Steve Percy
President, Diolkos Commerce Solutions
July 2022
Let’s go to the podcasts.
Payments Nerds (TCH), Payments on Fire, Fintech Insider, Payments Innovation Podcast, Powering Payments, The Paypod (Canada), The Payments Podcast, …
And how about the subject matter experts at PYMNTS.com, Payments Journal, The Global Treasurer, AFPonline.org, SWIFT, The Fed, Chris Skinner’s Blog,…
And the 20 year list of Hot Topics: Real-Time Payments, Modernization, Open Banking, BaaS Banking as a Service, PaaS Payments as a Service, Crypto, Tokenization, GIG Economy, PP Fraud (Push Payment), Advisory Boards, Buy Now Pay Later, Cloud Services, and finally Connected/Cross-Border Economy.
Yes, there is a lot of good work in progress but investment in every new solution demands a 2 year ROI on technology spend which limits any real progress to change the core exchange platforms. This issue as a front-of-mind consideration will continue to hold us all back. The efforts of Crytpo to replace the core are large and varying but the base technology is rife with educational and trust challenges that jurisdictions and their regulators will always find difficult to approve these for ongoing everyday transaction operation (Note: they all need to tax and regulate them). Additionally, the economic challenges of 2020/21/22 are putting reverse pressure on both globalization and centralization as countries re-evaluate the impact to their local economies.
Domestically, serious B2B payment volumes stall in progress as they stick to the older cheque/check payment method that is sitting on the same old exchange infrastructure. FINTECH innovation continues to sit as a layer on top of these old clearing and settlement infrastructures which limit change and expansion of capabilities. The risk management methods and fraud security challenges remain the same. So what is in progress to move these forward ?
A quick review of my notes from the above Podcasts and Websites:
Real-Time and Payments Modernization initiatives: It’s all about the speed, apparently. But the global approach has been to offer RT as a separate payment type, if only to closely manage cannibalization of revenues and support their P+L. Hey, I’ve been there. And the end-user delivery technology is primarily the C2C e-mail channel at present (Venmo, Paypal, etc). As a result, volumes of RT payments to date vs. whole market statistics are abysmally low compared to the amounts they should/could be. And that is true for every market.
RTP Payment initiation is such a complex implementation that the newest TCH volume building strategy is to attract FI’s to join the RTP Network as “Deposit Only” institutions, and justify it to their Board/Shareholders as a deposit acquisition strategy. I’ve been there to. Interesting. Not really. The FedNow system, introduced if only to address these issues, is supposed to improve on that for smaller FI players. To be determined.
Note: Real-Time payments in truth are not a separate payment type. Real-Time exchange is actually a feature to apply to all payment types. It answers the timing and liquidity question. Why not design directly to that requirement and address the revenue cannibalization issue as well ? The reason is because the current and newly designed core exchange network's will not allow it.
The GIG Economy: Growing annually and shifting the power to the worker, many jurisdictions are pushing back on this segment if only to retain control. The social challenges are marked up on the “leaderboard”. Many are working on resolutions and of course they will be resolved. The list of social contract issues include: Worker Classification, Benefits availability, Taxation Remittance and jurisdictional Deductions, Privacy, Business Risk and legal liability.
While all of these are in discussion and FINTECH’s are offering solutions, no one is talking about the technical delivery of payment features that address the needs of this specific market. Some but not all of the experts are reporting that Real-Time is a must. Split/Shared Payment is a must. Information about the purpose of the payment is a must. But that’s it. They need to add that Split Deposit is a must. Pre-Authorization is a must. Deduction management is a must. Tax remittance is a must. Cross-border and FX conversion is a must. Small Business and Retail (Personal) is a must, and lastly, execution of any of these functions from any FI is a must. And what about additional capabilities in the future to add/integrate Loyalty and Prepaid and Time-Sensitive and Approval Oversight for everyone ? The Experts, maybe you can find some but I haven't as yet, are not talking about this whole package.
BaaS – Banking as a Service and PaaS – Payments as a Service are Open Banking approaches to provide system API’s to allow non-financial service business to offer Lending AND Transactional Payment Services. Cool concepts but every conversation leads to significant complexity. Additionally, the regulatory management is significant and just like crypto they are not overly welcome. Discussion of these solutions are fun to listen to but ...
Open Banking: Experts identify that the preparedness for this capability is now at 63% for the larger financial institutions so products can now be made available that use this API integration methodology. The capabilities as to what capabilities are exposed vary, Direct Debits being the most important for payments (initiated by commercial and government enterprises). Thinking about how this operates, how does authentication and security integrate as corporations drill through to multiple FI’s to execute these transactions ? Much like Pre-Authorized Debit, these challenges will continue to demand special agreements and processes to support and in turn push consumer trust limits.
Tokenization – the new ID methodology that travels with the payment and is used to securely point to accounts and payee/payor individuals. Of course this is a great concept and useful methodology, but is there a better way ? Does the payment have to contain PII to assist Regulatory requirements ? And what about the inclusion of other payment participants like Approvers and split payments. Are Tokens addressing these issues or are they only a digital alternative to improve basic security ? The experts are limited in their discussion.
Crypto as a Payment Solution (Digital Settlement Assets et. al.): The talk continues on how to make this technology practical for everyday payment transactions. They appear to be evolving into a method for finalizing counterparty settlement on larger transactions vs. an everyday micro payment solution. For mainstream acceptance, the various control and regulatory requirements heap the same challenges on these as they have with fiat currencies. Proponents see these as a method to create anonymity and rid the world of fiat currencies for cross-border settlement however they continue to run into roadblocks.
Much of the current work has moved from un-backed tokens towards Stablecoins. Realization of gains have always been tied to conversion back to a fiat currency and the valuation volatility of un-backed tokens have made them impossible to use for everyday purchases (hence they remain speculative). Stablecoins are expected to be the solution. However, claims of pegging these to hard currencies have been proven false and trust has eroded. These solutions are still searching/finding markets. The players are working to alter the regulatory environment to address their solution.
Jurisdictional regulators are trying to get comfortable. Several in-house POC’s are ongoing but it appears that the various issues are edging them all towards their use as inter-FI settlement solutions rather than general public payments. The UK might be closest but the jury is still out as to how much volume can be captured.
Domestic exchange is the lifeblood of the world. And absolute trust and control of value exchanged is critical. The stability of all economies depends on safe and stable exchange. Borders matter and will continue to matter. And crossing borders will require inline currency conversion which is recognized by experts as a very important requirement to any cross-border real-time exchange.
So crypto seems to promise a single global currency and anonymity as the ultimate in privacy, but society actually needs a privacy model that is fair and effective that still allows lawful oversight. Regulators demand it. Legal systems and the Courts demand it.
But recognize that the complexity and finality of all crypto solutions requires expertise (technical) that can assess and communicate issues so the general population can understand. Trust in long-term operation will be dependent of whether the everyday citizen can understand.
NFT’s (Non-Fungible Tokens): Payment or Asset ? Sounds like a payment but is actually a digital asset. Does this need coverage ? These have delivered a different type of product value hype. But also a lot of losses to unknowledgeable purchasers (collectors ?). The shine is off the apple and for the everyday citizen these solutions will be either unknown or if known then have lost trust. The problem however is that it’s publicized issues due to naming convention overflow onto the other electronic currency solutions, adding to the mistrust of purely electronic payment solutions. Not helpful.
Buy Now Pay Later: Experts do some bragging about how this is one of the most innovative FINTECH solutions now available. These solutions mimic the old “layaway/installment” direct store credit of the past vs. credit card, sort of. Most are still using the card rails a.k.a. virtual cards for execution and the credit is provided by a non-financial entity with a lot of cash on their balance sheet or some relationship with a financial institution. This cash rich scenario is why many large corporations with direct access to consumers get into the financial services business. These high margin loans significantly improve returns on otherwise idle cash deposits held around the world.
Sanctions and AML Transaction Monitoring will always be required and of course are in the mix of FINTECH offerings. These requirements are costly and the banks have been crying “not fair” hence the opportunity to re-build and sell to new players. Of course, these are all focused on specifically targeted existing products as revenues to support these costs are critical. Are they thinking about timeliness in relation to real-time exchange ? There is no evidence as yet because the experts all agree that RT is not targeted to cross-border exchange at this time, and is well out on real industry timelines no matter what the leadership is pushing.
Fraud and financial crime continues to be a huge leak on society. Most experts identify that Covid artificially caused a non-linear payment volume transfer to electronic push payments, which in turn exposed more security holes. FINTECH solutions to remove fraud opportunities continue development and card companies have made headway using many of these on both the front and back-end’s of their offerings.
Statistics report that only 32% of fraud is recovered and that surveys state that 70% of businesses are willing to do more to protect themselves. PP Fraud (Push Payment Fraud) is now at $1B and has moved higher than credit card fraud. The card companies’ execution of technical solutions is proving more and more effective. However, more than half of businesses have a feeling that these losses are a cost of business and are now budgeting it in as a P&L expense. This is unacceptable.
While larger players are seeing improvement, the newest Push Payment Fraud is catastrophic and targets small businesses.
Business insider collusion is on the increase, becoming a major concern. Experts state that solutions that improve on payment oversight and internal approval processes should be the focus. Understanding who they are paying with methods of matching PO’s to Invoices and controlling payment authorization using multi-level approval. This issue applies to inbound collections as well. Who has paid and paid in full ? More eyeballs on the activity with technology to ease and support.
Cash Flow Management solutions, one that has had encyclopedic volumes of coverage over decades, becomes critical at times where businesses and the economy are stressed (Covid, Ukraine impact on the Energy Industry, Trucking, Farm Industry and commodities…). Collections are stressed because Payor’s purposely delay payment and Payees have no tools within the payment infrastructure to assist in accelerating even partial payments. One recommendation is improvement in Confirmation of Pay capabilities, a feature or solution that assists in tracking collections. These solutions need to be convenient and simple for small businesses and consumers.
International Real-Time payments: TBD. Domestic RT Payments are now 13 years old in the UK and surveys indicate that mid and large businesses are unsure of the benefits as a single offering in itself. These businesses manage their cash flow and have the resources in place to do so. And RT is currently focused on domestic exchange as International payments are typically a smaller portion of their cash flow challenges.
Experts agree that moving funds between jurisdictions (through Correspondent Banking services) is one hurdle and the other is the FX conversion. They are also of the opinion that “No one company can fix International RT payments so the industry will have to work together and continue efforts to …”. My own opinion is that they are mentally tied to the anchors of the current methods and regulations, and this limits them to inside-the-box problem solving. Crypto does not address the issues or meet current requirements but there is the Diolkos way…
Subscription Economy: Longstanding, many businesses are leaning towards this solution to lock-in relationships. But consumers only have so much purchasing capacity for this method. EFT and Card Networks provide clearing and settlement capability but these file exchange methods are limited and challenged when looking at new and diverse products plus the need for real-time exchange for cash management control.
One fact that must be clearly understood is that the various stakeholders will always ask the questions: How does this affect me ? What is the risk ? What is cannibalized ? Where am I exposed ? How difficult is this ? These are age-old issues that will never change and will always impact acceptance of new payment methods. Those that succeed in the long run understand this list of questions intimately and have answers. Diolkos built these into our design criteria...
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