As banks all over the country debate the merits of faster payments, Independence Bancshares of Greenville, S.C., is forging its own real-time payments platform.
The real-time capability, which is scheduled to go live this summer, would put the $109 million-asset bank ahead of most of its peers; the industry typically settles transactions in overnight batches. Many banks' core banking systems are more than 20 years old. Only a small number have systems that can handle straight-through, real-time transactions.
Independence recently filed several patents for mobile payments technology, including: one for real-time, secure transaction processing; one for processes that control the format and routing of electronic messaging in real-time and near real-time; and a third for authenticating and provisioning accounts, devices, payments and compliance functions.
CEO Gordon Baird shared his thoughts with American Banker on why it's important for banks to settle transactions in real-time and what his bank's new platform will look like.
You've said you're building a digital payment clearing bank. What does that mean? What would that look like?
Baird: We're developing a completely new system for processing payments around banking activity. We're providing a new set of settlement plumbing infrastructure optimized for the mobile channel. Most U.S. banks process payments in a batch at the end of the day. They've been doing that for 30 years and it hasn't changed. Straight-through or real-time processing exists in other industries and in banking in other parts of the world, and that's what we're doing. We're building a payment infrastructure for the mobile phone that is real-time processing. When you move money from account A to account B, that transaction happens in real time, not three days later. It improves efficiency, it lowers your cost, it lowers your fraud and credit risk, and it adds better utility for the consumer, because they don't have to wait the next day or multiple days to get their money. And the bank doesn't have to take that intra-period credit risk to advance funds when funds haven't been received.
Nacha tried last year to get the automated clearinghouses to offer same-day settlement of funds but big banks blocked the move. The big banks have clearXchange and FIS has its PayNet network for real-time payments. Where do you guys fit in?
We're better than all the ones you just described. PayNet and clearXchange, at the end of the day, still settle the next day. They have real-time messaging, but they still aren't [doing] direct straight-through, real-time processing. A lot of the backbone to that stuff still settles using the automated clearinghouse. ACH isn't bad. But the bank is taking that overnight risk. They're memo posting, blocking off the account, but you still could be deficient. Even an ATM transaction settles the next day via ACH. ACH and Nacha are trying to move to intra-day settlements, which is positive.
By mid-summer we'll have all this [Independence Bancshares' real-time system] up and running and in place. We will be one of the few real-time processing banks in the U.S.
Is that for on-us accounts within your bank?
Yes. And then connectivity to others that adopt technology similar to ours. We'll let other institutions opt in to this technology, without it being disruptive or having to replace any existing infrastructure they have.
How would you deliver the technology to other banks?
We're designing it as platform as a service. If you think about what Salesforce did to customer management, it's cloud-based and web-based, you can run a program separate from internal systems. It can be fully embedded in existing systems or an add-on product, like other services that run independently. We have a sophisticated capability to integrate with all other types of data. We're building middleware, and an ability to connect to all kinds of other systems, manage that data and analyze and store it in a highly-scaled, real-time environment that doesn't exist on any existing core system.
Can you explain how your technology works?
Roughly. I can't get into the super nitty-gritty. In our system, the second you hit a single transaction, it automatically flows through all the systems from start to finish. It's a real-time allocation back and forth of transaction activity. We're using a secure, stable, encrypted environment.
How far along are you on this path?
By the second half of this year we'll have full capability.
Would you want to partner with a startup and provide payments services behind the scenes?
First and foremost we're a bank. We're focused on our customers, we want to expand our products and attract new customers to our bank. We're open to working with and talking to other companies that are complementary to what we're doing.
Are you working with any technology partners?
We have our own internal developers, we have our own engineers, but we also have relationships with software vendors, some in financial services, some in data management. We do our own architecting and engineering and we use external firms for consulting and development and some components of the software code.
What about many bankers' objection that real-time payments are too risky?
Having a real-time system is different from providing real-time access to funds on an old system. If you had a real-time system, real-time funds would not create risk. When you ask a banker do you believe in real time payments, part of the reaction is “We've always done it this way.”
For this to work well, would all banks need to be providing real-time payments simultaneously?
I don't think you have to. We will transition over time. The mobile channel is starting to develop an almost independent life. Rather than make mobile backward compatible, you can build that in real time. Who's best positioned to win mobile? Facebook, Apple and Google. They already process in real time. They don't settle in real time. The new magic is both processing and settling the payments in real time on a straight-through, bank-account-to-bank-account basis. Banks have to get there because all these guys are on to this already.
One of the nice things about doing this as a bank is we're backward compatible to ACH and Fed systems. We can exist off all the existing platforms and offer a complementary new platform.