Faster Payments in the US: ACH vs. RTP vs. P2C
Faster payments are coming to the US one way or another, and 2019 was a seminal year in determining exactly how that will happen. Here's a quick overview of the key players involved in moving money in the US:
The National Automated Clearing House Association (NACHA) manages the development, administration, and governance of the Automated Clearing House (ACH) Network, which is the backbone of electronic payments in the US. While NACHA administers the network, the actual processing of transactions is handled by the Federal Reserve and The Clearing House.
The Clearing House is a banking association and payments company that is owned by a consortium of the largest commercial banks in the US. Fun fact: The Clearing House’s Real-Time Payments Network (RTP) is powered by technology from Vocalink, which was acquired by Mastercard in 2016.
Visa and Mastercard have been rolling out an alternative scheme to ACH and RTP for years. Known as Push-to-Card (P2C) generally and Visa Direct and Mastercard Send specifically, the (near) real-time payments ride atop existing debit card rails.
Disclaimer: Visa invested in Finix's Series A earlier this year and Finix is a service provider to Visa's push-to-card service, Visa Direct.
Public-Private Payments Cooperation
In July 2017, the Fed assembled a Faster Payments Task Force. Their overarching goal? Build a “faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient” payment system in the United States by 2020. In response, The Clearing House launched the Real-Time Payments network (RTP) in November 2017 and has spent the past two years enrolling member banks. This year, Wells Fargo, HSBC, and JP Morgan Chase all announced RTP-powered treasury products for their clients (Chase, via integration with Kyriba). Jack Henry, a provider of core banking technology, also launched a faster payments hub this year, giving customers access to RTP and had 15 financial institutions signed up as of October.
Meanwhile, Visa Direct and Mastercard Send have been gaining wider adoption among gig economy/on-demand companies and fintechs. This year alone, Quickbooks, Instacart, and Venmo all announced P2C-powered “instant cashout” features. Banks are also jumping on board. In February, MetaBank announced a partnership with Mastercard to provide P2C as part of their treasury suite, making P2C somewhat competitive to ACH and RTP. Visa’s CEO even took the time to diminish the need for faster ACH payments at an investor conference in NYC: “I’m not convinced” that faster payments “are going to take off like crazy. Does the consumer really need the funds that much faster?”
Faster Payments Drama
In NACHA’s defense, they have been trying to speed up ACH for a while. They launched Same-Day ACH in 2016 and put together the Faster Payments Task Force in 2017. Throughout 2019, they continued to propose or roll out ACH Network enhancements like later processing windows, earlier clearing times, and increasing the same-day ACH dollar limit to $100K. Things in ACH-land looked good but not real-time. Same-Day ACH volume grew by 54% in Q3 2019 versus the same quarter a year ago, and fintechs like OnDeck, Routable, and WePay have all built features around Same-Day ACH this year. In July, perhaps sensing the other networks were gaining traction on ACH and not wanting the bedrock of electronic payments in the US in the hands of corporations, a group of House and Senate Democrats introduced a bill that would require the Fed to create a real-time payments system.
In August 2019, that’s precisely what happened...well kinda. The Fed announced their own real-time payment network, called FedNow, but said it wouldn't be launched until...checks notes...2023 or 2024. In response, The Clearing House made it clear they want to be the only real-time payments game in town and that this development would disincentivize them from continuing to roll out RTP. So things are slightly messy now, and it’s not at all clear on which network we'll all be sending money in real-time, but some retailers welcome the competition two networks bring. Regardless, this is definitely a space to watch as it seems faster payments in the US are inevitable.
What you may have missed
One way of moving money faster is through cash advance apps like Earnin. These apps send users money they’ve already earned instantly for a small fee. It’s unclear if this activity can be considered a loan or simply a cash advance in exchange for a service fee. If considered a loan, the small amounts of money advanced relative to the fee can lead to effective APYs as high as 400%. That presents a severe discrepancy with our usury laws, which cap many interest rates at 36%. Congress is concerned and has proposed the Veterans and Consumers Fair Credit Act aimed at capping payday loan interest rates. This whole industry is essentially a workaround for the 2-3 business day ACH waiting period. Speeding up payments might make these products and the associated regulation unnecessary.
Payments Across the Globe
This review has been very US-centric so far, so let's take a look at some of the deals and payment initiatives happening around the globe. The numbers involved here are jaw-dropping.
In March, Japanese SoftBank (of WeWork fame) announced a $5 billion fund focused exclusively on Latin American tech companies. A month later, they put that money to work with a $1B investment in Rappi, a Colombian delivery (and increasingly financial) service company. SoftBank also invested $1B into Wirecard, a German white-labeled payment and card issuing company, and participated in Paytm’s latest round, which valued the Indian company at $16B.
PayPal’s $4B acquisition of Honey in November made a lot of noise but, most of their 2019 M&A, investment, and partnership activity were actually aimed at expanding their international portfolio:
Invested $750M in MercadoLibre, an Argentine e-commerce and financial services company
Invested $500M into Uber in April. Uber is a US company with operations around the globe and in a recent earnings call, their CFO stated that next up for Uber in the payments area is “testing, broadening out some of the capabilities, particularly in Latin America”
Acquired a majority stake of GoPay for $170M to access the Chinese market
Participated in pan-European saving and investing marketplace Raisin’s $114M Series D financing
Invested in Japanese instant-credit company Paidy’s $143M financing via PayPal Ventures
In August, Santa Monica-based lender Tala’s raised a $110M round to fuel entrance into the Indian market. PayPal Ventures followed-on from their previous investment in the company
Remittance Is Big Business
Juniper Research estimates that international digital remittances will reach $525 Billion by 2024, so it makes sense that a lot of investment and product development is happening in this space. Here are some of the most interesting remittance-related headlines of 2019:
WorldRemit raises $175M at $900M+ valuation to help users send money to contacts in emerging markets
Airwallex raises $100M to allow companies to “build their own TransferWise”
Remitly raises $220M at $1B valuation
Xoom expands to 32 Markets across Europe
Bill.com now supports 106 currencies and payments to 130+ countries
Amazon and Western Union launch PayCode to let shoppers in Chile, Indonesia, Kenya, etc. pay in cash
Cross-Border Bidding War
Behind the scenes, there’s been a cross-border battle playing out between Visa and Mastercard. As recently as January 2019, it looked as if Mastercard was going to acquire London-based Earthport, which provides cross-border payment services to banks and money transfer service providers. Then Visa increased their offer to $320M, and by March, Mastercard decided to opt-out of the bidding war and bought NYC-based cross-border payments firm Transfast instead. Both companies are eager to add cross-border functionality to their real-time services, Mastercard Send and Visa Direct, which are handy for use cases like funds disbursements, peer-to-peer payments, marketplace payouts, and bill payments.
In August, Mastercard upped the ante, further spending $3.19B on Denmark-based Nets’ account-to-account business to bolster real-time and bill payments. But Mastercard also saw a cross border play in this acquisition. Paul Stoddart, president of New Payment Platforms at Mastercard: “We obviously expect that the collective set of technology and the services that we’re buying can be further exported more widely across Europe and into other markets.” Visa, for its part, announced two partnerships with Western Union and MoneyGram focused on offering Visa Direct as part of each company's international disbursement networks.
What you may have missed
Some of the most exciting fintech activity is happening across Latin America and Africa. It’s fascinating to see how these ecosystems are developing as each region has its own unique dynamic based on the specifics of existing infrastructure, public-private partnership, and which foreign investors are active. Here's what's happening in Mexico and Nigeria specifically:
MTN Nigeria, the country’s largest telecoms operator, wants has been awarded a license by Nigeria's central bank that would allow it to provide financial services and require it to service unbanked customers in Nigeria’s rural areas.
The Mexican Central Bank is piloting a digital payments network called Cobro Digital (CoDi) based on QR codes and near-field communication (NFC) technology. Think of it as a state-owned version of WeChat Pay. This is a great example of a public-private partnership but critics are concerned because Mexico's interbank electronic payment system (SPEI) already has fraud and security concerns, not to mention that 42M Mexicans lack bank accounts.
That’s it for Finix’s inaugural Payments Year in Review. If you missed part 1, we suggest you go back and read it now. We can’t want to see what happens in 2020! See ya’ on the other side!
- BlogPublished 12.13.19
2019 Payments Year in Review | Part IIt’s been a BIG year for payments, which is exciting for payments nerds like us! Even if you haven’t reached the pinnacle of payments obsession, the sheer numbers these payments companies put up in 2019 should make you take note. It’s almost too much to keep up with, so we took some time to catalog the biggest payments-related stories of 2019. We also did our best to highlight some essential stories we felt were overlooked. Be sure to checkout Part 2 of our 2019 Payments Year in Review where we look at faster payments in the US and the payments arms race taking place around the globe. Let’s dive in!
- BlogPublished 12.19.19
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