Fintech solutions, new payment rails and the rapid pace at which the financial sector is changing is putting massive pressure on the incumbents, and Jim Aramanda is urging the banking industry to move as fast as it can to stay competitive in the digital economy.
Speaking at the American Bankers Association Payments Forum in Washington, D.C. to financial institutions, credit unions and community banks, The Clearing House CEO defined the real threat.
“The real competition out there isn’t the other banks. It’s the fintechs and others that are using the payment system as it exists today to disintermediate you from your customers. I would tell you that’s the real existential threat.”
TCH’s Real-Time Payments system, which is open to all depository institutions, is a new real-time payments platform that all federally insured US depository institutions are eligible to use for payments. It was launched in November of 2017, and was billed as “the first new payments infrastructure to be introduced in more than 40 years.”
Aramanda says it needs to be a ubiquitous network in order to outpace the competition.
Reaching roughly half of US demand deposit accounts, which includes checking and savings, the platform is targeting every US bank and credit union by the end of 2020.
“We’re paying up to help everybody get connected because ubiquity is key.”
“And I should mention, maybe it came up in the panel discussion, one of the unique aspects of our system is what we call request for payment. And again, the whole strategy is to reconnect the consumer with the bank, keep them from going outside the banking industry. We have a bill pay pilot going live at the end of next quarter, beginning of the third quarter, and we’ve got a number of banks in this.”
“There’s a unique attribute of the system. It’s called a ‘request for payment’, and that is the ability for a biller to send a request for payment through the banking channels to your customers, and they in turn would push a credit out of their account to pay the bill. When that occurs, the banks that are hosting the request for payment are going to get paid $.10 for every transaction. This is new. Right now, these debits are coming out of your account, and you’re not getting paid at all. And it’s actually a cost to you. So we’ve flipped the model. It becomes – instead of a pure cost to you – it becomes a revenue stream for all of you.”
The incentive-based model is specifically designed to tackle the risks at play from new competitors.
“We need to get you connected quickly because, again, I think the biggest risk to our industry is coming from outside our industry. The fintechs have made no secret that they want your customers, and they’re offering lending products, et cetera. And let’s face it, in the digital age, which is clearly what we are in today, our payment rails were developed 40 years ago: pre-digital age, pre-internet, pre-everything.
I find it amazing that I can order a package from Amazon and have it delivered faster than I can get a payment from one bank to another. The fintechs are leveraging that vacuum, if you will.”
In addition to fintech solutions such as Venmo and PayPal, Bitcoin and cryptocurrency platforms are attempting to address many of the issues plaguing 40-year-old payment rails by making remittances easier, faster, cheaper, more transparent and more accessible to businesses, communities and customers. These new systems are flourishing, particularly outside of the US. As more platforms are deployed and fully integrated into everyday life, the network effects of blockchain-based platforms continues to challenge the status quo.
According to a report by JRC Science Hub published by the European Commission,
“In recent years, a new trend has emerged among migrant workers to send money back to families in home countries: the use of cryptocurrency services. The cryptocurrency market is still in a nascent stage in terms of reaching the migrant population masses, but it may have considerable potential in the future.
With the advent of blockchain, several companies and startups have begun adopting cryptocurrencies like Bitcoin to offer remittance services. In a sector highly dominated by Western Union and MoneyGram, these new players are offering a different money transfer service, trying to solve multiple issues such as the high transfer costs, the limited money distribution methods, limited brand options, limited ways to deal with money, etc.
Most of remittances receivers do not live in big urban centers and, most of time, they must walk for several hours, sometimes an entire day, in order to get to the nearest money transfer office, receive the money and go back to the place where they live. It is not only time consuming, but depending on weather conditions, it may be impossible to reach the urban sites for prolonged periods of time. Moreover, rapid growth in smartphone adoption is one of the main reasons why the digital remittance market has steadily increased in size.
At the moment, the fastest developments are happening in Southeast Asia, in particular the Philippines and Vietnam, but some African countries – like Kenya, Tanzania, Nigeria, and Uganda – have entered the market.”
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