‘Campfire’ interview with NPP Australia, The Clearing House and Vocalink: Implementing Instant Payments
As the development of instant payments systems around the world starts to multiply, the industry has seen a variety of differing system implementations, as well as varying options for operating associate value added services. However, we are seeing two main models surface in the market – (i) a model that incorporates extensive non-payment functionality in the core system, for example The Clearing House RTP system and (ii) a model with a slim, lightweight core with layered overlay architecture, for example the NPP Australia.
Katrina Stuart, Head of Engagement at New Payments Platform Australia Limited; Steve Ledford, SVP, Product and Strategy at The Clearing House; and George Evers, Senior Vice President, Product, Real-time Payments at Vocalink discuss these models and their future with Editor, Lauren Jones.
1) Steve, The Clearing House decided to implement a fairly substantial system in RTP. In that I mean, it has the potential to incorporate quite a range of non-payment functionality, e.g. extended non-payments remittance data. In other markets we are starting to see a trend away from this. Why did the US opt for this model?
Steve: The reason we built extensive non-payment functionality into the core payment system was because banks asked us to. When we set out to design the RTP network, we did not start with any overall architecture in mind. We started by bringing together commercial and retail payments business managers from banks and asking them what they wanted a new network to do. What we learned was that making payments faster was good, but that a more capable, secure, integrated and reliable way to deliver data was much more compelling. The business managers saw the extended message set as a toolbox for building innovative products. Instead of working on the plumbing, product developers could focus on the customer value proposition. Tightly integrating payment and non-payment messages also makes it easier to create a seamless customer experience and eliminate the need for reconcilement.
Another practical consideration is that, with more than 11,000 financial institutions in the US, it is very difficult to build overlay services that have the reach necessary to be viable. There are successful examples such as Zelle, which has been adopted by a large number of financial institutions to enable payments using social aliases. But by avoiding reliance on end-to-end overlays, the RTP network allows financial institutions to develop products rapidly and independently, without having to assemble a group of like-minded peers.
2) Katrina, Australia went in a different direction and decided to have a very minimalist central infrastructure in the New Payments Platform, which essentially is comprised of an instant push credit rail and the market is responsible for developing value added services on top. Why was this decision taken?
Katrina: The NPP has been designed to enable product innovation from multiple sources and a diverse range of organisations, not just financial institutions that are involved in the clearing and settling of payments. Having said that the Platform is also intended to provide a certain level of native capability to enable organisations to develop innovative payment services and experiences outside of the Platform (what we refer to as “innovation at the edges”) and be able to use the Platform for their payment needs without having to develop a whole new service.
This is why in Australia we took the decision to consciously separate the infrastructure layer from products in order to both support innovation as well as ensuring we have a modern payments system that can evolve over time according to market demand and needs.
Separating it this way gives the Platform maximum flexibility and potential extendibility, future proofing it for as long as possible. In 40 years from now we want to have a Platform that is still fit for purpose, so we don’t have to build an entirely new one or significantly upgrade the existing one to support a new product need.
At NPP Australia our focus as managers of the infrastructure is to ensure we have the right capability “building blocks” in place in order to support this, for example the Addressing Service (PayID). This is also why we chose ISO20022 – it’s adaptability helps make the Platform both flexible and interoperable.
3) What are the challenges you are both seeing when implementing each of these models?
Katrina: In Australia, we have recognised that as an industry we can’t leave progress entirely in the hands of market forces alone. That in itself is not sufficient to produce desired outcomes within a reasonable timeframe.
As managers of the infrastructure, we still have an important role to play in cultivating the ecosystem and encouraging the use of the Platform. That is why we have adopted a proactive role in developing capabilities – such as the development of an API framework and sandbox and the development of standards for the ISO messages, whilst still providing flexibility at a product level.
Steve: The biggest advantage of the “thick core” approach – the robustness of its messages – is also the biggest challenge. Financial institutions must do much more than send and receive payments; they must be able to deliver non-payment messages to their customers and enable a response.
Another challenge is that the product development flexibility enabled by non-payment messages requires lots of design choices. To help overcome “decision paralysis” The Clearing House has sponsored multi-bank projects to develop reference designs for such applications as bill pay based on request for payment. The reference designs are not overlays or user interface requirements. They are simply a collection of effective, research-tested product elements that provide a starting point for detailed design.
4) Neither of the two systems were mandated by regulators. How much did that play into the decision around what each system would look like?
Steve: A lot. We had to think about what would entice 11,000 banks and credit unions to sign up for a new payment network. Fast payment wasn’t enough. One-stop shopping for payments plus value-added capabilities is a much more compelling sell.
Katrina: While the regulator did not mandate the New Payments Platform in Australia, the Reserve Bank of Australia was very closely involved in the design and development of the Platform – and not just in their role as regulator but also in their role as provider of banking services to a number of government agencies.
The genesis of the NPP was essentially a review by the RBA’s Payments System Board back in 2012 which set out a number of strategic objectives for the payments system, including the ability for users to make real-time payments, have a simpler way of addressing payments, being able to include more complete remittance information and having the ability to make and receive payments outside of normal business hours.
The Reserve Bank did not prescribe how these strategic objectives should be delivered but rather invited the industry to determine the most effective way for these objectives to be met. Hence it was largely left up the payments industry to collectively decide the best way to design the NPP.
5) George, Vocalink has experience in delivering a variety of instant payments models . What do you see are the drivers behind adopting a particular type?
George: In our experience, it tends to be based on what the driver is for that particular modernisation programme. If it’s government-led then, for the most part, you can expect to see a relatively basic model where cost is an overriding factor. This will have a predominant focus on implementing a real-time payments platform simply for real-time credit transfers. However, if the modernisation programme is industry-led, like we have seen in the US with The Clearing House, then there’s a huge amount more thought that goes into the opportunities that can be created for the users of the new of the platform to generate additional value.
Speed is only one aspect of the system – so when the industry comes together to collaborate on a programme, innovation is very much front of mind and a much more functionally rich payments platform will emerge. However, as you would expect, this type of model takes longer to roll out and isn’t always conducive to being able to meet a mandated timeline to put a new instant payments system in place.
What we try to do, during our conversations with countries that are embarking on a modernisation programme, is talk about the broader opportunity for those platforms when you create a much richer functionality set than just the instant payments. And actually what we’ve seen, is that this is helpful for central banks and regulators because they can bring a perspective to this modernisation programme they’re driving that is more than just compliance – this is a far bigger opportunity to create value for users right across the payments eco-system.
6) As a provider, how challenging is it that there is not a definitive way in which instant payments are implemented globally?
George: Pragmatically speaking, this is a national payments infrastructure; there’s only one in each country and therefore you would anticipate that there has to be quite a lot of localisation or specific requirements needed for that country. With that in mind, it does make for complex individual projects, but they are all complex projects regardless.
However, the benefits arise when users of the platforms use common standards, i.e. the ISO 20022 message set, operate them in the same way; and if the platform is made available for participants outside of that one country, it could help solve issues such as cross-border payments, as well as support the growth of volume of traffic using that platform.
7) Given that there are multiple models, standards as well as operational and technical best practice become extremely important for ensuring a level of ubiquity globally. How effective is the industry at developing open, collaborative industry best practice?
Katrina: In Australia the industry has been quite effective at coming together to collaborate. That’s been driven by the collective recognition that if we work together around the core payments infrastructure to ensure standardisation, then this benefits everyone.
The full benefits of having the Platform built upon the ISO 20022 message schema in terms of straight-through processing and operational efficiencies won’t be realised unless we can ensure the consistent treatment of data to support data rich payments for different payment types.
That is why we are actively in the process of developing some message data standards for a number of payments – including pension, payroll, e-invoicing and insurance. As part of this work we are trying to make sure that we take into account any relevant activity in other international markets to ensure as much consistency globally. Particularly in today’s world when a number of organisations such as payroll providers and technology vendors operate internationally – and their appetite to have to develop something customised for a market the size of Australia is limited. NPP Australia also participates in the ISO 20022 Real Time Payments Group.
George: There is good global industry collaboration on the ISO 20022 message set, which includes Vocalink, The Clearing House, NPP Australia etc., who have all been working hard to come together on this already. Furthermore, now Vocalink has customers in multiple regions (Singapore, Thailand, UK, US and Peru), we think that allows for the use of best practice and a more consistent platform, enabling better industry co-ordination.
Steve: That’s a tough question. Sometimes best practices result from collaboration, but sometimes they come from successful experimentation by individual players that everyone rushes to copy. We need both models.
8) Will we continue to see the two models profligate, or will one become the ‘norm’?
George: I think we’ll continue to have both models, as cost and timing will still to be consideration factors to some degree, but what you’ll see is, where the infrastructure is ‘skinny’, i.e. only real-time credit transfers, there will be quite quick follow-ons. The additional functionality, such as request to pay messages and request for information, that comes with a functionally rich switch, provides a platform on which users can innovate and start creating value instantly.
Katrina Stuart, Head of Engagement at New Payments Platform Australia Limited
Steve Ledford, SVP, Product and Strategy at The Clearing House
George Evers, Senior Vice President, Product, Real-time Payments at Vocalink