A panel of payment industry experts recently convened to discuss the significant shifts occurring as businesses of all sizes adopt technology like faster payment methods, such as automated clearing house (ACH) and real-time (or instant) payments. These advances aim to transform transaction speeds and address the varied strategic demands of the financial sector’s participants.
Walgreens’ Vice President of Payments & Financial Services, Maria Smith, steered the conversation, which featured input from Ginger Baker, Chief Network Officer at Plaid, and Tom Greenwood, Founder and CEO of Volt. Stacy Greiner, Chief Operating Officer at DailyPay, and Nirmal Kumar, Chief Product Officer at Aliaswire, also contributed their sector-specific insights.*
The move toward real-time payments is particularly challenging for smaller merchants due to the operational issues it raises, notably in fraud detection. While some service providers have emerged to fill this void, the necessity for a standardized industry-wide strategy to simplify the integration process remains a hot topic.
Banking institutions are strategically investing, prioritizing immediate improvements in loan payouts rather than the future promise of buy-now-pay-later services at the point of sale. This reflects a broader challenge within the banking industry: the integration of various financial systems, from loans to deposit accounts to investment services, into a single, streamlined operation.
The discussion also touched on the future of loyalty and reward programs, recognizing their capacity to change the landscape of consumer engagement. The consensus was clear: the current priority is to build a solid infrastructural base to overcome existing obstacles, setting the stage for future advancements.
Against the backdrop of evolving financial technology, Baker pointed to the not-so-distant past, where a simple delay in payment processing could throttle a small business’s operations. She highlighted the plight of an antique sneaker merchant who grappled with the inherent lag of credit card settlements, a delay that directly curtailed the merchant’s ability to restock and thrive.
This bottleneck led the merchant’s FinTech collaborator to take a leap of faith, fronting funds ahead of payment finalization—a workaround that was effective but not without its risks.
Reflecting on how different the situation could have been with today’s technology, Baker said, “If we had had RTP (real-time payments) rails at the time, this problem wouldn’t have existed. Without the need to absorb the (payment settlement) risk, the FinTech could have facilitated immediate turnover for the merchant, allowing them to reinvest in their business on the spot.”
The Technical and Regulatory Challenges in Payment System Innovation
As the payment industry leans into the future, propelled by technological advancements, the terrain reveals an intricate weave of challenges and opportunities. Integrating new payment systems is a colossal undertaking that involves overcoming technical complexities and stringent regulatory landscapes.
Technical Integration Complexities
For many institutions, especially smaller banks and merchants, the march towards high-tech payment solutions like ACH and instant payments is fraught with integration challenges. Systems are often siloed, and the data that flows through them can be disparate and unstructured. Merging these streams into a cohesive whole requires sophisticated technical solutions and significant capital investment.
Emerging service providers are attempting to bridge these technical gaps by offering plug-and-play solutions, yet this often leads to a new issue: the ‘vendor sprawl’, where a merchant must deal with numerous third-party solutions to cover all their operational needs. The question then arises: how can the industry create a more unified approach to payments that is efficient and universally accessible?
Regulatory Hurdles
Moreover, the regulatory environment surrounding payments is complex and varies significantly from one jurisdiction to another. Regulations are not only designed to protect consumers but also to prevent fraud, money laundering, and other illicit activities. As new payment methods emerge, regulators are often playing catch-up, creating a lag between innovation and legal frameworks.
The need for compliance adds another layer of complexity to the deployment of new payment technologies. Banks and merchants must navigate a maze of regulations that can differ starkly between regions, which can inhibit the scalability of innovative payment solutions.
Panelists discussed European payments regulation to see how it helped or hindered innovation in FinTech. European regulators placed restrictions on data elements and how APIs should be defined before the market started to take off. In the United States, by contrast, regulation has not been as specific, hopefully enabling the market to evolve and innovate more quickly without harm to consumers.
The Role of Standards and Protocols
Standardization could be the linchpin in resolving many of these issues. By developing and adhering to common standards and protocols, the industry could reduce the complexity and cost of technical integration. These standards must encompass not only the technical aspects of payment processing but also data privacy, security, and regulatory compliance.
One such initiative that could serve as a model is the development of the ISO 20022 messaging standards for electronic data interchange between financial institutions. Its implementation across various payment networks could pave the way for seamless, cross-border payments and a reduction in technical barriers, though the standard’s multiple ‘flavors’ can still make implementation difficult.
One of the discussion’s most critical points was the emphasis on the need to support smaller and community banks. These institutions often lack the resources for the technological build required to integrate with new payment systems. The panelists expressed a collective interest in providing aid to these smaller entities to ensure the payment system’s evolution is inclusive.
The Need For Interoperability
Interoperability in the financial sector is a critical concern that was echoed in the recent discussion among industry experts. The consensus highlights the necessity for different payment systems and platforms to communicate and function in tandem to meet the diverse needs of consumers and businesses. As financial transactions become increasingly digital, the requirement for seamless interconnectivity becomes more pressing, with the goal of creating a frictionless experience for users across various payment networks.
The panel emphasized that while there are companies working to bridge operational gaps, including those related to fraud prevention, it would be significantly more beneficial for the industry as a whole if interoperability was universally addressed by the platforms and networks themselves. This universal approach could prevent the current scenario where one company’s progress outpaces another’s, potentially leading to a fragmented market where merchants must interface with multiple service providers. This integration challenge is especially daunting for smaller merchants who may lack the financial resources to invest in complex payment systems integration, unlike larger players such as Walmart.
Furthermore, the discussion shed light on the current investment trends within banks, noting that investments are often directed towards more immediate, ‘lower-hanging fruit’ opportunities. As such, innovations such as instant payouts for loans take precedence over other potential areas like integrating loyalty and rewards programs at the point of sale. The complexity of bank infrastructure, where different accounts and services may exist on separate systems, creates a significant challenge in achieving the desired level of interoperability.
The participants recognized that a solution needs to support smaller or community banks that might not have the technical capacity to integrate with the required systems. There was a call to action for ideas or connections that could aid in resolving these integration issues, signaling a collaborative spirit within the industry to assist smaller entities in overcoming technological barriers.
Overall, the panel’s commentary on interoperability pointed out the necessity for a concerted effort across the financial ecosystem to support a payment infrastructure that can accommodate the evolving demands of commerce, allowing for smooth and secure transactions for all parties involved. The future of payments, as envisaged by the experts, is one where robust, interoperable systems empower both consumers and businesses, paving the way for innovative solutions and more dynamic economic interactions.
From Past to Future
The conversation also touched upon the innovations of the past, highlighting the early adoption of email and phone numbers as payment aliases, which predated many of today’s payment conveniences. This retrospective glance emphasizes that consumer-centric innovations have long been at the heart of the payment industry’s evolution.
The dialogue among industry leaders painted an optimistic picture of payment systems’ evolution, recognizing significant strides in real-time fund access and consumer engagement. This is not just about technological leaps but also the strengthening of partnerships between FinTech and traditional banking sectors. With an unwavering commitment to innovation, these discussions suggest a future where financial transactions become more seamless and universally accessible, setting the stage for a dynamic payment ecosystem that benefits all players in the market.
* The panel took place at the Federal Reserve Bank of Chicago Payments Symposium, Oct. 4-5, 2023.