The Good, The Bad And The Ugly of Instant Payments

Transcription:

Chris Napier (00:08):

Good morning everybody. My name is Chris, and as you mentioned, I am a Partner at Mitchell Sandler and I focus mostly on regulatory work and serve both FinTech companies and banks. We'll just kind of go down the line and introduce ourselves before we get started here.

Dan Gonzalez (00:30):

Sure. Good morning everyone. Dan Gonzalez. I'm from the Federal Reserves Financial Services Division, so that is the division that manages all of our payment operations, so that's check ACH, wire, cash, and now instant payments as well. I also need to do a little housekeeping before we get started, and that is any opinions that I shared today are those of my own and do not reflect any official position of the Federal Reserve Board or any Federal Reserve Bank. And with that said, now we can actually have a little bit of a dialogue around instant payments. So Mike.

Mike Thomas (01:06):

Hey everybody. Mike Thomas. I'm the Head of Instant Payments at US Bank. I've been with the bank for just over four years, and before that I was actually part of the clearinghouse helping to stand up the RTP network. Glad to be here today as a bank rep talking about the good, the good and the good of instant payments. And so US Bank is a participant in both the RTP and Fed Now Networks. We're the second largest sender by dollar volume on the RTP network. We're the largest RFP request for payment sender in the industry, and we've unlocked a lot of value for our customers with instant payments and happy to share some of those experiences today.

Cheryl Gurz (01:47):

Thanks. Good morning everyone. My name's Cheryl Gurz. I work for the Clearinghouse, which is the private payment operator in the United States. We support wire's ACH check and seven years ago launched the RTP network introducing instant payments into the US marketplace. I'm one of the RTP product managers and excited to talk about what's happening, what will happen, and how we all can get there and get the same experiences that Mike is giving all his US Bank customers.

Chris Napier (02:26):

Great. So I think before we get really started here, it's important to define what it is we're talking about, right? So when we're talking about instant payments, we are specifically talking for this section about real-time payments through the Clearing house and instant payments involving the Fed Now service through obviously the Federal Reserve. So Dan, starting with you in terms of someone who might be unfamiliar with this, what is Fed now from a 20,000 foot view and how does it differ from more traditional or legacy payment rails?

Dan Gonzalez (03:04):

Sure. So we just launched the service last year. So in July of 23 we launched the Fed Now Service. And it is just that it is an instant payment service, an instant payment capability. And when we talk about instant payments and we think about all the payment choices that are out there in the marketplace, you've got ACH, you've got check, you've got wire, and then you've got this new capability. And like Cheryl said, the clearinghouse has been doing this for about seven years with instant payment capabilities. But when we talk about instant payments, it is a payment type that essentially we keep using the word instant but happens within seconds. So generally 15 seconds or less, but it is a complete transaction, which means that both parties have now completed the transaction within that 15 seconds. The settlement has also occurred for that payment, which means that the counterparties or their financial institutions have also been made whole in the transaction and the transaction is available instantly to the recipient.

(04:07):

So no holds no delay in availability. Those payments are then available instantly so that the user or the recipient can then actually use the funds as soon as they get it. And the example I always use is if there's a payment that's made and someone is sitting at an ATM machine and they're there waiting for that payment to come in, if I sent them an instant payment to their bank account, they can look in their app or look on the ATM machine and have access to those funds instantly and can withdraw the money instantly. So it is really a game changer when you think about the way we do payments either through ACH or check today, even card. This is now a service that gives folks the ability to move payments within seconds between financial institutions

Chris Napier (04:59):

And Cheryl. Same for R-T-P.

Cheryl Gurz (05:05):

R-T-P acts the same as what Dan just went through with the instant settlement. I like to look at it more globally where instant payments is, where payment and settlement together, and there's two distinct rails that can execute that in the back office, which is Fed Now and which is the clearinghouse. Ours is RTP network. But you and your customers should not even know those differences. They just know it's an instant payment. And I really like to highlight that it's 24 7 and it's being used 24 7 and it's irrevocable. There's no chargebacks, there's no day two returns. So it's good funds and posted and available. The other thing that I just like to point out, everyone will say, well, we've had that for years. We've had Zelle, we've had PayPal, we've had Venmo. That's money movement, that's message movement. The money isn't settling. You think you have the money in your checking account and your bank probably gives it to you, but the banks don't have the money and there's risks there. There could be other aspects that make it not settle and it could be unwound to you. So when we talk about the category of instant, it's not the same as maybe emerging or faster. I think people are using faster, faster payments versus legacy payments. Legacy as ACHY or check faster would be Zelle, PayPal, instant Payments, which is what only Fed NOW and RTP can provide to the industry.

Chris Napier (06:46):

And I think that's an important distinction to make. Right? I think there are, or at least as a practitioner on the legal side, I have seen the word instant or real time thrown out there a lot to mean various different things. Mike, I was curious your experience from the industry, how your clients, when they use the word instant, do they mean this? Do they mean other things or what have you kind of experienced?

Mike Thomas (07:13):

So something that's really abundantly clear in talking with our customers is that they don't know what instant payments. They do not define instant payments in the way that my two colleagues just define instant payments. In fact, even at US Bank, we do use the term instant payments and we use it to refer to RTP and Fed now, but we also include in that category, Zelle push to card. And when we put our customer's hats on and our customer lens on the act of moving money from pushing a payment from one account to another account and having the customer know the receiver, know instantly that the funds have arrived, that's how our clients think about instant payments. So I think that might be part of, I said we were going to talk about the good, the good, the good, but there's still a lot of education we need to do as an industry to make sure our customers understand some of the nuances of using those different rails. But we also need to simplify it for our customers at the same time and speak in their language.

Chris Napier (08:14):

And I think that's particularly important, right? Because of the way that they're used right now, everyone has a different idea of what those terms mean and what they're referring to. So if you're incorporating these rails into your product offerings, then you need to be able to distinguish them and kind of create a vocabulary that everyone's going to understand. So let's get a little bit deeper into start. We'll start with real-time payments. So Cheryl, what has been built in the seven years now around real-time payments and are there any recent developments or changes to the network that you want to highlight?

Cheryl Gurz (08:52):

Again, we introduced it six years ago last November, so we're on our seventh year and it truly was a brand new network fit for purpose for the digital age. That's the whole purpose of the quick settlement. The 24 7, the clearinghouse with their banks partners saw that there was going to be a need in the US as mobile banking and online became more and more prevalent and this ISO 2002 to standardized application was put in place for instant settlement. It wasn't many people say, oh, you bolted it on ACH or you bolted it on wire. No, it was a pure standalone bring a new technology. So we've been bringing banks on that technology for the last six years. We're up to about 600 banks. We have moved over 750 million payments since we started. We've moved over six, about 300 billion in money. So we've continuously been operating on a 24 7 basis. It's interesting to watch. There are a lot of people using the payment capability between midnight eastern time and 6:00 AM eastern time. It's not just being used nine to five. I think it's freed a lot of people to get away from banker's hours and cutoff times. You see that West Coast individuals are glad there's not eastern cutoffs on some of their ACH files, so it is continuously being used.

(10:27):

We are providing credit transfers as a credit push system. So you have to be able to push that system out. There's no debits on the network. It is because in order to be good funds irrevocable, the banks have to make sure that when they send it, they receive the money from their customer and that the person that's receiving, there's a lot of use cases on it, a lot of gig economy workers are using it and we're evolving into collections. If you look at the credit transfers today and the 750 million, it's from the disbursement side. Someone's paying someone, there's a disbursement because it's a credit push. So where we're evolving to is now as a mature network is moving into the collection side and there's a message type which is called request for payment that's been used in Europe for a while and we're introducing this. I know Mike will be able to talk a little bit about this with his customer experiences, but that will be for us, our next generation of adding, experiencing and educating the industry and finding a very secure way to maybe eliminate ACH debits where they're not the right tool for a business or for a consumer.

Chris Napier (11:50):

And then for Fed now it's brand new. So to the extent you can share, is there anything in the works in terms of what the fed's working on?

Dan Gonzalez (12:00):

Yeah, so maybe I'll start with where we are right now. And like I said, you just kind of highlighted we're the new kids on the block. So we just launched this service in July. We did this with a lot of extensive input from the payments ecosystem. So that included financial institutions, service providers, corporates, merchants, you name it. We got a lot of input, a lot of people wanted to talk to us and tell us what we needed to do. And eventually at the end of the day, we did launch the service successfully. Once we went into market, we've been very active to grow the network through adding participants. We are currently at just over 650 participants. And when we say participants, those are financial institutions, those are the actual banks and credit unions that are connected to the service. When we launched and where we are right now is we have a full suite of capabilities.

(12:58):

So like Cheryl said, this is a credit push system, which means the payments got to be initiated by the sender. So we have credit push transactions, we also have RFP or request for payment capabilities. We also just recently announced to the participants that we're going to be enhancing some of our fraud mitigation capabilities. So we launched with a core set or what I'll say is a basic set of fraud mitigation tools for the participants, but we're looking to continually enhance and update those capabilities. We will touch a little bit on fraud a little bit later in the conversation, but just like any payment type, you have to have the right tools in place both at the participant level and at the network level to manage and mitigate fraud. I don't know if folks know, but probably this might come as a surprise, but one of the areas that we're seeing a lot of fraud in today is check of all things.

(13:53):

Checks have been around forever and we're seeing all kinds of check fraud. So we know about wire fraud, we know about ACH fraud, but checks of all things, even though they're declining, the fraud is going the opposite direction in checks. So it's something as an industry we have to be very cognizant of and have to really work to manage and mitigate as much fraud as we can. So we will continue to update that on the network side. But from a standpoint of the network and what we launched, we really launched one of the most modern payment systems to date. We have some capabilities that generally we don't get into just because it's kind of behind the scenes, behind the curtain, the way we operate the system. But from a standpoint of the participants, they know that we are there 24 by seven, we've initiated all these different capabilities and have got some active transactions. So we're working to grow the network first. And Cheryl will know this, you can't have a network without a set of receivers, so you have to have somebody to play catch if you're going to have people sending transactions. So working on that receiver base and then slowly growing our send capabilities as we move forward.

Chris Napier (15:06):

And Mike, since you have Cheryl and Dan, here's a captive audience, is there anything in particular you want to see developed or anything that would be helpful for the industry or your bank?

Dan Gonzalez (15:16):

You notice they put mic between the two Competitors.

Cheryl Gurz (15:20):

And a one customer.

Mike Thomas (15:22):

So I think I appreciate the comments on fraud across the industry.

(15:38):

The potential for fraud in an instant payments world. There's this saying in fear, faster payments, faster fraud, instant payments, instant fraud. We need to make sure that the rails are prepared. And I think further investments in fraud monitoring to help banks senders manage counterparty risk because we don't know a lot about the receiver, and that's something that the network knows much better than any individual originator does. So being able to enable us that way, similar to the investments that we've made. I know we're not talking about Zelle today, right? But we've made some significant investments as an industry to help mitigate the risk of our customers falling for scams through Zelle. I also think the Fed and the clearinghouse both did a really good job prior to launch and in their early days bringing stakeholders together to talk about what's next and to design these networks in a way that works for multiple stakeholders.

(16:37):

One of the things I consistently gave feedback on is the value of consistency at US Bank. We try to make this simple for our customers. We don't want them thinking about RTP versus Fed now. And the way to do that is making these networks look as similar to each other as possible. If I have to explain to my customer, oh, you couldn't send this transaction, which was a $600,000 transaction because the endpoint is only available on Fed Now and they're not available on RTP, which has the million dollar limit, that's a nuance. I never want to have that conversation with a customer. So the more we can make these things similar guys, the better off we'll be as an industry.

Dan Gonzalez (17:18):

And that's actually a great point. The what we do. So if you think about payment systems in the us, we don't have any major payment system that operates just on one provider. So ACH has two wires, has two cards as a bunch, instant payments now has two. But to Mike's point, when we launched, we wanted to make the service look and feel as similar to what was in market, which at that point was RTP. And what I typically say to folks is that what we do is the same. How we do it is maybe a little bit different. And to Mike's point, there might be some nuanced differences, but at the base level from a customer, one of Mike's customers, one of the actual user's perspective, they're getting a similar experience, which is an instant payment, something that is initiated, happens within seconds, settles and is available. I mean that at the end of the day is what the end user is looking for from an experience standpoint, we can get into all the other capabilities like data elements and dollar limits when we could certainly talk about.

Mike Thomas (18:27):

There could be real payment geeks in here and talk about data elements.

Dan Gonzalez (18:31):

And we could really talk about data elements. And to be totally upfront when we were thinking about launching the service or said we were going to launch the service, we said we were going to launch at $25,000 capability. So we did move up a little bit. We're not quite at a million yet, but it's something we are monitoring the marketplace to see where we need to go from a dollar standpoint.

Cheryl Gurz (18:53):

I think what's also important for the audience to realize, you mentioned 600 and some banks, we have about 550. Most of those are on both majority, but there's no a thousand banks in this United States to get on this system. So the customer experience isn't going to be similar to your point, Mike, until more banks out there. If any of you are not on it, it needs to have everyone's involvement. And by having the Fed involved, we at the Clearing house, we're real excited. It's hard to bring 9,000 banks on very hard. It's hard to bring 500, 600. I mean there's a lot of banks that we need to reach in order to make this available to every one of your customers to reach every receipt endpoint. And the other thing I just wanted to just mention is Dan mentioned speaking to stakeholders and people in the industry we're competitors, but we are one of those stakeholders that talk to the Fed. We are continuously, I'm in product management, we have regular touch points with our Fed product partners. How can we with our own DNA as a company, you have your own competitors. No matter where you're in, how do you find commonalities? So we don't have that such distinct differences. How do we find our ways to provide the customer experiences on the front end as similar as can be, where we can compete very aggressively on the backend to bring the banks onto our networks?

Chris Napier (20:23):

No great points. And so let's bring this from kind of the conceptual to the real world at this point now Mike, as since US Bank has incorporated both of these payment technologies. Now give some examples of how you use the technology and what it's allowed you to do in terms of your product and service offerings.

Mike Thomas (20:44):

So the way we like to think about and talk about instant payments in general is a lot of the benefits that Cheryl and Dan just talked about are kind of back office type benefits, but where there's real power in instant payments is creating differentiated digital experiences for our customers. We have an example of, we worked with an auto dealership to launch a site where customers, consumers can sell their cars. And when someone's coming to your house to pick up a car and they're handing you a check and they're driving away and you don't know if that check is going to clear or not, that's not a happy experience. And to launch a new company or a new brand in this space where you've got competitors like Carvana or the other CarGurus, being able to have an instant payment deposited into the seller's account before the car left the driveway was a differentiating factor for them and it allowed them to quickly gain market share in the markets where they were operating On the west coast.

(21:49):

We also see, so that's an example of a front, I'll call it front office digital capability that we help work with our customers to discover how can an instant payment really differentiate them from the rest of their industry. We're similarly working with some fintech's who specialize within the healthcare and insurance verticals to help them expand. Many of those companies adopted push to card and instant payment is just another instant alternative that allows them to deposit funds into their customer's accounts for disaster recovery type things or even auto insurance type claims. And we're really excited about that opportunity. Then we get to the back office and I think this is where we as an industry have some work to do still, right? So US Bank does a really good job of being our own customer first and we send a lot of bank payments through the instant payment rails where we see benefit whether it's a differentiating benefit for us or it creates a revenue opportunity for us.

(22:52):

As an example, we have a big merchant services business and we offer various levels of settlement to our customers and they can be on standard settlement, which they get their money a day or two after they close their shop for the day, or we can offer them everyday settlement and they can actually, when they close their registers funds get deposited directly into their account. If I'm paying out tips or what have you to my service staff, that can be really powerful for them and something that they're willing to pay for. So looking internally as a financial institution into how you move money is a really good way to identify and where you've got those pain points and your customers have pain points and have given you feedback, that's a really good way to identify where instant payments can drive differentiation and value.

Chris Napier (23:41):

Yeah, that's a good point too. I think before we started here, outside I think you mentioned the merchants themselves or other clients might not actually think that these are things that they need or ways that these can be deployed. So that's more of the bank being kind of proactive in terms of determining what the need is and figuring out a solution that you can then offer. So it's not necessarily driven by someone asking you for this. Right? That's right. And Cheryl and Dan, are there any other kind of use cases or interesting kind of ways this technology has been deployed that you've seen that Mike hasn't mentioned?

Cheryl Gurz (24:24):

Oh, it's been very interesting watching how people and businesses are adopting it in their own organization. So I think the other day I looked, we have 233,000 businesses have done at least one payment last month and that grows every month. So we talk about the high use cases like any of you use your digital wallets, you're probably given the instant option. That's probably the biggest one. Any of you using some online gaming entertainment, you probably have used the instant option. So there's major users and I would say the early adopters were really the more back office forward technologies. They didn't have legacy ERP systems and they all found a way to either find a new revenue model or find a way to reduce their costs or give them to what Mike just said, a differentiation such as that car seller online. So the very, and I think now we're starting to see what I would call the fast followers.

(25:46):

They've been asking what use cases, but it's really bringing it in organically and seeing where your payment type that you're using today doesn't work. It's not a lift and shift. What we're not talking about is lifting all your ACH payments and send them over to instant payments. Of course, I'd love you to lift all your check payments up and move to instant payments, but we know how difficult that was to even bring over to ACH. So not asking for that, but talking to another auto finance, right? If any of you have purchased a car and then you want to do your last payoff and you need your lien or your title released and today they'll take ACH or they'll take a check, but they're going to wait 60, 90 days until they give you that because there's the potential of clawback. So some of them are looking, and I know one is doing where they're actually taking or asking the company the person to push out an instant payment irrevocable and they'll release the lien.

(26:49):

We're seeing that. I'm seeing many real estate transactions. Some of the smaller beginning users in the real estate are paying their agents. The title companies are paying their real estate agent, their commissions instead of the checks that never get cashed. The real estate agent is walking away with their commission and their checking account is their closing the door in the title office. That's a fun one. We're seeing the gaming a lot of investment companies. So if you're sitting there and have a wealth account and you want to disperse your monies into your own checking account instead of holding keeping it in your wealth cash account, you'll be moving those out. So auto dealers are being paid since we have a theme with auto dealers,

Mike Thomas (27:48):

Well, I would say you mentioned on the last one, that's account to account fund counter to account. That's got to be probably the largest driving use case today. And it makes sense. Just think about the last time you had to move money from one bank to another bank, and we're all payments geeks here, so we understand why it takes three days or two days for the money to show up in the other account. But the general consumer who's using a Venmo, who's using, I don't know, apple Pay, PayPal, what have you, they're used to real time. They're used to instant, that's not new to them. And when they come to their bank to move money, say from their US bank account to.

(28:25):

I don't want to talk about other banks here today, right? But I want a less than ideal experience. They don't understand why When US Bank launched the instant feature within our own external transfers capability in our mobile app, we saw a 20 point increase in customer satisfaction with that particular experience. And that's going to help us retain our customers longer, make us more central to our customers' lives. And it's those sorts of proof points that demonstrate that we are onto something really good here. It is what our customers expect from us and banks and financial institutions as an industry. We're really using this new tool to catch up to where innovators and fintech's have created expectations.

Cheryl Gurz (29:12):

You're really seeing that in financial wellness. You have earned wage access, companies you earn, they're looking at your employer know that you earn $200 and you leave at the end of the day and you're able to take $50 out and credit it. They're using instant, but it's not just the employer based one. You have many of your food delivery services, your car ride services. They're letting their drivers that drop me off today right after my drop off. He could have taken money out instantly and put it in his checking account. And I remember the first couple months that they started offering that service, we actually talked to one of their drivers. He cashed out 30 times in an eight hour period. He just wanted to make sure it worked. So we kept sending it instantly after every ride to his checking account and then he'd go to the ATM to make sure he can get the money. It's just amazing how people, we forget sometimes that folks need access, like you said to their money now they need to get some food or they need to get the gas so they can keep driving. There's so much of a gig economy out there. So there's a lot of gig economy giving them access to what they earned immediately. Their employers are providing that to them. And that is a growing place for us.

Dan Gonzalez (30:42):

So we're seeing a lot of the same type of use cases over the network. So I think from a use case perspective, I think we're going to see that grow and build. And I think what I would like to leave folks with is a couple of things. Number one, Cheryl and I built the rails, not ourselves personally, but our organizations built the rails and that is the infrastructure to support this type of activity. And folks are saying, well, why did you do this? We have a really good payment system in the US marketplace. It works really well. It's efficient, it's secure, it's cost effective, you name it. So why'd you do this? Well, the reality is what are we up to now like 60 countries globally that have instant payments teams? This is kind of the way things are going back to Mike's point, consumers, businesses are getting used to instant gratification.

(31:36):

You hit a button and something happens and it happens as you expect it. But when you think about the use cases, there are going to be pockets of opportunity where the current payment infrastructure doesn't meet the needs of the end users. And that's what we're looking to satisfy here. So it's not about taking all of ACH payments and moving them to instant payments because ACH is a batch payment system works really well for our two week payroll are recurring monthly mortgage payment, you name it. Those things that are scheduled and work well, let them be. That's fine checks. We might argue that we want to get some of that inefficiency out of the system and maybe move those to instant, like the examples that Mike used. But I've got a great example of a situation where in the economy today, there's a lot of folks that live paycheck to paycheck. So back to the conversation of gig workers, those folks that really need that money as quickly as possible. There was a situation that a worker was going to their job and was running out of gas and needed to stop at a gas station to fill up, went to put their debit card in the gas pump and it was declined. Opens up her bank app, she doesn't have enough money in her account, she gets into her payroll app because her company offers instant or daily access to payroll, saw that she had payroll available, did an instant payroll transaction, hit her bank account, was able to swipe the debit card again and get the gas so that she could get to work for that day. That is something we would not have been able to solve before instant payment capabilities. So this is the way we need to think about it. Where are those opportunities with this new payment rail and new payment capabilities that we can solve for payment issues and problems to help really end users at the end of the day have a better experience with their payment process?

Chris Napier (33:42):

Awesome. So let's get a little bit more into the technical side of things, right? Or at least a high level of the technical. So there's obviously differences between these two rails and let's say traditional ACH, right? Certain things that are just necessary to make instant payments possible. So starting with you Cheryl, can you describe some of the differences between RTP and say a traditional ACH for things like returns, liability errors, that sort of thing?

Cheryl Gurz (34:23):

So with the instant in the 15 seconds that Dan mentioned, it's a message by message system. So our current rail, ACH, it's batch. So someone batches everything up, sends it, gives you a day or hours and everything is processed through and you won't know until after you as a sender won't know until maybe a couple days, 48 hours that the money didn't make it there. So under the instant payment rails, we require a response by the banks, the endpoints within 15 seconds if that account is open. Good, and have you posted it? So I think that's the number one is that there's an immediate confirmation that when you sent that money, that money was received and it was placed into an account, they have access to it and a confirmation is received back to the bank who can then receive it back. There's no confirmation. There's a negative confirmation, right? And the ACH network, it's negative when you find out 48 hours, 24 hours later that it didn't post. So that's probably one of the biggest differences because right up front, and it's a heavy lift for the banks to put these systems in when they're putting them in, you have to know all that right Mike in 15 seconds.

Mike Thomas (35:47):

Well, so I think yeah, there's a technical investment that needs to be made in order to stand up well or there's many processors out there who are connected to these rails and can help simplify that decision and that process for financial institutions. One thing that's astounding, RTP and Fed, sorry, instant payments at US Bank is officially a higher volume rail than wires, right? When you look at our back office operations team on the wire side, it is five times as large as our operations team on the instant payment side. Because there isn't a day two process, there's no day, there's not a return, there's not a manual process to get anything entered into the system. It's made for a digital world, it's made for straight through processing and that's powerful for banks. As we're thinking about how volumes are going to shift across rails in the future, that helps us understand what our operations teams are going to look like more in the future.

(36:49):

And our customers will say the same thing, right? If I'm on the receivable side and there's reconciliation breaks, I've got a whole team who is my receivables team trying to do that reconciliation with an instant payment where the money and the data is moving together and instantly it eliminate, not eliminates, it reduces the need for that on the corporate side. So I actually one other, sorry, sorry. Instant. We talk about instant a lot and immediacy and the speed is absolutely an important attribute of what instant payments is, but it's also about flexibility. Being able to hold the funds for as long as I can in a high rate environment that's actually valuable to hold the funds an extra day. It's about simplicity in the back office and it's these aspects of instant payments that we need to continue to educate the market on in order to get customers excited and interested. Drive more end user adoption. You mentioned 233,000 businesses used it last month, that's great.

Cheryl Gurz (38:00):

How many, it's a fraction.

Mike Thomas (38:01):

That's so small still, right? We're still very early days and we need to continue to talk about these various value propositions like we're doing today. So thank you.

Cheryl Gurz (38:13):

I just wanted to mention the legal, you asked about the legal. So because there is no day two, it's irrevocable. The payments are good funds, they're there, so they can't be returned, you can't dispute them. So all that's gone. There is a process if there's errors to ask for the money back. I wanted, everyone's like, oh, you can't get anything back if you, no, there's workflows that are separate that will ascending bank can request through straight through processing, through messages. All this is message based, that individual and say please, we sent these wrong, could you go to your customer, give debit authority and return the payment? So there is methods to come back, but from legally these items are not that are good funds. We had actually clearinghouse, no one knows who we are. We've been here since 1892, very since the last couple of years we're out speaking.

(39:13):

But before that we were pretty anonymous. I remember getting a call from someone in our reception area, somebody from Florida somehow received our number, no one knew where to send it. I get the call, it's someone in Florida that's selling a yacht to somebody and they received an instant payment, a real-time payment, and they didn't want to release the yacht. It was the million dollars, didn't want to release it. They were scared that the money wasn't good. So those are the things the banks would be dealing with customer service and education. But it just shows you that those are types of places. Think of you as a business and you want to release goods and you've been on credit hold and you want to get a release of funds and you can immediately send an RTP, no worry on the business about a return or a dispute or a chargeback or stolen credit card was used. This is where using the messages and having the legal framework of good funds and confirmations really helps companies make a determination why they should adopt it in certain places.

Dan Gonzalez (40:26):

Yeah, I think what you're hearing a little bit here is that these are different. So we're all used to ACH, we're used to checks, checks, bounce, ACH, you can claw them back. All the challenges that you have between the two parties that are facilitating the payment. So what we've done here by introducing instant payments is we've put the counterparties in better control, better position to manage their finances. So to the point of the yacht, and I want to know who that person is, I'd love to buy a yacht someday. But looking at that capability, you're putting those people in control that if you're handing over the keys to the yacht, you know that you've got a good payment. You don't have to worry about it bouncing, you don't have to worry about it getting clawed back. Yes, that comes with other concerns that we have to manage.

(41:16):

But again, the banks I'm looking at Mike here are putting those controls in. Mike is not going to let that buyer send that money dollars unless he's validated, verified, done 25 different things to make sure that a payment of $500,000 is going out the door because Mike knows very well that he can't claw that back. I always call that the oops button. So yes, we have a process. We both have processes, we have rule sets, we have operating circulars, you name it. That kind of put the guidelines around the payment process. But at the end of the day, the recipient that is getting that money knows that that is a good payment and they can use that money and don't have to worry about it being clawed back except in the case of an error, which then the parties, the counterparties will work that out through their financial institutions.

(42:14):

But these are different payments now they're different capabilities that we think, and I'll say collectively that ultimately will be embraced. Michael already said his payments are more than wires. Wires were our original instant payment capability. But anybody that sat at a mortgage closing, waiting for the wire show up, guess who they always blame why the wire is slowed down. Oh, we're waiting for the Fed. Well, the Fed doess their part with wires. We actually do that instantly. As soon as Mike tells me to move money to another bank, that happens. It's done instantly. But the back office, they have to review the wire, check everything out before it's posted to the customer's account. We've taken out that noise in between and when somebody hits send, the recipient can then see now that the money has been received and mortgage closings can be shrunk down quite a bit through that process.

Cheryl Gurz (43:13):

And one of the things I just wanted to mention, we said the 15 seconds and a lot of banks get real, that's on the receipt side. The send side. To your point, Mike and the banks, they cannot send that payment for days. Weeks. They call people going through their AML, they don't have to release after I ask my bank to send that payment. The banks have as much time as they want to do their reviews. Most will do them fast. But some banks are very concerned that they're sending too fast. We don't want them to send that fast. We want them to do all your compliance reviews, your fraud reviews before sending them in.

Mike Thomas (43:54):

Well I think at the end of the day, the customer, when you talk about instant payments, they are expecting you to do this instant to mean seconds, not days, right?

Cheryl Gurz (44:03):

But you can't humble up if there's a lot.

Mike Thomas (44:04):

But to your point, yes, before a payment becomes a payment in the network, we are responsible for doing all the right risk reviews and we had to invest heavily as an early adopter and making sure that we got that right. I do want to mention though, as we're talking through irrevocability, right? That's really what we were just talking about and the difference of instant compared to ACH that certainly does intimidate some customers because now they got to think, okay, if I actually use this thing, the money's really gone. It looks like a wire. But it also creates tremendous value in certain aspects of the market. We mentioned request for payment earlier and where US Bank is seeing a lot of traction right now is with broker dealers. If I want to buy a stock but I don't have cash in my brokerage account today, there's not really a good way for me to fund that account.

(45:00):

And a lot of broker dealers are doing ACH debits and accepting the risk and letting their customers transact before the funds actually clear and settle. And then there's also a really big problem in this industry of first party funds. So I made an investment, that stock dropped in value 50% within the first 60 days of me owning it. Now I call my bank and say, oh, I didn't actually authorize that debit and all of a sudden I made whole and the broker dealer is out the funds. So using a tool like request for payment to drive an instant and irrevocable funding into a brokerage account is a really powerful use case that we're excited to see a lot of growth in over the last couple of quarters. And as more and more banks join. So when you join these networks, everybody's got to be receive enabled.

(45:51):

And then most financial institutions start with receive and then think about how do I dip my toe into send. But being able to present a request for payment to a customer and have them push pay is potentially transformative to many of these use cases like account to account funding potentially in bill pay as well. Think about closing on the weekend instead of needing to set your wire on Friday or Thursday and do that in advance. How can I stage the funds for closing when I'm in the office and use RFPs to do so that can completely transform that home buying experience? And it's something we've been working on with some of our title clients. So a lot of great opportunities also created by these key differences between ACH and instant.

Cheryl Gurz (46:44):

And it gets to the network effect, right Mike? It's a complex journey receive, it's a journey to go on by the banks receive send RFP, and it gets more complex. They have to do more product building and a technology build, but it doesn't work unless everyone on the network is going to be at all those levels of capabilities. And that's where getting as many banks as we can through Fed Now and RTP, it's going to be the best for all of us as consumers because it's really, I think consumers and businesses, as you keep saying, has such value in this network when you really start looking at it and we start touching and feeling more people in the end users community to start using these. Because I could never understand, even as a banker why I wanted to move bank from one bank to another and it's three days and you're just like, what? I know it could be done, but this is truly 15 seconds and if any of you have ever had children and needed to send money to somebody that 15 seconds at two in the morning not there has a benefit.

Chris Napier (48:04):

Now given some of these differences, does fraud risk look different for instant payments versus other rails?

Cheryl Gurz (48:12):

I hate the term faster payments, faster fraud, it's just you're welcome.

Chris Napier (48:16):

None of us like that.

Dan Gonzalez (48:19):

It's a catchy phrase.

Cheryl Gurz (48:20):

Yeah, it's a catchy phrase, but it's all about controls. I mean I think we've said it, we on the network, we've had six years of experience now we monitor and have the banks report to us. Again, we talked about it's a credit push system. So one of the major categories of fraud is I get wrong, unauthorized fraud, someone's doing account takeover. And that's really what we monitor on the system because a majority of our senders are business accounts and you're not seeing a lot because we don't have a lot of consumers yet initiating them on their own. It's done. But to what Mike said, Zal is one of our payment partners and they have done a lot of work in scams and looking at risk insights and attributes of the receiver. So we at the clearinghouse, we have been working very diligently with our EWS partners and some consultants and we're getting closer and closer to coming out with a new offering that will help the senders get some information on the receivers.

(49:33):

So it augments what they're already doing. We're not replacing what the sending bank knows. The sending banks should know from a fraud perspective, if their customer's good, they did their AML checks, they did the know your customers and it's their responsibility. But as Mike said, they really don't know about the account they're sending to Ed Bank X has that account been a place where some bad actors like to open accounts and they have quick turnaround of scams going there. So we are going to be able to start providing them with some kind of visibility onto the actions that we know within our network, but within our network alone doesn't help stop fraud. We have to also think of what's happened to fed now those receivers and ACH and wire. So our long-term view is that it will go across all payment view rails in order to give a view of the receiving customers so that the sending banks have more visibility or transparency into the accounts that someone's trying to get money to Real fast.

Mike Thomas (50:46):

So sorry Dan, go ahead.

Dan Gonzalez (50:48):

No, I was just going to say that just the nature of the network and the way it works is inherently safer just because it is a credit push only network. All the other payment systems, somebody can come into a customer's account and take money out. So debit check people get ahold of people's checking account numbers and all that. They can come in and grab the money and take it out. And the only way the consumer knows is once they look in their account and go, where'd all my money go? It's gone. So it's inherently safer. It doesn't mean there's not things that can happen because there is count takeover and things like that. So to Mike and Cheryl's point, I think when we think of faster payments, I like to say that we think of smarter fraud mitigation capabilities because we've really advanced with some of those capabilities, understanding behavior of consumers, where they are, what they're doing, how they're doing it, all those things that we're seeing are being built into those applications so that before somebody hits the actual send button, the bank is pretty sure of that is a good, it is their consumer that's making that transaction.

(51:56):

And it's a good transaction doesn't mean it's a hundred percent. Like I said earlier, every payment system we have today in the US has the potential and has fraud activity on it. Our job as the banking infrastructure is to make sure that we're managing and mitigating that while still offering a good experience to our consumers. So we're going to add friction where friction needs to be added, but we're not going to make it so difficult that if I'm trying to just pay Mike 50 bucks for a little wager that I might've lost, we can do that. So just think of it from that standpoint that inherently the network itself or the process is safer than most capabilities that we have today. Sorry Mike, go ahead.

Mike Thomas (52:43):

No, so you made the point for me. Thank you Dan. I think the good news, safety and security of our customer's funds and payment activity is always top of mind. And so ultimately when deciding to join and become instant payments enabled, there were clearly going to be investments made on how do we mitigate fraud risk. What are those fraud risks? The good news here as the second largest sender in the RTP network, I can count on my fingers how many transactions were claimed fraud last year for US bank customers. And that's out of millions of payments. So it is always an evolving game and we always need to be diligent about how the fraudsters may attack next and how they may take advantage of these new capabilities. But I think early days, at least the inherently lower risk push functionality has kept the fraudsters at bay in addition to the investments banks have made on the front end to make sure we've got strong authentication.

Chris Napier (53:46):

Yeah, no, that's great. So kind of bottom line from what I've been hearing from everybody is that these systems are not necessarily introducing any new risk or additional risk. In fact, they actually take some of the inherent risk out of existing payment models, but it's just important to understand how these systems work, what the differences are so you can deploy them responsibly. So with that, I think that is everything we've planned to cover today. I'm not sure if we have time for questions or not.

Mike Thomas (54:18):

We are blinking red if we do.

Chris Napier (54:19):

Nope. Alright, so thank you very much everyone for attending and I hope you got something out of this. And if you'd like to speak with any US after, please feel free.

Mike Thomas (54:32):

Thank you.

Dan Gonzalez (54:32):

Thank you.