Real-time Payments or The Illusion of Real-time Payments?

Real time payments is a big goal for the US payments ecosystem:

• Banks are partnering on RTP efforts like Zelle
• NACHA has introduced same-day ACH with feels like a stepping stone to something greater
• Networks like Visa and MasterCard are pushing out OCT products to allow your debit card (and the checking account attached to it) to become a method to receive a payment in real-time

All of these are attempts to satisfy consumer demand to be able to send money like any other piece of content. After all, money is just data so then why can’t we send it to a friend in real-time?

The main issue with legacy infrastructure boils down to sending someone money actually takes two steps. First there is a notification of payment and then there is settlement of funds.

How does this take place on transactions we are see every day?

• When you swipe your credit card, the network (e.g., Visa, MasterCard, AMEX, Discover etc) first routes an authorization to your card’s issuing bank or lender to determine if you have the requisite cash remaining in your account or line of credit. If so, your transaction is approved and you walk away with value. The network then works to facilitate an ACH that pushes funds to from your issuing bank or lender to the merchant’s account. The merchant is comfortable letting you leave with their product or service knowing funds will come shortly.
• When your payroll hits your checking account, that is actually the date of settlement. In reality, your bank most likely receiving an ACH file 1–3 business days earlier which told it how much money you’d receive. Your bank is providing you value knowing your payroll is coming shortly.
• When you cash a check, it takes several days for your bank to collect the funds from whomever wrote it to you. Any value the bank lets you spend prior to it receiving funds, is actually the bank advancing you value. They determine how much value to provide immediately based on their best estimation of the probability of funds coming shortly.

So how do Real Time Payments work on legacy rails? Easy — you fake it!

• When you Venmo funds to a friend, you are not actually moving money so long as you have requisite money in your Venmo account. Funds sit in a bank account called an omnibus that holds all of the money within the Venmo ecosystem. “All” Venmo does is update a ledger that manages the amount each person possesses within that master account. Interestingly, should you not have requisite funds in your Venmo account, the company will still allow you to push value to your friends so long as you have a connected bank account. Concurrently, they’ll debit your bank account knowing they’ll be made whole in ~2 business days. There is risk you won’t have the money in your bank account, but tools like Plaid and Venmo’s own algorithms help mitigate this. Sorta.
• When your bank account or prepaid card allows you access to your payroll two days early like Chime does, they are simply advancing you money knowing that funds are in transit to ensure repayment. They’ll limit this function to direct deposits on the ACH network, which sends a file that provides notification of an impending payment. Trusting that the sender is good for the money, Chime or another bank will provide you the value in the amount you’ll receive knowing they’ll be made whole when your money actually comes in a day or two.

These methods boil down to “ledger transactions” where money does not move or “advances” where a party will float funds for a period of time, generally know there are funds already in transit to make them whole.

Next, I’ll write about why Crypto is so exciting as it solves a fundamental issue that prohibits RTP on traditional rails: Auth and Settlement at the same time.