In this episode of The Purposeful Banker, Jim Young welcomes Keith Gray from The Clearing House for an update on how banks and businesses are adopting the instant payments rails.
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Transcript
Jim Young
Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young. Welcome to the show. Today I'm bringing in Keith Gray, vice president of strategic partnerships for The Clearing House, which provides the RTP instant payments rail. Keith, welcome to the show.
Keith Gray
Thank you, Jim. Thank you.
Jim Young
So before we get into this and start talking instant payments, can you just tell us a little bit about yourself?
Keith Gray
Yeah, thanks Jim. I've been with The Clearing House now for about eight years. I came to TCH to help launch our new RTP network at the time—seven, eight years ago. We're going to talk a lot about that moving forward. Prior to that, I've been in the banking, technology payments, mobile, and online kind of space within financial services for, well, since before I had gray hair actually. So I've been around a while at this point.
Jim Young
Possibly the whole payment sector has brought on the gray hair, as well.
Keith Gray
Yeah, I'm sure it didn't hurt. Yeah.
Jim Young
So Keith, I know you do a lot of webinars and speaking engagements about instant payments, also called real-time payments, and of course we use the term “instant payments” generically so it's not confused with The Clearing House RTP network. Can you tell us what's different about RTP than other payment rails we're used to talking about?
Keith Gray
Yeah, and it seems like in our industry that not a lot new happened with payments for a very long time. And then about five to seven years ago, we decided to do everything at once. We launched RTP, same-day ACH rolled around, Zelle launched, several other payments-related big initiatives. And in addition to all the great new functionality that brought, I think it also served to confuse the heck out of a lot of people as far as what you're talking about. So we launched RTP seven plus years ago, and it was the first new payment rail here in the U.S. in 40 plus years since we launched our ACH network actually. So we spent a lot of time in the planning stages as an industry determining what the next generation of payments should look like here in the U.S., and then we mapped RTP functionality to that.
So one of the things I find is useful is to compare it to some of our legacy payment rails. RTP is by definition immediate. That's the thing that everybody takes for granted. It's faster and safer without question, and that's what you expect. In addition, it's what's called a credit push network, which means I can send you payments, you can't pull it. That inherently makes it a much safer network to run payments across. And in addition to the immediacy component, especially for business-based transactions and commercial-based transactions, sometime is the perfect timing ability of the network that really adds a lot of value. We do a lot of business-to-business payments, one corporation paying another corporation as an example. And the timing of it, the fact that I can say at midnight tonight, I owe you a million dollars, I'm going to kick that payment off at 11:59 and I know it's closed 15 seconds later.
So the ability to control payments is a big advantage, especially in the business world. And also another huge advantage of business-based transactions is the fact that the information about the payment travels with the payment. So if you think about the way bill pay works is a good example. Now a lot of times you'll get an invoice via email and then you'll go into whatever payment rail you're using and pay that bill. So things travel separately. With RTP, everything—the payment and the information—travels together, which really makes straight-through processing possible where something can come out of an accounts payable system and feed into an accounts receivable system and get confirmed and closed within seconds. And that's a huge advantage in the commercial sector especially.
Jim Young
Yeah, I’ve got to imagine that's huge when you've got between companies, that sort of thing, multiple different accounts, different things, that sort of thing, to know that this payment is going to be paid for this particular thing.
Keith Gray
Yeah, exactly.
Jim Young
Rather than you guys sent us some money, what are you paying off here basically?
Keith Gray
Yeah. And frankly what we've found since RTP launched, RTP provides that visibility where everybody knows what's going on on both ends of the transaction. So you don't get a lot of those inbound calls where people are trying to figure out, hey, what'd you pay for this? Or why'd you short-pay this? Or whatever it might be. So it really has made it a much cleaner process when you're thinking about payments.
Jim Young
I think I know the answer, but I wonder if you can elaborate a little bit on what you were talking about that really that ability to really control the 11:59 sort of thing and what are, I guess, the advantages for that, for a company to be able to control it to that degree.
Keith Gray
And if you think about it, especially in a rising interest rate environment, and especially over the past few years, where I would think our small business sector as well, cash has been made very, very important, I should say, even more so than it has been, the ability to maintain that. So the fact that I can control my disbursements down to perfect timing is a big deal for a lot of businesses and gives you that control and visibility is the way I talk about it to companies that are using the network.
Jim Young
OK. So sounds wonderful, but what's the status of the network? Where are we with it in the U.S. right now? And I guess, again, given our podcast listeners are on the commercial side, where are we particularly from a commercial standpoint?
Keith Gray
So the things we track, the way we judge where we are as a network are the number of institutions on the network, the percentage of the U.S. account base that you can reach on the RTP network, and of course transaction volume, the actual payments going over the network. We have, as of today, very close to 600 FIs on the network. That makes up for just under 70%, like 67% of the U.S. account base. So what that means, if you're a company like Square or Venmo, PayPal, Amazon, many others that are using the network, you can typically reach about 70% of your customer base that you're trying to pay, whoever that might be. So 67% of the accounts in the U.S. are reachable with RTP.
The transaction volume, what we're finding is the transaction volume is such that when a bank goes live, regardless of where that bank is located or the size of that institution, payments invariably become coming in immediately. There's enough volume on the network that touches everybody across the country, every institution. So literally within the same day, often within the same hour, sometimes in the same minute when they hit the button and go live on the network, payments start coming in. So there's enough volume on the network that it shows immediate value to institutions when they jump on the network.
The other side of that is there's enough coverage. So businesses and corporations that want to leverage RTP to pay their suppliers or customers, whoever it might be, that 67, 68% is well worth their time and effort to start leveraging the RTP network. Oftentimes what companies will do, they'll default to RTP first, and if you can't reach a person or a company on the network because their bank isn't on the network, then they fall back to one of the other payment rails.
Jim Young
OK, got it. So speaking of other payment rails. Last July, Fed Reserve launches the FedNow instant payments rail. How has that affected the instant payments landscape, and is this an either/or is this a both situation?
Keith Gray
Yeah, that's a great question. It's something that the industry has been dealing with ever since the Fed announced what their plans were. And I've talked to bankers, people in the industry and they're like, "Oh my gosh, how are we going to handle two different payment rails?" And I'm thinking, “Well, we always have.” We run an ACH network, they run an ACH network. We run a wire network, the Fed runs a wire network. So there's multiple debit cards networks, there's multiple credit networks. So it's something we're used to. The difference with RTP and FedNow is that if you compare it to ACH, we run a network, they run a network. The Fed (when I say “they,” the Federal Reserve) runs a network and the two interoperate. At this point, RTP and FedNow doesn't interoperate. That means the two networks don't talk to each other, as of yet anyway. It's definitely technically possible.
So what institutions are doing is joining both, and most banks use a technology provider—whether it's a company like Q2, or a core provider, whoever it might be—to join the RTP network to provide the technology to join the network. And all of those providers offer both, and you can route transactions to the appropriate place. The key is your customers, the consumer, the businesses, commercial lenders, whoever it might be, they don't care which network is traveling. They want to get paid smarter, faster, and better. And how are you going to do that? So just like with ACH, it's completely invisible to the actual people using the network. Direct deposit, as an example, people don't know that's an ACH. That's a direct deposit in my bank account, right?
Jim Young
Right.
Keith Gray
So the consumers just want to get paid better and faster, and as an industry is something we have to continue to evolve to and figure out.
Jim Young
Got it. Another hot topic in payments right now is ERP/accounting system integration. We know from talking to our customers that a lot of them are getting pressure from their large corporate clients to provide that integration and help get the companies to have more efficient accounting practices. And I'm wondering, are commercial banks getting that same kind of pressure when it comes to instant payments? I mean, you mentioned the numbers, the adoption numbers are rising rapidly, but I'm curious if there are any of the laggards are getting that pressure. And I'm wondering, are these two things a little bit connected here, the ERP and account system stuff along with instant payments?
Keith Gray
They're absolutely connected. And wow, the RTP volume, I think we did like 80 million payments last quarter or something like that for, I forget how many billions of dollars, two and a half billion maybe. But anyway, the numbers are big and they're growing by about 15% a quarter as far as the volume that travels on the network. Now that still just is scratching the tip of the iceberg, is a good way to put it, I guess. So there's so much more potential for how these new payment rails, RTP and FedNow, both can be leveraged to the advantage of the customer moving forward. One of the key components of that to realizing that value is broad-based, open APIs that allow easy access to the payment rails. And we've known that from the beginning. It's been, I’d say, slow in coming, but maybe it's relative, I guess could consider it fast in coming depending on your perspective, I guess.
But we're seeing more and more of that capability launched, and there's banks that have done a really good job providing that type of open API access to their payment rails. Those banks do really, really well in the payment space. More and more I see technology spending aimed at the payment space and specifically around making those type of payment capabilities available across their customer base. I think that's going to continue to grow, and, frankly, to realize the full potential of instant payments across the U.S., that needs to continue to grow as well. So I think that's definitely a challenge in the industry across the board. I mean, we've had a quarter of a million businesses make a payment on the RTP network at this point, and I see that going nothing but up and to the right, as they say, as more and more of these type of capabilities and specifically around APIs come to market.
Jim Young
So you mentioned you use the phrase tech spending. I'll be honest with you, a lot of times when that phrase gets used, you start to think of the big boy banks and the general advantage they have in scale and budget when it comes to spending on tech. But at the same time, a lot of the stuff that I've heard and we've talked about at Q2 is about how instant payments is a thing that can level the playing field for banks. So are those two things in conflict? Are you seeing this as a thing that levels the playing field?
Keith Gray
I think, I guess we hoped, I should say, we hoped when we launched the network that it would spur a lot of new innovation in the industry. And we've absolutely seen that, and maybe surprisingly, maybe not, but a lot of that innovation is not at the big bank or big bank provider type of area. Actually two of the top five originators on the RTP network are small FIs that have done a great job enabling technology to provide their customers access to networks like RTP and others. And customers come flocking, right? They do millions of transactions every month, and you probably have never heard of these banks, but they have big customers, fintech customers and others that want to use the network and take advantage of the payment rails, and they saw a need and they met it. And I'm seeing more and more of that type of development, that type of innovation happening. And like I said, it's not always with the big issuer or the big originators.
Jim Young
Interesting. Also, just want to circle back as we talked about this. I know the beginning it was about receiving payments, receiving payments, receiving payments, and I know that Debbie Smart, one of our in-house experts on this, you know her well, at one point was like, "Everybody's receiving, we still don't have as many sending." Where does that stand and is that … how important is it for the two maybe to balance out?
Keith Gray
Well, it's … obviously to realize the full potential of the network, you need as many senders as you can get as well as many people receiving. What a lot of the mid-size and smaller FIs did first was turn on the ability to receive payments. And it's a much easier lift. And like I said earlier, you just turn it on and you don't have to do anything and payments start coming in. So you get the infrastructure in place, you don't have to do a lot and boom, you're showing value to your customers. Now, a lot of those banks are looking at what their strategy is on the send side of the equation, and it could be corporate focus. Commercial lending is an example, is a big use case funding loans as a good example on the RTP network so that you just decide what your strategy might be.
And again, when you turn on receive it's one initiative, turn on the ability for all your customers to receive payments. On the send side of the equation, it's more about what is the use case? Are you doing a bill pay? Are you doing something for consumers or are you targeting fee-based income from offering commercial products as an example? And that started definitely with the big banks launching send first. Many right out of on day one, we had a handful of the large originators sending payments across the network. Now the small, it's trickling down to those, like I said, two of the top five are not big banks, so we're getting to the point where you're going to see more and more use cases that are deployed across the network.
Jim Young
OK.
Keith Gray
[inaudible 00:16:21].
Jim Young
Yeah, boy, funding commercial loans is RTP that I'm sure some of our listeners will be very interested in that use case in particular. So I'm curious, where do we go from here? I guess you detailed what you've seen happen over the past year and where things are going. What do you expect if we're having this conversation next year or the year after that, what do you think things will go?
Keith Gray
So we continue to look for ways to optimize the network to support different types of functionality, different types of use cases, business-to-business, requests for payment capability. The ability for me to send you an invoice and say, “Hey, I need you to pay it by this date,” and the ability for you to approve it and automatically pay that right back or set it at a perfect time. I think you're going to see a lot of that type of functionality deployed in the business-to-business space and in the commercial space. I think you're going to see, we talked about more and more open and flexible access to APIs. So a lot of straight-through processing types of use cases we're going to see over the next year or two. Already on the network but I think these are big areas of growth on the network.
I think we're going to be doing cross-border, real-time payments very soon this year, as well, which frankly would be just a big game-changer for a lot of corporations, a lot of people as well. So that's the areas we're focusing on. And again, we continue to grow more and more FIs getting on the network, partnering with companies like Q2. You mentioned Debbie Smart. She's just a great resource and a great advocate for instant payments across the industry and your organization. So we're hopeful all of that continues, and we're definitely not taking that for granted. But like I said, up and to the right, and I think that's to the benefit of the industry, which is where we need to be.
Jim Young
So we had to wait 40 years between ACH basic instant payments. How long do you think we'll have to wait between instant payments in the next [inaudible 00:18:22]-
Keith Gray
The next thing, yeah. I wish I had a crystal ball. You could probably make a lot of money with that kind of crystal ball, but if I were that one big thing, the next big thing, is cross-border, I think, being able to pay anyone anywhere immediately, I think that's where we're headed.
Jim Young
Gotcha. Yeah, absolutely. It sounds interesting and I look forward hopefully to catching up with you about the next future innovation on this, but before you go, I'd be remiss, we talked about instant payments here, but I believe you guys have your own podcast, is that right?
Keith Gray
Yeah, some five, six years ago, I guess, one of our guys started doing a podcast that we call Payments Nerds. And I didn't realize that's what I was, but apparently I've evolved to that. I don't have anything to do with it, so I can say it's really well done. It's something I enjoy listening to. We have our moderator that typically … he's getting panelists that are customers using the RTP network, so you get a great visibility of how they built the business case around the network, how they decided what to use the network for. It's everything from banks, commercial bankers, corporations that we have on this podcast. It's entertaining and it's informational. If you're not careful, you'll become a payments nerd too, if you're not already.
Jim Young
I can only hope to aspire to that. Well, thanks for the great insights, Keith, and thanks for coming on the show, and I hope we can have you on the show again soon.
Keith Gray
Thanks, Jim. My pleasure. Thank you.
Jim Young
That'll do it for this week's episode of The Purposeful Banker. If you want to catch more episodes, please subscribe to the show wherever you like to listen to podcasts, including Apple Podcasts, Spotify, Stitcher, and iHeartRadio. If you prefer a video, you can check out our YouTube channel. As always, we'd love to hear what you think in the comments. And remember, you can learn more about the company behind the content by visiting Q2.com. Until next time, this is Jim Young and you've been listening to The Purposeful Banker.
