Payments: Faster, Smarter, and Better??

1. Payments: Faster, Smarter, and Better??

2. Agenda A Definition of FASTER payments Real-time or near real-time options • What came out of the Faster Payments Task Force • RTP • Zelle • Card Network Options Same-day ACH • Where we are now • Phase IV • Other ACH changes The RTGS (Real Time Gross Settlement) RFP from the Fed Where do we go from here??

3. Definition of Faster Payments Does it mean Real-Time? Sometimes – but then what is real time? 5 seconds, 30 seconds, a minute, five minutes, etc. In the end the question is, what’s fast enough for you and your customers needs? Same-day ACH is a “Faster Payment” but it’s not real-time, just faster than it used to be Check image is MUCH faster than paper deliver, so you can call check a faster payment as well Wire has been a fast payment forever

4. Who, and What Came Out Of The Faster Payments Task Force Sixteen possible “solutions’ were submitted that met, or at least partially met the 36 “Effectiveness Criteria” the Task Force developed No individual vendor was picked, that’s up to the market Final Report listed 10 objectives – the first was to form a group to foster faster payments the second to begin the development of Rules GFFT was formed – Governance Framework Formation Team – Represented FI’s, business, processors, etc. US Faster Payments Council formed last fall to move this along – UMACHA joined!

5. Who We’re the Sixteen? They were: • RTP by the Clearing House • Dwolla • SHAZAM • WingCash • Hub Culture • Intercomputer • Kalypton/ECCHO • Momo NABC/ICBA Nanopay Ripple Swapstech Thought Matrix Token University Bank World Currency

6. RTP RTP is a Payment Rail, not a product • Key Features: • Credit push - irrevocable • Request for Credit also available • ISO 20022 – global compatibility • Robust messaging • Immediate Transaction acknowledgement • Real-time payments • 24/7/365 processing and settlement • Integrated tokenization and directory services (use of alias’s supported) • FI’s can be receive only or send & receive • Started in 2013, supported by Vocalink (UK) • First LIVE transaction happened in Nov. 2017, focusing on B-to-B • Growth is slow, less than 25 F.I.’s are connected • FIS and Jack Henry have signed agreements to offer the service, Fiserve may have as well • Goal: 95% of F.I.’s by the end of 2019

7. Zelle Owned by Early Warning Systems (AWS) AWS owned by 7 large Banks Rolled out last year by a number (about 50) of large banks and credit unions Primary focus – Person to person (P-to-P), plan on more business cases this year Key features: • Near real-time if the two F.I.’s signed up with Zelle • Use phone number or email rather than R/T # and Account Number (called an alias directory) • Will use the debit card rails for outside of network entries • Credit push network similar to RTP Now up to 173 F.I.s (Oct. 2018) but most not have launched – talk to your processor – that’s the way to get connected $25 Billion moved in the 1st Qtr. 2018 – up 33% from 1st Qtr. 2017 and growing quickly Some bad press about fraud – most was account takeover based

8. VISA and Mastercard The networks are working together, somewhat “VISA Direct” & “Mastercard Send” are the products Deposit based products – so credit push like RTP – primarily to Debit Cards (so to the DDA Acct.) Sold as a P-to-P solution or a funds disbursement solution (corporate – for reimbursements, refunds, rebates, payouts, etc.) Near real-time – instant payments to all eligible US debit cards or prepaid cards Leverages Visa/Mastercard payment security systems

9. Other Faster Payment Options Primary focus is on P-2-P Solutions • Paypal • FI owned (Chase QuickPay) • Popmoney • Venmo • SHAZAM Bolt • Dwolla • SquareCash Social media affiliated platforms (Mostly P-2-P via mobile) Are any of these truly real-time or even same-day?

10. Same-Day ACH – Phase 4 Quick Review of Same-Day ACH… • Phase 1 (9/2016) – Credits Only with a $25,000 per transaction cap – All SEC codes but IAT and a few specialty ones • Effective Entry date was key • There was a fee to use the two same-day windows • Posting by the receiving FI was at their “close of business” • Returns & NOC’s could also be run same-day (without a fee) • Phase 2 (9/2017) – Both credits and debits – same limits, same issues • Phase 3 (3/2018) – Receiving institutions were required to make funds available by 5:00 P.M. local time for consumer credits – everything else was the same

11. Phase 4 - Upgrades!! Three major changes: • Expanding access to Same-Day ACH • Increasing the Same-Day ACH dollar limit • Providing Faster Funds Availability What do these mean to the users of Same-Day ACH?

12. Expanding Access NAVIGATING PAYMENTS 2018: PASSPORT TO PAYMENTS * Indicates new changes

13. Expanding Access This is GREAT the further west you go, or for those that can’t deliver files until later, BUT: • The Fed has to move back settlement times by at least 30 minutes to allow this to happen – in phase 1 this “ASK” was a tough one with the Fed agreeing to the change on the last day they could based on NACHA’s ballot • RDFI’s would not be required to make funds available for this window until the close of business – this varies significantly! The Fed has come back and said they can’t meet NACHA’s deadline for approval of the change • New effective date for the new window would be March 19, 2021 • Fed still plans on going out for comment

14. Increasing the Dollar Limit Current Dollar limit - $25,000 NEW Dollar limit - $100,000 (RTP dollar limit is $25,000) Positives: • Can run balanced files with the offset up to $100,000 • Can process larger transactions, generally good for the business-to-business market • More transactions can run same-day when needed Negatives: • Customers COULD have large dollar transactions hitting their accounts late in the day when funding is an issue

15. Faster Funds Availability Transactions delivered in the first Same-Day window would be available by 1:30 P.M. local time • Today these are by 5:00 P.M. local time Funds from ALL non-Same-Day credits would be available by 9 A.M. local time regardless of when they entered the network or whether they are consumer or business payments • Today some are not required to be made available until the end of settlement day These are incremental, but positive changes!

16. Timing Expanding Same-Day ACH – September 18, 2020 • Now delayed 6 months Increasing the Dollar limit – March 20, 2020 Providing faster funds availability – September 20, 2019

17. Other Rule Changes Coming ACH Quality and Risk Management Topics: • Return for Questionable Transaction (R17) • Supplementing Fraud Detection Standards for WEB Debits (account validation) • Supplementing Data Security Requirements (protecting data at rest – will be completed in two stages) • R10 broken into two codes – R10 & R11 – this one JUST passed Minor Rules Topics: • Updating some ACH operator edits • Clarification of TEL Authorization Requirements • Clarification of RDFI obligation to return a credit entry declined by the receiver • Editorial clarification on Reinitiation of Return Entries • Editorial clarification on RDFI liability upon receipt of a written demand for payment

18. RTGS Stands for Real Time Gross Settlement • Gross settlement is settling each and every transaction individually, Wire is a gross settlement network • ACH is a net settlement network The Federal Reserve issued a Request for Comment on November 15th, 2018 • The comment period closed on December 14th • They requested feedback on two general topics: • Should the fed build a 24x7x365 real-time gross settlement system for faster payments? • Should the Fed build a liquidity management tool that would enable transfers between Fed accounts to support 24x7x365 processing?

19. RTGS The Fed asked nine very detailed questions in the RFC The Fed has stated that no decisions have been made when it comes to development of either service The feedback so far: • The larger banks and RTP users have suggested that since there is already an operating network in place the Fed does not need to build new settlement system • Although not stated anywhere, RTGS would compete with RTP • Community banks and large merchants have encouraged the Fed to play a part and develop a network • Both the Clearing House and the Fed have written numerous articles recently explain their positions

20. RTGA Issues Interoperability • It’s hard to switch transactions between two competing networks in real-time with all the security and integrity issues with payments Speed to market • RTP is up and running, how long would it take the Fed to design and develop a 277x365 system? And if they do, would that slow down the implementation of faster payments as much of the market might wait for the Fed to build their network There is no timeline! And a side issue….ubiquity

21. Where Do We Go From Here For most of us, we monitor, read, talk to our peers, and watch Ask our customers about their expectations when it comes to payments – not just faster payments Review internal business cases, whether FI or Company, to determine where a faster payment makes sense • Cost/benefit will be part of the equation Begin or refine your strategy around payments – what do you need to compete in your market?? Real-time payments WILL be a reality – the REAL question is when!

22. QUESTIONS???? ??? ??? Thanks for Coming Today I hope you enjoyed the session ??? You can reach us at: Fred Laing – fredl@umacha.org 800-348-3692 ???