see money leave one account and into another.

A lot of the applications that we see on the network are individuals or businesses moving money from accounts that they hold in different financial institutions, making them the individual on both sides.

So, to actually be able to hit send for an OTP payment on my bank account and have the money instantaneously sent to my brokerage account is a clear and apparent experience for consumers and is something very different from what they’re used to. Which is why the feedback we’re getting is very positive.

Any examples you would like to highlight?

One of the earliest use cases was Uber for gig economy workers. The problem they were trying to solve was that the drivers were looking to get paid at the end of the shift. What they’re doing is they are now signing up to to receive that money instantaneously at the end of their shift. Gig economy access is one of the first applications that we saw on the network, and it’s continuing to grow.

We’ve also seen earned wage access, which is essentially early access to wages that you’ve earned, and companies who are using the RTP network to deliver that money to individuals who’ve earned it and need it for a particular purpose.

We’re seeing a lot of B2B transactions going on the network, and a lot of these are for late in the day payments. We’re seeing businesses move money after hours or on weekends to support their expansion capabilities. We’re also seeing merchant settlement move over to real time payments because of the cash flow needs, especially smaller merchants who need their money more rapidly and those who need it when banks and payment systems are typically closed.

As we’re starting to see interest rates increase in the US we’re actually seeing customers and organisations using it more actively to manage cash flow, because it allows you to be precise right down to the minute. For businesses in the current economic climate, that’s extraordinarily important. When you couple that with the transparency of knowing that the money is received when you send it, we see a lot of value, which is why we’re starting to see those business originator numbers increase month over month.

Scams are also getting sophisticated each passing day. What are your thoughts on this? Is the speed and finality of RTP a double-edged sword?

No, I don’t think RTP is a double-edged sword, and I don’t subscribe to a lot of the concerns. We have not seen levels of fraud on our network. They’ve been extraordinarily low in the hundreds of basis points in terms of activity that we’ve seen.

We haven’t yet experienced fraud on the network, but we do know that fraudsters do look to the instant payment networks to try and destroy people and get them to move their money out.

But here, the consumer, the individual is in control. And one of the things that banks are doing are putting controls in place, such as reminding consumers that if you make this payment you can’t pull it back. Banks are also leveraging machine learning and artificial intelligence to make sure there are pre-existing relationships between originators and beneficiaries for transactions.

We also have network monitoring in place, meaning we are taking a look at traffic on the network, but so far, fraud levels have been extraordinarily small. But the one thing we need to be conscious of is fraud is now the static concern. Fraudsters are very creative. They are some of the most innovative folks on the planet, so we do have to be constantly vigilant. Education is a big piece of it. The more educated the originator, the less likely they are to be defrauded.

As far as we’re seeing right now, we do see that the RTP network, because of this credit push, has a lot more controls in it and is naturally a network that is less prone to fraud than some of the others where money can be pulled from an account by a fraudster.

But again, we look at that through a traditional lens. We need to be forward-looking in terms of where the threat vectors are going to be coming from in the future and be constantly vigilant. So it is something we constantly monitor and are constantly aware of. So far, we have not seen that threat operating on our network.

How do you see the payments landscape evolving over the next couple of years?

I do expect the payments landscape to really start embracing instant and real time payments as it aligns a lot better with the way digital commerce operates today.

You are going to see as a lot more companies start to move over to digital experiences for their customers. They’re going to be looking to adopt the payment mechanisms that will align to the

customer experiences that they’re creating. So we do expect to see a lot more adoption or real time payments.

We are also expecting to see some work that we’re doing right now in terms of cross border instant payments, kind of the holy grail of payments. As somebody who has been in payments for over 30 years, I can tell you that was something that wasn’t even envisioned when I came into banking years ago.

To talk about a world where we’re going to be able to connect instant payment networks so that transactions can clear and settle cross border with finality in seconds – that is really where I see the real value and the power of this network.

The other thing I’ll mention is that we have built the RTP network on the global standard ISO 20022. So we also have a messaging standard across different IP networks that will allow us to do a lot with messaging not only for moving money, but moving information.

You’ll see end-to-end processing that has full transparency and full detail which is extremely important to businesses of all sizes, and that occurs instantaneously and with finality. This is what the business community is looking for. And I think RTP in particular solves that problem.

Now I do believe that RTP for a very long time will be sitting alongside ACH and wires because the latter are good for large transactions that are recurring. But for the transactions that are increasingly going digital, you’re going to see a lot more adoption of the instant payment frameworks and networks.

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