Faster Payments – Will tech eat the banks?

pexels-photo-870902
Checks and Pony Express

At last the big, big tech companies are driving the US Federal Reserve to sponsor and get behind a faster payments initiative.

Amazon, Apple, Google, PayPal, Square, Stripe and Intuit, have all co-signed a letter supporting the the Fed being in charge of the development of a system that can connect all the banks and credit unions in the U.S. to speed up payments. I’ve long complained here that the US System is laughably out of date, and the system Automated Clearing House and its associated network is still loosely based on the delivery times of the Pony Express and definately around checks.

The ACH itself still describes itself as a using batch processing and a store-and-forward system. And that’s exactly the problem, the store-and-forward part and the regional centers deployed to support it are largely based on the old Pony Express delivery model. The ACH and it’s partners have pivoted since the push by the tech giants, to lauding their fraud and safety. Largely the only reason they can is because of the huge inefficiency and delays built into their system, rather that the inherent security qualities they’ve developed.

While a fast payments network should not be implemented over the public Internet, it’s simply both unbelievable, and unacceptable that my bank cannot not directly send money from my account to your account. This isn’t about Bitcoin and similar nonsense, it does require databases that have the attributes of a Blockchain, but it doesn’t require a Blockchain. This isn’t spin to invest in some imaginary new technology, it is merely a plea to move to a modern switching network, with updated apps.

I don’t transfer money around in Europe or the UK anymore, maybe once a year or so. However, I’ve been able to use the UK Fast Payments network via my UK Bank, FirstDirect, to instantly pay other banks/accounts in the UK, as well as transfer money from UK Pounds Sterling to Euro’s in a German bank in less than 2-hours, all at not cost to me, and using a single system, rather than a secondary system, branded app, or external service. Faster Payments isn’t just a year or two ahead of the US, it’s currently celebrating its 10th Anniversary, and will likely be on its 15th before the US has anything.

That’s mostly why services like PayPal, Stripe, Square, PopMoney exist. To allow the banks and credit unions offer a service they themselves can’t offer. Also, when originally launched it was a way of charging extra for a service that was faster and more flexible than their ACH system offered. Any institution currently charging for these services is charging for lipstick on a big now.

pronto

I first came to the USA in 1983 to work on the server-side of worlds first home banking system, Pronto, at Chemical Bank in New York; in 1987, I was hired by IBM UK in their London Banking Branch, to help London banks like Lloyds Bank, NatWest and TSB, as well as Abbey National, prepare their systems to start Year 2000 (Y2K) testing.

Finally, in 1998, was the Chief Architect for IBM in their NatWest (Business) Online implementation. The first at-scale version of Internet banking at National Westminster Bank, after failed projects by Sun Microsystems and Microsoft.

nwol

I have some idea of the complexity of updating and integrating batch, hub and spoke systems, it’s no cheap or easy. While it’s easy to assert the banks don’t want to change because as everyone believes, “they are making money out of the delays”. They are really not, in any meaningful way. What they are doing is simply avoiding making key investments and dressing it up under the guise of safety and security. Now they are blaming the “lack of a mandate“.

as everyone believes, “they are making money out of the delays”

And that’s what is likely to be their undoing. They’ll continue to push back and resist, until so much of their business has shifted to non-core systems. While the likes of Amazon and Google have to be in the ACH, and have Fed backing and security, they can increasingly provide a home run around the traditional banks.

Just checking in…

My disdain for the US Banking system should be obvious to anyone who follows my blog. Their attempts at modernizing, really are just “lipstick on a pig”.

While most countries are looking for ways to get out of the check processing business, and many to avoid it all together, using micro-banking and straight-through-processing to enable both a more effective user experience, and also reduce risk inherent in a real-time banking system. The UK even initially announced an end-date for the use of “cheques” in 2018, although that was later withdrawn. It’s still possible to transfer money between accounts in different banks within the UK banking system almost instantly and within 15-minutes, and for free.

Not so here in the USA. Much to my disappointment, I recently ran out of checks for my Texas FCU. It was the easiest and most effective way to pay some big bills for the construction work we’ve been doing, as well as bills for our wedding. I went online to the FCU and clicked order checks, it took me to an external website, where I was unable to order checks. Turns out the 3rd party had my address from when I first ordered 250 checks back in 2006.

You can’t change the address online, I had to call the FCU, they had to go through the update process and order the checks for me. Sure enough 8-dys later they appeared in my mailbox.

Mobile Ready Checks

Much to my “surprise” the checks have changed, just a little bit. They now include accommodation of the process which allows us to pay cheques in by taking pictures and submitting them on out phones via an app. I’m sure someone is feeling pretty smug, they’ve just invented pig lipstick.

Everything a consumer or non-financial institution does in terms of moving money around depends on the ACH, it’s not just checks, it’s pretty much anything online. Hey, but there’s an eCheck API.

Bloomberg had a good article on America’s addiction to checks back in July, by @kate_robertson – I think though they tackled it from the wrong angle, the reason people are addicted is because they work, and the patchwork of alternatives and restrictions on how they can be used has put them off if they’ve tried them.

My local credit union, Elevations FCU does a pretty good job at working within the confines of the American Clearing House and Federal Reserve straight jackets. Their technology is pretty solid, and their process limits, reasonable. Their mobile app has fingerprint sign-in, a good UI, and access to Popmoney, with useable daily and monthly limit. Their effectiveness and ability to innovate though is still hampered by the “system”.

My Texas FCU, Amplify, so mirrors their roots and seems incapable of escaping them. They started life as the IBM Federal Credit Union in Texas in 1967, and they’ve struggled much like their namesake to move with the times. While they have Internet/Web banking, I’ve had numerous problems and one acknowledged defect between their web and backend systems which frustrated my efforts to avoid paying by checks. They also claim Texas State rules prevent them from allowing various amounts above $1,000 in an out of accounts, especially Home Equity Line of Credit (HELOC) accounts.

Two small deposits

I’ve often commented on my absolute disdain for the US Banking system. I’ve been poking around with what I can do to remove some of the barrier to the time delay and inefficiency in the system.

I used my online banking system to add the bank details of a friend. I did it by adding it as an “external account”, providing the ABA routing number and the account number. It informed me that two small deposits would be made into the account, and once I had the details to come back and confirm.

I emailed my friend and said I’d done it and why, and asked to be notified when they arrived and what they were. Once notified, I confirmed with my online bank and immediately did an online funds transfer of $100, it arrived overnight. Next day, I initiated a transfer from my friends account of $50, again, it arrived overnight. I then did another transfer of $50, no problem.

So, while there is no way for me to do any formal set-up or account management, without a single signature, and as far as we can see, no way for my friend to stop me crediting, or more importantly debiting from their account. I’m hopeful that a call to the bank could stop it, surely?

For the record, we bank at completely different banks. Yep, the US Banking system truly sucks, 3rd world at best of function and performance. Out of this world on profits though…