The evolution of payment technology: Expert perspectives from Rusiru Gunasena

The Finterview - Fintech Exposed episode 24.

Our latest Finterview podcast guest is Rusiru Gunasena, a seasoned payments executive and SVP of Product and Strategy at The Clearing House. Rusiru gives us a glimpse of the profound impact of technology innovations on global and US markets, guided by insights from his extensive experience.

In this episode, we explore the challenges and opportunities in evolving payment technologies, the role of the Federal Reserve in promoting Fintech innovation, and the significance of the real-time payments(RTP) network in the payment ecosystem.

Tune in to understand why the partnership between traditional and emerging financial players is crucial for future innovations, setting the stage for a future where real-time payments transform the economic landscape.

Keep reading for the key takeaways from the episode or 🎧 listen to the full podcast here.

Background in Fintech and payment technologies

Rusiru's background spans all things financial technology, with a primary focus on enhancing payment systems within the US. Before joining The Clearing House, he contributed to a major processor serving thousands of banks and credit unions across the US.

His key achievements include the development of a centralised payment hub that facilitated RTPs, and establishing connections with both Zelle and the RTP network. This initiative marked a significant step forward in RTP connectivity and the adoption of RTP systems by financial institutions.

Technological advancements and payment systems

Despite the technological domination of regions like New York and Silicon Valley, payment technologies in the US exhibit a notable lag in adopting modern advancements compared to other areas of technological development. This discrepancy is particularly evident when comparing the US payment landscape with that of Europe and the UK.

For instance, the Single European Payment Area (SEPA) and the UK's early adoption of low-value RTP systems highlight a more rapid evolution in payment technologies outside the US. In contrast, traditional payment methods, such as cheques, remain prevalent in the US, indicating a slower transition towards RTP ecosystems.

Challenges and opportunities in payment technology evolution

The complexity of the US financial ecosystem, characterised by a vast number of financial institutions, technology partners and platforms, presents unique challenges in modernising payment systems. Legacy technologies and infrastructural inefficiencies contribute to the slower pace of innovation. However, there is a clear trend towards modernisation, with core platforms migrating to cloud-based solutions and adopting real-time processing over batch processing.

A notable difference in the US approach to payment system evolution is the absence of mandates from central authorities, contrasting with strategies in other regions such as India, which actively promotes cashless transactions to modernise commerce. Despite these challenges, the US is making significant strides, as evidenced by the growth and adoption of the RTP network, which continues to expand in volume and introduce new use cases.

The role of the federal reserve in fostering innovation

The Federal Reserve (Fed) plays a pivotal role in promoting innovation within the Fintech landscape, especially in the US. Unlike in the UK and Europe, where independent regulators and participant regulators, such as the Bank of England and the European Central Bank, directly influence commercial banks, the Fed operates differently. Despite being a private entity, it works closely with payment networks to ensure their safety, security, and equitable access for all participants.

Ensuring safety and access in payment networks

The Fed collaborates with payment networks like the RTP network to prioritise safety and security. This cooperation extends to auditing and compliance activities, ensuring that consumers and businesses alike have secure access to these networks. A notable achievement of this partnership is the widespread adoption of the RTP network by over 80% of community banks and credit unions, demonstrating the Fed's commitment to inclusivity in financial services.

Collaborative efforts toward innovation

The Clearing House and the Fed engage in continuous dialogue to align on emerging technologies and the development of new features and functionalities within payment systems. This collaborative approach aims to benefit the broader financial ecosystem, including banks, credit unions, consumers, and businesses. The Fed's involvement spans multiple agencies, each focusing on different aspects of fintech, payments, and fair competition, highlighting its multifaceted role in the sector.

Anatomy of a payment transaction

Understanding the intricate process of a payment transaction reveals the complexity and the number of actors involved. A payment transaction, especially through networks like RTP, involves several steps:

  1. Sender and receiver involvement: A payment is initiated from a sender and is destined for a receiver, facilitated by their respective financial institutions.
  2. Network as a medium: The transaction is processed through a payment network (e.g., RTP), acting as the intermediary.
  3. Real-time settlement: The banks adjust their accounts in real-time, ensuring immediate transfer of funds, and reducing settlement risk.

Real-time gross settlement (RTGS) benefits

RTGS systems like RTP offer significant advantages across the financial spectrum. These benefits include immediate fund confirmation for recipients, enabling real-time economic activities such as instant wage access for the gig economy workers. Furthermore, the system supports various use cases like wallet defunding, demonstrating its versatility and the broad benefits it delivers to financial institutions, consumers, and businesses.

Pre-funding requirements and the role of The Clearing House in the payment ecosystem

Understanding pre-funding requirements and the essential role of The Clearing House offers insightful perspectives into the complexities of the payment ecosystem.

Pre-funding in payment systems

Pre-funding involves maintaining a balance in an account to ensure sufficient funds for transaction settlements. The requirements for pre-funding balances vary based on the size of the institution and the volume of payments.

A calculated recommendation is provided to each participant, ensuring they maintain adequate funds based on historical data and future forecasts. This approach guarantees the seamless execution of transactions without financial setbacks.

Significance of The Clearing House

The Clearing House has been a keystone of the payment ecosystem since 1853, even predating the Federal Reserve. It plays a pivotal role in driving payment innovations and ensuring the efficiency, safety, and speed of transactions across the US.

Operating major networks like the EPN (ACH equivalent), CHIPS (Fedwire equivalent), and the RTP, The Clearing House is instrumental in facilitating a diverse range of payment solutions, including check clearing. For close to two centuries, it has consistently demonstrated a commitment to enhancing the payment infrastructure, emphasising its enduring existence.

Central bank digital currencies (CBDCs) and the future of payments

The discussion around Central Bank Digital Currencies (CBDCs) and their potential impact on the payment ecosystem is evolving. CBDCs represent a significant shift towards digitising currencies, with varying implications across different jurisdictions. The Clearing House plays a key role in this transformation by developing standards, engaging in advocacy, and contributing to policy discussions.

  • CBDC considerations: the evaluation of CBDCs involves analysing benefits against costs, understanding technological implications, and considering their impact on thousands of financial institutions. Safety and security emerge as paramount concerns, especially regarding the administration of digital currencies globally.
  • Global perspectives on CBDCs: while some regions may favour CBDCs for greater control over monetary policies, the suitability of a CBDC in the U.S. payment ecosystem remains under discussion. The need to assess whether CBDCs would serve for interbank settlements or broader retail and commercial payments is critical.
  • The dollar's global role: the US dollar continues to be a dominant currency for global transactions, supporting the American economy and its financial institutions' role in the global payment landscape. The usage of the dollar, whether through traditional means or stablecoins like USDC, reinforces its strength and preference for international trade.

The Clearing House's enduring presence and its proactive approach towards emerging technologies, including the exploration of CBDCs, highlight its crucial role in shaping the future of payments. As the payment landscape evolves, the interplay between traditional institutions, digital currencies, and global economic dynamics will undoubtedly influence the direction of financial innovation.

Emerging technologies and the evolution of the RTP network

The real-time payments (RTP) network faces no direct threats but remains vigilant against emerging technologies and payment mediums that could potentially reshape the transaction landscape. This proactive stance ensures the RTP network continuously adapts and integrates innovations to serve a broad spectrum of use cases more effectively.

Adaptation to emerging trends

The landscape of financial transactions is ever-evolving, with new technologies frequently emerging that promise to enhance the speed, efficiency, and security of payments. The RTP network actively monitors these developments, collaborating with financial institutions, fintechs, and other stakeholders. This collaboration aims to identify high-value use cases for the RTP network, thereby ensuring it remains an enabling platform for real-time financial transactions.

Integration and collaboration with fintech

Over the decade, the perception of fintechs has shifted from viewing them as potential threats to recognising them as vital contributors to the payment ecosystem. This transformation is attributed to the realisation that fintechs drive innovation, creating more efficient processes and enabling new functionalities within the financial sector. The RTP network and other traditional financial entities now see fintechs as partners, working together to fuel innovation and expand the ecosystem's capabilities.

Future trends and priorities

Looking toward the future, the RTP network focuses on expanding its reach and incorporating new payment volumes through the adoption of new use cases. The goal is to achieve widespread recognition, ensuring that all financial institutions can easily connect and utilise the RTP network. While the transaction speed from A to B is quite impressive, future innovations may not necessarily focus on speed but rather on the network's expansion, security enhancements, and the integration of new technologies.

Key Areas of Focus Include:

  • Increasing network reach: To achieve omnipresence, it's crucial to have every financial institution connected and active on the RTP network.
  • Volume and use case expansion: Introducing new use cases to drive the adoption and volume of transactions on the RTP network.
  • Security innovations: Continuously improving payment security measures, such as biometric authentication and advanced encryption, to protect against fraud and increase consumer trust in digital payments.
  • Education: Educating consumers and businesses about the benefits of RTPs and promoting best practices for safe and efficient use.

The RTP network's ongoing commitment to innovation, collaboration, and security positions it well to adapt to future trends in the payment ecosystem. By focusing on expanding its reach, embracing new use cases, and enhancing security measures, the RTP network aims to sustain its role in facilitating efficient, secure, and instantaneous financial transactions.

Enhancing collaboration for future payment innovations

Traditional banks, fintechs, startups, and tech companies are crucial in working together to develop and introduce innovative payment solutions. Their goal is to use the RTP network for a wider variety of applications.

The path to adoption in the US

The journey toward widespread adoption of RTPs in the United States is seen as a gradual yet inevitable process. The focus is on normalising RTPs to the point where the distinction between real-time and traditional payments blurs, making real-time transactions the norm rather than the exception. Within the next few years, significant growth and adoption of RTPs are anticipated, driven by various factors:

  • Employer-employee payment innovations: some employers are already offering the option to "work today and get paid today," highlighting the flexibility and efficiency real-time payments bring to the workforce.
  • Commerce and disbursement: RTPs are transforming commerce and disbursement processes, facilitating instant transactions between businesses and consumers, streamlining bill payments.
  • Request for payment adoption: this feature revolutionises the bill payment process by giving consumers greater control over their finances. Unlike traditional ACH debits, payment requests allow consumers to authorise payments through secure banking channels, enhancing transparency and security.

Challenges and opportunities

While the transition towards RTPs is progressing, certain challenges remain. These include overcoming inertia within the ecosystem and addressing any inhibitors to full adoption. However, the move towards RTPs is viewed positively, with the potential to significantly improve efficiency, reduce costs, and enhance the overall user experience for both consumers and businesses.

In conclusion, the fintech landscape, especially in payment technologies, is undergoing paradigm transformation. Collaboration among traditional banks, fintechs, and technology companies underscores this transformation, driving the adoption of RTP for diverse applications. The RTP network's proactive adaptation to emerging technologies and its partnership with fintechs signal a shift towards a more inclusive, efficient payment ecosystem.

Looking ahead, the focus shifts from merely speeding up transactions to expanding network reach, enhancing security, and educating stakeholders about real-time payment benefits. With significant growth anticipated in the upcoming years, RTPs are set to become the standard, promising to streamline commerce, improve payment swiftness, and bolster economic activities.

The journey toward universal acceptance in real-time transactions not only underscores the importance of technological advancement but also highlights the collaborative effort required to achieve a future where payments are instantaneous, secure, and accessible to all.

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