Cross-border payments targeted for upgrades

Innovation in payments will charge ahead in 2023, though not in the same way it has in the past few years. With venture capital firms tightening purse strings and startups floundering, legacy players are likely to pick off some industry small fry.

Meanwhile, other fintechs may close down amid challenging economic conditions, including rising borrowing costs and the threat of a recession.

One new payments area primed to advance in any case is embedded finance, and specifically embedded payments — the practice of bundling payments with a service or product in a seamless sort of way. Companies across the spectrum are considering ways they can employ such tools and they’re likely to move beyond consumer uses to corporate applications as well.

The arrival of FedNow, the Federal Reserve’s real-time payments system, is also expected to spur not only more efficient payments, but also new rails for developing services and inspiring more startups in the industry.

While buy now-pay later mania has cooled since the COVID-19 pandemic fueled online use, it will continue to be a hot theme in the industry as it adjusts to in-store use and new regulations in the offing for 2023.

Meanwhile, regulators won’t be the only ones keeping an eye on consumer safety. Lawmakers and payments companies alike will join in a campaign to beef up cybersecurity in the arena amid the rise of digital payments.

FedNow on the way

There are high expectations for FedNow’s launch, which could come as early as May, with industry participants wagering it will super-charge the use of faster payments in the U.S. and spur innovations.

The new national system allowing payments of up to $500,000 to be made in seconds on any day and at any time may also allow the U.S. to catch up with other countries already speeding ahead with the technology.

The system will build on an existing private sector real-time payments network, RTP, begun by bank-owned The Clearing House in 2017. While RTP roped its big bank owners into the real-time fold, FedNow is aimed at luring more small- and mid-sized banks.

“In 2023, in the U.S., real-time payments will start becoming real,” said Sanjay Gupta, who heads the biller segment at payments company ACI Worldwide. Instant payments have been transformational in other countries, he explained. Now, U.S. companies, including ACI, are ready to make use of real-time payments too, Gupta said in an interview last week. 

More banks using real-time systems will mean more U.S. businesses have access to those services through their financial institutions and can increase the efficiency of their payments. 

As more companies adopt real-time payments, it will allow them to upgrade other aspects of their payments and finance infrastructure, Modern Treasury CEO Dimitri Dadiomov said in an interview this week.

While the service might seem pricey relative to automated, or ACH, payments, it’s less expensive than wire transfers and more efficient than check-writing, Dadiomov noted. Plus, over time as FedNow, The Clearing House and banks compete for real-time customers, the prices will move lower.

“All in all, I think it's going to be a pretty significant, if not the dominant type [of payment], in a couple of years,” he said of real-time payments. “I don't really think of cost as a big obstacle.”

Eventually, digital requests for payment are likely be a bigger part of the real-time realm too, Dadiomov said. RTP has “been kind of like a send-only way of using it,” Dadiomov said.

Needless to say, the rise of digital payments is also likely to boost business-to-business payments as companies realize the benefits of faster payments, especially in a high-interest-rate environment that increases the importance of holding money, Dadiomov said. Instant payments can also increase cost savings.

“Given the market environment, the main priority for people is efficiency,” Dadiomov said. Payments and operations in the office of the chief financial officer are key places where they can increase those efficiencies, he explained. 

Eventually, real-time payments will also improve cross-border payments, but that won’t happen this year, according to Dadiomov. 

Funding challenges won’t slow competition

Startup competition is unlikely to let up, even as funding becomes harder to secure. It will favor some areas over others though, with more interest in business-to-business (B2B) or infrastructure concepts, and less in consumer or cryptocurrency, payments players said.

Fintech infrastructure companies “will be in vogue,” said Sunil Singh, CEO and founder of card issuance fintech Tallied. “There’s still a lot of different parts of the economy that can benefit from, sort of, a technology upgrade.” 

Embedded finance and cross-border e-commerce hold promise this year, said Rob Anderson, a partner with San Francisco-based venture firm FTV Capital.

Startups have become more accepting of current valuations and a tougher economic climate, he said. “I think you’re starting to see that now flow through in people’s mindsets for 2023,” he said. 

Money is still there for early-stage fintechs, said Jordan McKee, a principal research analyst with 451 Research, part of S&P Global Market Intelligence. “The challenge is for those fintechs that are more mature,” and looking for significant funding, around $100 million-plus, McKee said. That’s where investors have become more skeptical, in terms of plans for profitability and scale.

Given venture capitalists’ pullback, collaboration between fintech startups and larger companies may accelerate in 2023, said Tom Zschach, the chief innovation officer at international financial message firm Swift.

After a period of so much capital and too many competing ideas, some startups will drop off too, he said. “But it also makes the survivors a lot stronger, and more focused, and they're going to have to create value faster,” he added.

Embedded payments on the rise

Consulting firm Bain & Company has projected the transaction value of embedded finance will reach $7 trillion by 2026. “We are seeing a big focus on embedded finance” this year, said Jodie Kelley, CEO of trade group the Electronic Transactions Association, in an email.  

A host of fintechs are pouncing on the opportunity to sell embedded financial services to software companies that haven’t monetized payments, said Maast CEO Tom Bell. Maast is a subsidiary of Synovus Bank, which sells banking and payments services to software providers. 

Investors have been attracted to embedded finance even as capital has become less plentiful. That’s because such businesses are able to scale without the capital a consumer-focused fintech might need, McKee said. 

“It's not about acquiring users one by one by one,” McKee said. “It's about selling into a large platform or a large technology company in accessing all of their customers through one relationship.”

Increasingly, the business-to-business realm is being drawn into the trend. Embedded payments has focused mainly on bundling products and services with payments for consumer use, but will move into a 2.0 stage where it picks up speed with respect to back-office business payments, said Extend CEO Andrew Jamison.

The next iteration of embedded payments is going to start to permeate business use of software like Intuit's Quickbooks and German software provider SAP payments, Jamison predicted.

BNPL matures under new pressures

Buy now-pay later will experience growing pains this year, as the industry faces shopping shifts, debt-saddled consumers and potential regulation. 

The installment payment providers, such as San Francisco-based Affirm, Sweden’s Klarna, Block-owned Afterpay, Australian Zip and Minneapolis-based Sezzle, are tightening underwriting as inflation bears down on consumers. 

They’re also grappling with investors pressing for profits over growth, and bracing for regulation following last year’s Consumer Financial Protection Bureau report on the industry.

Regulators are “behind the eight ball” when it comes to BNPL, said Capco Managing Principal Daniela Hawkins, but it’s under scrutiny now, as they realize consumers who struggle with debt management may overextend themselves.

Hawkins said she’s watching to see when interest rates and rising debt levels prompt consumers to cut spending, and how that will affect products like BNPL. “Will they fall out of favor, because the amount of consumer debt has become challenging?” she said.

Additionally, BNPL companies that benefited from the e-commerce surge are scrambling to beef up their brick-and-mortar usability with the return to in-person shopping.

“These players are going to have to figure out how to be easy to use in physical locations, otherwise they’ll find themselves stuck in digital channels,” said Jason Barro, founder of Bain & Company’s NPS Prism, a customer experience benchmarking service.  

BNPL’s quick maturity suggests it filled a need in the marketplace, but Aite-Novarica strategic adviser Thad Peterson and other payments consultants expect 2023 will bring attrition among BNPL providers. That’s likely to lead to consolidation in the industry, with some companies bought by others.

Deal-making revs up

Acquisitions are widely expected to increase in the payments industry this year as difficult economic conditions and less available venture capital lead to lower, more attractive price tags for businesses. 

In the first 10 days of 2023, one acquisition has already been announced with the Canadian company Nuvei saying it will purchase Atlanta-based payments integrator Paya for $1.3 billion. 

Also, Florida-based payments software company ACI Worldwide is reportedly considering a sale, according to news outlet Bloomberg.

Deals are likely to crop up across the payments landscape, among big and small players alike, and won’t necessarily lead to consolidation because some large companies may be on the cusp of divestitures too.

Investors owning shares in the mega payments processors Fidelity National Information Services and Fiserv are pressuring those companies to consider divestitures that could lead them to break off chunks of their businesses. The companies have declined to comment on those possibilities.

Large incumbents and private equity firms still have plenty of capital for acquisitions, even if smaller fintechs don’t, and that will drive an increase in deal-making this year, said Jamison, whose company sells virtual card and expense management software services. 

“Opportunities will arise for M&A to actually accelerate because there's still plenty of money out there in the ecosystem,” Jamison said. ”There's going to be some good technology out there available to purchase because a lot of fintechs will start to run out of capital,”

Young fintechs that find it difficult to raise their next round of capital may suddenly find themselves thinking about a sale, with larger peers waiting in the wings to snap up talent, technology and intellectual property. 

Jack Henry & Associates CEO David Foss has said his company is eager to make acquisitions once prices come down. Digital payments behemoth PayPal may also become acquisitive as activist investors push the company to jump-start financial results, Truist Securities analysts suggested in a report last week.

Beating back bad actors

With digital payments on the rise across all sorts of rails, from real-time to B2B to peer-to-peer, fraudsters and other criminals follow the money trail.

That’s why cybersecurity is likely to be an important trend this year too, as payments companies seek to prevent fraud and protect their customers. It’s not just companies taking up defenses. Regulators and lawmakers are seeking to increase safeguards too, especially in light of the FTX crypto exchange collapse.

“Cybersecurity is the area where people are going to continue to double down,” Jamison said.

There has been a proliferation of companies selling software and services for payments protection, from digital identity verification companies, such as Socure, and chargeback fraud prevention firms, including Chargebacks911.

The industry’s efforts to combat fraud have paid off, with card fraud declining for instance, but cybercriminals are evolving too.

“The people who are nefarious actors are becoming more and more sophisticated, using phishing, social phishing, a variety of things, taking over accounts,” Gupta said. “The area of security is an important theme, but I think it's becoming even more important this year.” 

Some payments players and software companies, including tech giant Google, have been advocating a move away from passwords to biometrics for years as a way to fight back. Nonetheless, biometrics as a payments method appears to be one would-be trend that won’t take off this year.

Dive Brief:

• A central bank digital currency (CBDC), in combination with digital ledger technology (DLT) could make cross-border payments faster and safer, the New York Fed found last week in sharing the results of the first phase of research conducted in partnership with the Bank for International Settlements (BIS) Innovation Hub.
• Over a 12-week span, the New York Fed designed a wholesale CBDC prototype and connected it to a blockchain. It also simulated foreign exchange spot transactions with counterparts using similar ledgers and found the transactions cleared for both parties simultaneously — or not at all — within 10 seconds, on average. 
• Those transactions typically take two days to settle — and during that time, the sender and the recipient each are “exposed to settlement, counterparty and credit risk,” according to the report. The currency and blockchain the researchers designed reduced or eliminated a number of risks, the New York Fed said.

Dive Insight:

The CBDC experiment, dubbed Project Cedar, marks the first team-up of the New York Fed’s research group and the BIS’s Innovation Hub — collectively, the New York Innovation Center (NYIC).

It isn’t, however, the Fed’s first foray into CBDC research. The Boston Fed partnered with the Massachusetts Institute of Technology (MIT) before the larger central bank issued a January draft paper laying out the pros and cons of issuing a CBDC.

While the Fed has not definitively committed to issuing a CBDC, not all of the central bank’s officials are convinced of its necessity. Fed Gov. Christopher Waller last month said he doubts a CBDC’s introduction would boost or harm the dollar’s position in the global economy.

"Safe and efficient cross-border payments are critical to the functioning of the global economy," Per von Zelowitz, director of the NYIC, said in a statement, adding that Phase I “revealed promising applications of blockchain technology in modernizing critical payments infrastructure.”

“Our inaugural experiment provides a strategic launch pad for further research and development regarding the future of money and payments from the U.S. perspective,” von Zelowitz said.

The NYIC’s prototype was accessible for 24 hours a day and 365 days a year. Under the current system, transactions can only be pushed during business hours. Throughput across the system increased when additional currencies were included, the study found.

The design is not the NYIC’s final choice or that of a potential U.S. CBDC, the report said.

Future research will focus on interoperability, security and ledger design, according to the report.

The report does not endorse any specific policy outcome and does not assume the Federal Reserve will make any decisions based on the findings. The New York Fed noted that Project Cedar is meant to add to the dialogue surrounding CBDCs.

This year presented tumult for payments companies, forcing them to grapple with soaring inflation, currency volatility, Russia’s invasion of Ukraine and consumer shifts as the COVID-19 pandemic wanes. In response, the industry kept evolving to emphasize faster, easier payments.

As 2022 winds down, attention is shifting to 2023, and the payments hurdles and opportunities that may emerge as the U.S. economy targets a smooth landing. In this sixth edition of our CEOs Sound Off series, we spoke with three industry leaders to get their perspective on the trends and challenges likely to surface next year. 

Below are insights from Henrique Dubugras, CEO of corporate spend management fintech Brex, which is based in San Francisco; Nandan Sheth, CEO of Atlanta-based Splitit, which provides buy now-pay later services to consumers via their existing credit cards; and Jeremy Almond, CEO of Scotts Valley, California-based Paystand, a blockchain-powered payment network for business-to-business (B2B) payments.

PAYMENTS DIVE: What do you think the payments trends for 2023 will be?

HENRIQUE DUBUGRAS: I think one is real time. Payments and finance are still [shifting] from the batch world, where everything is done in batches, to a real-time role. That trend is increasing every year. Payments in general are becoming more 24/7 and real-time, both the processes and the money transfer itself. The second trend is global. There's this huge trend with payments and fintech being local to now going global. The third thing I’ll say is that with increases in interest rates, you’ll see a fight for deposits.

NANDAN SHETH: Trend number one is going to be the next evolution of buy now-pay later. We call that BNPL 2.0, which is going to be very different from the legacy buy now-pay later business models, especially because of the regulatory changes being spearheaded by the Consumer Financial Protection Bureau in the United States, but also other regulators in other countries. And what you're going to see is a shift back to more conventional lending practices driven by the key stakeholders in the lending, financial services and fintech value chain. You're going to see much more collaboration between the fintechs and the traditional financial services players. As part of that, I think you're going to see a much more global standard for buy now-pay later. That standard is going to be driven by assets that are already in the market, such as the card rails, such as the banking platforms, such as online banking.

JEREMY ALMOND: As we've seen over the last decade or so, blockchain is a transformative technology in payments and financial services. We now have over 100 million wallet users in blockchain and crypto today. We're seeing new applications: decentralized finance, the ability to move capital in highly efficient ways. The underlying technology is evolving, and most importantly, the amount of users is rapidly, rapidly increasing. We foresee that it's getting to critical mass in 2023.

What do you think will be the biggest challenges for the payments industry in 2023?

DUBUGRAS: Fintechs are the type of businesses that need money to grow. If funding is reduced, they will grow less, compared to banks and traditional players that have the capital. I would predict that the companies that are well capitalized and raised a lot of money last year will do really well in consolidating their position, versus companies that need to raise money — they’ll do worse because they won't have the balance sheet to win, and that's particularly important in fintech.

SHETH: One of the biggest challenges in payments and financial services is going to be the implication of inflation, and how inflation impacts lending, and how the restriction in lending curtails individuals in their making purchases. I think there's going to be a lot more tightening of the belt as lenders become much more selective about who they lend to. It's going to become very difficult for consumers, and frankly merchants also, to absorb higher interest rates.

ALMOND: Through 2022, and certainly in early 2023, market conditions will remain choppy. The economic outlook is quite mixed. What that means is, for businesses, capital efficiency becomes ever more important. How do they get their money quicker, how do they get their money in ways that they can automate and scale faster? Automation is huge for them. And then ultimately, how do they lower their costs so they can put that money back and reinvest in the business? In B2B payments, there’s still a significant amount of commercial payments that are done through paper checks. One of the big challenges is the industry needs to move to more modern tech, and modern business models, because businesses fundamentally need them to be more efficient in economic climates where costs have been scaling.

What do you think the industry’s merger and acquisition landscape will look like next year?

SHETH: Companies that want to sell, or have to sell, or have an urgency to sell, those companies’ valuations have come down and they’ll be selling at a valuation that's going to be less than it was 12 months ago. Companies that don't need to sell, or don't need to do an M&A transaction, that are healthy, are going to just wait it out. My sense is that the deal flow for M&A is going to slow down to a level that's going to be less than what it was, on an average basis, for the last three years. You’re going to see a lot more divestitures from large companies. That’s going to come on the back of pressure that those companies are going to feel in terms of growth.

DUBUGRAS: A lot of people are saying that mergers and acquisitions will happen. Honestly, I'm on the fence. I'm not sure yet. Public company consolidation — I think that’s definitely going to happen. Private equity takes private. Big companies buying big companies. On the public side, I definitely expect that. On the private side, I’m not so sure yet. I think it’ll all depend on whether valuations correct on the private side or not.  

What do you think the regulatory climate for the industry will look like next year?

DUBUGRAS: Definitely more conservative than before. Regulators are learning and improving, but they’re also very worried. It won’t be an easy regulatory year for companies that are bleeding edge, like crypto and decentralized finance.   

SHETH: For general consumer lending, I think there's going to be a lot more parity between fintechs and more traditional financial services. There's going to be a consistency in regulation between those two categories that doesn't exist today. If you look at the more emerging payment methods, including cryptocurrency, I think regulation will also tighten there, but it's going to make those payment methods stronger, and it's going to allow more mainstream players to adopt those payment methods because there is a regulatory framework. And there's going to be a lot more alignment among countries around cross-border payments. And frankly, I think there's going to be a lot more collaboration, as it relates to regulation, to make it easier to conduct cross-border commerce.

ALMOND: The fee structure for the Visas and Mastercards of the world are just untenable for merchants, so it’ll be interesting to watch what the regulators and the government do there. There's more institutional adoption on the blockchain and crypto side than there's ever been before, and that means there's more pressure back to the government and regulators on what are the right institutional approaches.

Dive Brief:

• Continuing a cryptocurrency tilt, MoneyGram International this week introduced a new service that lets customers buy, sell and hold cryptocurrency on its mobile app, the money transfer company announced.
• Through its partnership with Coinme, a cryptocurrency exchange and crypto-as-a-service provider, the company is allowing users to trade Bitcoin, Ethereum and Litecoin within the mobile app, according to a press release from the company Tuesday.
• MoneyGram said it is planning to add more cryptocurrencies as it enters other markets in 2023, international regulations permitting, per the press release.

Dive Insight:

MoneyGram, which counts about 150 million customers worldwide, said the rollout of its cryptocurrency feature allows the company to expand on the financial services it’s offering those clients.

"Cryptocurrencies are additive to everything we're doing at MoneyGram,” Alex Holmes, MoneyGram chairman and CEO, said in a statement. “From dollars to euros to yen and so on, MoneyGram enables instant access to over 120 currencies around the globe, and we see crypto and digital currencies as another input and output option.”

“As a next step in the evolution of MoneyGram, we're thrilled to provide our customers with access to a trusted and easy-to-use platform to securely buy, sell and hold select cryptocurrencies," he added.

Holmes said in September that the company’s tilt toward crypto is part of an effort to appeal to young, digital-first customers. Holmes has led the company for more than a decade, according to his LinkedIn profile, but he’s taking direction this year from a new owner. In February, the private equity firm Madison Dearborn Partners agreed to acquire the company in a $1.8 billion deal.

MoneyGram's introduction of a cryptocurrency service is part of the company's experimentation with digital assets. The company has previously partnered with Stellar, Coinme and G-Coin to let customers buy and store cryptocurrency and exchange it for fiat currency. MoneyGram teamed up with Wyre and Stellar in July to allow users in multiple countries to trade between fiat currencies and digital assets. It also has a tie to Circle for cross-border settlement of crypto in the stablecoin USD Coin.

Though MoneyGram is betting on consumers' interest in cryptocurrencies, research suggests that the industry is on the decline. A Bank of America analysis of anonymized customer data found that the share of customers interacting with cryptocurrency platforms dropped by more than half from about 1 million people to under 500,000 between November 2021 to May 2022.

Meanwhile, data from Coin Market Cap show that the total cryptocurrency market cap has dropped from its peak of more than $2.8 trillion on Nov. 11, 2021, down to about $1.01 trillion on Oct. 31.

MoneyGram has concentrated on its cryptocurrency ambitions, but it’s also faced scrutiny from the Consumer Financial Protection Bureau. In April, the CFPB and New York Attorney General Letitia James filed a civil suit against MoneyGram International, alleging multiple consumer financial protection law violations. The lawsuit also noted that many of MoneyGram’s U.S. customers are immigrants and refugees sending money to their home countries, and alleged the company is failing to deliver funds to recipients abroad on time.

Payroll paytech company Papaya Global is on a hiring binge in the U.S., seeking to increase its employee headcount by about a third by yearend as it builds out new cross-border payroll payment capabilities.

The Israeli company, with about half of its clients headquartered in the U.S., aims to add between 50 and 70 U.S. employees to its current 180 stateside workers, Papaya CEO Eynat Guez said in an interview this week. Worldwide, it’s trying to add about 300 to its 750 overall headcount.

Papaya, which is backed by major venture capital firms including Sequoia Capital and Bessemer Venture Partners, has built out its cross-border payroll company by adding a payments capability this week. 

While payroll companies abound, it’s a rarity for one to actually make the payments to employees globally, handling all the tax compliance and benefit detail complexities across borders, Guez said. Papaya didn’t offer that option either until its purchase this year of the London-based money transfer company Azimo, which added money transfer licenses to Papaya’s operations. In July, Papaya received regulatory approval of the merger, allowing it to launch the new services this week after a silent start-up in recent months.

“We are taking a very bold approach in saying that we can do that all over the world within 72 hours,” said Guez, who co-founded the company six years ago in 2016. She noted that in Europe, Papaya can sometimes deliver payments even faster, in less than two hours.

Papaya paid between $150 million and $200 million for the acquisition in March, according to TechCrunch, after raising $250 million last year. While a company may manage payroll payments domestically, it can tap Papaya for payments to employees in any or all of 160 countries.

“The payments piece is the biggest thing,” she said. “If you are looking at any other payroll company in the world none has a money transfer license.” 

Attracting big-name clients

So far, Papaya clients include car-maker Toyota, tech giant Microsoft, e-commerce company Shopify and the video-streaming outlet Vimeo, a spokesperson for the company said.

The other half of Papaya’s clients are headquartered in Europe and the Middle East, Guez said. Worldwide, the clients have employee headcounts of anywhere from 500 to 55,000 employees. While it might seem that only large companies would need such international payroll services, she said increasingly smaller ones need them, too.

“Companies are becoming global on a much, much earlier basis,” she said. “Our clients are mid-market to large clients.”

The company’s software-as-a-service platform allows for easy startup within days, without third-party integrators, and lets clients buy the services in only countries they choose, Guez said. The Papaya system incorporates different classifications for payroll payments by country so it can receive payroll orders and disburse the payments accurately in different locales, Guez said.

“If you send it locally, it’s very easy to classify it as payroll — if you send it internationally, it’s very hard to classify something internationally as payroll so the bank will see it,” explained Guez, who said she has 20 years of payroll and global workforce experience.

Major rivals to battle

Still, Papaya has some big-time competition in the industry, like Roseland, New Jersey-based Automatic Data Processing, better known as ADP. It, too, has some payment offerings, and it serves 990,000 clients in 140 countries.

“Papaya is a great business and I’m a big fan of Eynat Guez,” said Dan Dolev, a senior analyst at Mizuho Americas who follows the fintech industry and ADP. “She is a remarkable leader.”

“That said, ADP has a billion-dollar revenue business in multinational payroll,” Dolev said by email. He explained that his understanding is that Papaya acts as a “global employer of record,” which is similar to ADP’s professional employer organization business, except that Papaya is global and therefore pays employees in other countries on the client’s behalf.

“We believe that the way it’s divided (between payroll processing and payments), it’s actually creating a lot of friction for the client,” Guez said. “It needs to be a seamless process. You need to calculate the payroll, then you need to execute the funds globally.”

U.S. jobs

Papaya’s U.S. job openings listed on its website indicate openings for product and marketing managers in the U.S. Guez adds that it’s seeking also to hire customer service managers and sales representatives in large numbers.

While Papaya’s U.S. home base is currently in New York, it’s expanding mainly in Austin so that office will soon overtake New York’s to become Papaya’s largest in the U.S., Guez said. 

The type of talent that Papaya is hiring is generally moving from New York and San Francisco to Austin and that’s why Papaya’s office there is becoming a key outpost, she explained.

Guez said she splits her time between New York and Israel. Her co-founders include Ofer Herman, who is the company’s chief technology officer, and Ruben Drong, who is its chief innovation officer.

In the future, she foresees potentially partnering with banks to be able to offer financial services to employees, if they consent to be marketed to through their employer. Conversations with European banks about that possibility are underway now, Guez said.

Fintechs are pushing the Federal Reserve to consider allowing nonbanks access to the new real-time payments network that the central bank plans to launch next year.

The Financial Technology Association, which represents fintechs that include Block, Marqeta, Stripe and Wise, among others, is urging the Fed to make direct access to the new faster payments system, called FedNow, more widely available so fintechs can tap the new service without going through banks.

Generally, only licensed banks have access to the Fed’s master accounts, giving them clearance to use FedNow’s faster payments system when it’s available, but non-bank fintechs argue it’s short-sighted to exclude them from the same direct access to the new public system. While there is also The Clearing House’s rival RTP Network, the new FedNow system may provide more cost-effective services.

FedNow has been in development for years and is scheduled to be available for commercial use by the middle of next year. Rules governing the new system and the entities that will participate in it took effect this month as the next stage of testing in the pilot program moved ahead.

Angelena Bradfield, FTA’s head of policy and government relations, is one of the financial technology company representatives speaking out on behalf of providing those new-generation businesses more access to FedNow.

“Giving a broader set of firms, including technology-based financial companies, access to federal payments infrastructure like FedNow would help lower costs, drive competition, and give consumers greater access to instant payments,” Bradfield said in an emailed statement, reiterating the message the trade group gave in an Oct. 3 press release.

Not only would that allow fintechs to provide faster payments for consumers, whether it’s for bill payments or depositing checks, it would let the fintechs provide those services at lower fees, Bradfield argues.

Fintechs have been lobbying for more bank privileges for years. In the meantime, they’ve tried to make headway by piggy-backing on bank licenses, mainly those held by smaller financial institutions, to provide new digital services to consumers. But they’re still anxious to have more direct access to Fed facilities.

Rina Wulfing, who is the North American policy and campaign manager for cross-border company Wise, noted that other countries that have begun to implement faster payment systems, including Canada, have mainly done so with the intent of making them available to a broader set of financial institutions.

The FedNow approach “is just in such stark contrast to what we're seeing internationally,” Wulfing said in an interview. Canada, which is developing its Real-Time Rail faster payment system, has already taken nonbanks into consideration and there have been efforts to amend the Canadian Payments Act to give nonbanks access to the RTR system, she explained. “Whereas we're not seeing that type of initiative in the United States,” she said.

Wulfing is based in New York, where London-based Wise has one of three offices in the U.S., along with its biggest office in Tampa and a growing presence in Austin, said a spokesperson for the company.

While Wise is supportive of the FedNow project to speed up payments, it was also part of a letter sent last year to the Fed expressing concerns about implementing the program. “While we agree it is crucial for the Board to adopt rules governing FedNow well before the service is commercially available, we believe that the Board should ensure adequate time is taken during the process for thorough development of, and understanding regarding, the rights and obligations of the end users of the FedNow service as well as the parties that will ultimately make the service available to end users, including financial institutions, financial technology companies, service providers, and business end users,” the Sept. 9, 2021 letter said.

Given Wise’s interest in cross-border services, it’s also eager to hear more conversation on FedNow as an international system. It might make sense that the U.S. wants to shore up the domestic infrastructure first, but “the lack of conversations on next steps” doesn’t jibe with how other countries are approaching this, Wulfing said.

She noted that at least one Congress member, Rep. Jake Auchincloss (D-MA), seemed to share Wise’s concern about including nonbanks in the new real-time system when he asked Fed Chair Jerome Powell about it at a June hearing of the House Financial Services Committee.

“That’s something we’re looking at — mainly it’s for the broad sweep of banks and we’ll have to look at going beyond that,” Powell said in response at that hearing, with no commitment to do so.

Bradfield declined to discuss any details of conversations the FTA may have had with the Fed, congressional members or regulators on the issue.

To keep providing more innovative products to consumers, the FTA is more broadly seeking nonbank access to the Fed’s master account system. That’s currently a prerogative that’s generally reserved for banks.

“Having access to a central clearing facility through the Federal Reserve is the most direct way really for nonbank financial institutions to be able to provide services to their customers and it’s something that other countries allow,” Bradfield said in an interview.

Conversations about providing fintechs with more status on a federal basis, and moving them beyond a piecemeal state regime, is an ongoing policy discussion. A recent Congressional Research Service document is continuing debate on that issue, given risks and lack of regulatory experience with some nonbank players.

“Absent statutory changes, the Fed could find itself with limited ability to monitor or mitigate risks after a master account has been granted to an institution with no primary federal regulator,” the Oct. 12 document from the CRS said. “This raises the question of whether a nontraditional firm should benefit from valuable Fed services without bearing the regulatory costs applied to other users to access those services (and other benefits).”

The Clearing House, Swift, Ramp and other payments players are hotly pursuing plans to speed up cross-border payments, and grab a slice of that evolving market.

As payments increasingly move to the digital sphere and pick up real-time speed, companies around the globe are racing to extend faster domestic technologies to the international arena.

New York-based The Clearing House, the bank-owned company operating U.S.-based payments networks, has teamed with the pan-European payment services company EBA Clearing and the international payments messaging firm Swift to jump-start a new cross-border instant payments system. The companies said in an Oct. 5 press release that they’ve completed a proof-of-concept phase of the project and are delving into a pilot that they hope will transition into a commercial enterprise next year.

Their Immediate Cross-Border Payments (IXB) system will allow payments initially just between the U.S. and Europe, but will have the potential to extend to other countries eventually, said Russ Waterhouse, the executive vice president for product development and strategy at The Clearing House. While it’s allowing for payments in 30 seconds or less now, the goal is to reduce that timeframe to 10 seconds or less, he said.

By tapping new real-time payments systems around the world, including The Clearing House’s RTP Network and EBA’s RT1 system, the pilot participants believe they can improve on current cross-border payments by linking faster domestic payments systems that are available 24 hours a day. For now, they’re targeting their efforts at business-to-business payments, as opposed peer-to-peer payments, such as remittances, Waterhouse said.

“We're now very close to actually having a production version where customers in the U.S. can initiate a transaction on RTP and have it land in Europe in Euros on the RT1 system, and be accepted and processed in Europe, end-to-end, in something around 10 seconds,” Waterhouse said in a Friday interview.

Bank participation

There are 12 banks participating in the pilot now, but it’s tapping the “intellectual firepower” of about 25, with all of the banks interested in being part of the commercial rollout next year, Waterhouse said. Transactions consummated in the pilot are real, but the participants are keeping a $25,000 lid on them so as to manage risk in this testing stage, he said.

The companies are revving up their plans just as payments players from around the world gather in Amsterdam starting today for the Sibos financial services conference that will take up topics about “embracing the digital landscape.”

The conference presents an opportunity to discuss the project and the possibility of extending its reach by way of discussions with some the 8,500 conference attendees, Waterhouse said. Eventually, he expects IXB may extend to include the Canadian dollar, the Australian dollar and the British Sterling Pound, among others. All of the countries that have real-time payments systems, which is some 50-plus names, are candidates for collaboration.

IXB isn’t the only cross-border effort underway aimed at improving cross-border payments. The Bank for International Settlements (BIS), which is based in Basel, Switzerland, has a similar project called Nexus in which it has locked arms with the Bank of Italy, the Monetary Authority of Singapore, Central Bank of Malaysia and other entities to link the payment systems of Singapore, Malaysia and the Euro area.

Fintechs like Ramp are also jumping into the ring to solve the issue of slow, complex cross-border payments. That company told Payments Dive last month that it’s seeking to expand in the $120 trillion B2B market by offering clients cross-border services.

CBDC efforts

In a different cross-border payments tack, BIS also has another initiative called Dunbar underway, with that project attempting to tap the technology of governments’ digital assets, known as central bank digital currencies (CBDCs), to bolster cross-border transactions. In this case, BIS is working with Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore and the South African Reserve Bank.

Swift is also pursuing the CBDC approach, eyeing potential benefits of improving cross-border payments with those digital asset channels. Last week, Swift said it’s shown in two separate experiments that it can create such an interoperable, cross-border CBDC payments system by way of distributed ledger technology.

“This important step forward builds on SWIFT’s core capabilities and means that as CBDCs and tokens develop, they can be rapidly deployed at scale to facilitate trade and investment between more than 200 countries and territories around the world,” Swift said in an Oct. 5 blog post.

The CBDC route is not one that The Clearing House is backing, Waterhouse noted. His organization and many financial institutions in the U.S. have taken issue with the technology behind CBDCs, rejecting it as an answer for improving cross-border payments. 

Indeed, The Clearing House last year urged U.S. government officials to proceed with caution in even considering development of a central bank digital currency, saying it could do more harm than good. The Clearing House said in a July 2021 press release that the “introduction of a U.S. CBDC has the potential to destabilize both the domestic and foreign banking and financial services sectors, and to make illicit activity using the U.S. dollar easier.”

As the rivals proceed with their disparate and overlapping strategies for improving cross-border payments, one scheme or another is likely to improve the international system for passing payments sometime soon.