Artificially Intelligent with Sam Maule and Maia Bittner

FedNow or FedLater?

• Sam Maule, Maia Bittner, Rachel Morrissey

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How did a payment system from Japan in 1973 pave the way for the digital wallet in your pocket today? Join us as we uncover the fascinating history and rapid evolution of faster payment systems worldwide. We take you on a journey from Japan's groundbreaking Zenjin system to contemporary giants like the UK's Faster Payment System, Brazil's PIX, and India's UPI. Along the way, you'll hear my firsthand experiences from a recent FedNow feedback session in Utah, featuring insights from industry leaders like MX and Galileo. 

Ever wondered why some transactions are instant while others take days? We break down the complexities of payment systems, diving into the mechanics of ACH, RTP, and the newly introduced FedNow. Learn about the crucial differences between push and pull payments and how banks manage the risks and fraud associated with each type. Through real-world examples, we emphasize the importance of maintaining a balance between transaction speed and security. Discover why certain transactions might seem slow but are actually designed to protect you from fraudsters who adapt quickly to new systems.

Is FedNow poised to revolutionize the financial industry like Zelle or UPI? In our final discussion, we compare these two real-time payment platforms and debate FedNow's potential to become a game-changer. We invite you to share your thoughts and feedback via LinkedIn or Twitter, and suggest future topics you'd like us to cover. Don't miss this comprehensive exploration of faster payments, filled with intriguing anecdotes and expert insights. Thank you for tuning in, and we can't wait to hear from you on our next episode!

Hosts: Sam Maule & Maia Bittner


Maia Bittner:

Hello, hello. You are listening to the Artificially Intelligent podcast. I am one of your co-hosts. Your perpetual fintech intern, Maia Bittner.

Sam Maule:

Hey everybody, and I'm Sam Maule, the other intern. I need good t-shirts. I really do. I need t-shirts for this.

Maia Bittner:

It's probably the intern's job to make the t-shirts.

Sam Maule:

Oh, you know what it makes me think of when I join Google and you get the Google hat with the stupid propeller on it. I do have it behind me somewhere in that movie, the Intern. My daughter asked me if that was real and I died laughing and said yeah, they really do. They give you the hat. That's a real thing.

Maia Bittner:

It is a real thing we need like branded artificially intelligent podcast coffee trays. I love a good coffee tray. I love a good coffee tray. Right, I miss coffee trays.

Sam Maule:

Lord have mercy reminds me of growing up. Well, Maia, I've got an exciting couple of days coming up Tomorrow. I jump on a plane and head to Utah.

Maia Bittner:

You know a lot of good fintech in Utah.

Sam Maule:

Oh man, silicon Slopes baby, I love me some Utah. Yeah, I'm flying out to join MX and Galileo and a bunch of other folks because the team behind FedNow so Mark Gold and his team, mark is the chief payments executive for the Federal Reserve Financial Services System, or basically FedNow, and they're kind of doing a tour around the US to talk with folks in this space to get feedback, which I like right. It's a chance to sit down with them, talk about payments, talk about FedNow, what we've seen ask them a ton of questions, and so that made me think what a great opportunity to tap into the high brain that is Maya Bittner to talk about faster payments, talk about FedNow and where we think the US is on this. But I have a trivia question. As always, I love doing this, everybody, I love doing this. Do you know what was the first pastor payment system that was launched in the US? Sorry, globally. What was the first pastor payment system globally? What country had the first one?

Sam Maule:

And man, I hope I have this right. And you mean like bank payments, what we about is ach in the us a 24 by7 300 365 type system. I do believe I have this one right. What country?

Maia Bittner:

I'm gonna go. I'm gonna go Japan damn it.

Sam Maule:

You know what? We're gonna get a new show which is Sam Never Gets Anything, by Maia Japan 1973, the Zenjin system. I am so disappointed, as usual, that you got that right. It's amazing, folks. What college should you go to again?

Maia Bittner:

because it's good esteemed, highly prestigious Franklinlin w olin college of engineering they, they rock everybody.

Sam Maule:

I went to southern illinois and I didn't know that and dang it, Maia got it that on right. So yeah, it's funny, because faster it just makes sense.

Maia Bittner:

Faster payments was about the time when japan. I mean Japan is no longer as dominant a world force, but the 70s and the 80s man Japan was really killing it. They had a lot of innovation.

Sam Maule:

My first job out of the Navy was with the Japanese company in 1994, katsushiro Rone Corporation. I spent about a month studying Kaizen believe it or not, Maia in Japan. Wow, that's cool Because it was hot as anything back then.

Maia Bittner:

Yeah, yeah.

Sam Maule:

Loved it. Yeah, well you're right. And Zenjin I'm sorry I'm saying that wrong 1973 in Japan, and then you know there's been multiple others. Like when I lived in the UK, they had the faster payment system and that goes back to 2008. You've got what PIX in Brazil that would be. I think that was the second largest RTP market by volume. Was PIX. They're responsible for something like 90% of all RTP volumes in Latin America, the big one UPI. So we're talking India. It's a beast. Upi is a beast, everybody really want to see a payment system that just rocks it.

Maia Bittner:

UPI, yeah, and then in the US Really impressive, admirable.

Sam Maule:

Yeah, yeah, I mean UPI is unbelievable. They get like 400 million users of over 500 banks and PSPs and payment service providers that are on it and it's really the biggest in the world. Interesting enough, it also provided the framework for Google Pay, my old alma mater of all things. So it was there and in the US RTP was, I think, 2017, if I remember right 2015, by the clearinghouse.

Maia Bittner:

Uh, yes, that sounds right. And, sam, you know I have a, I have a. I have a silly question for you. I know, so I know a lot about the concept of getting paid up to two days early. I would say I probably know more about this concept. I am probably one of the top 10 most knowledgeable people in the world on this concept, which the neobanks have really popularized. I think it was maybe first invented. I actually am not sure on this. I think Rushcard, if you know them.

Sam Maule:

That sounds right. I worked for T-SYS back in 2010 and 11 on their prepaid platform, which Rushcard was on, by the way.

Maia Bittner:

Wow, I know.

Sam Maule:

Date myself.

Maia Bittner:

Hey, T-SYS. You know, my first merchant bank account was through T-SYS.

Sam Maule:

There you go.

Maia Bittner:

So I know a lot about getting paid up two days early we could talk about.

Maia Bittner:

You know we should do an episode on that.

Maia Bittner:

It's a good concept, but one of the things in contrast to so the neobanks have really popularized getting paid up to two days early, so much so that lots of traditional brick and mortar banks also provide paychecks up to two days early and getting paid two days early, which people really love. But it's always in conflict with having a reliable time you get your paycheck and from my understanding that was always one of the ideas with why ACH took so long or was so slow. It was that there was a ton of slack built into the system so that you could say you always get your paycheck every other Friday by 9 am or whatever time in your time zone and that people could count on that. They could plan on being at the grocery store with their cart of groceries in line at 9 am Pacific and have the money to pay for it. Does RTP right? Does it sort of erode that value prop at all, or how do you see it coming into fruition, given how much consumers like the reliability of knowing when an ACH payment's coming in?

Sam Maule:

Yeah, I think it gives you optionality around that. I don't think it's going to displace it. Um, you know, it's funny whenever you talk about payments, just like you were saying, right, um, real time, near real time, why is there a delay? Do we really need real-time payments? I mean, there's this has been the debate that's gone back and forth on this and that's that's what makes um fed now really interesting, because it's really the first new bank payment rail in the US since the 70s, because, I mean, ach would have gone back to what 1978, same day ACH was, I think 210. And then you know, like we talked about RTP, but that's the clearinghouse. I think it was 2017. So this is the first coming out of the Fed payment rail that we're talking about. But I think there's some things that we got to kind of talk through. We're talking about ACH and real-time payments and FedNow and all that, and it's really the difference between push and pull payments. Folks. We're getting it in the weeds right now. So payment geeks right, going back and forth on this. So you know, I don't know what to say. Get a cup of coffee, get a cappuccino, sit down, grab a pen and pencil, cause this should be fun Cause it is kind of important to talk about push versus pull.

Sam Maule:

So when we talk about push payments, you know we're talking about like bank transfers. So you know you're going in and telling your bank for funds from one account to another. This could be peer-to-peer payments. So everybody's favorite, because now we're talking like Venmo, paypal, zelle, cash App all of those Loan disbursements is a really good one Once the loan's approved. Pushing those funds out, if y'all don't know what I work for Move, so we move money. So this is the geek stuff that I absolutely love to do. Mobile wallet transfers that's another one. So again we're still in the push payments category, but now you're sending money from one wallet to another. So now we are talking everybody's favorite, apple Pay or Google Pay or Samsung Pay that's examples of push payments. Poll payments are different, because on a poll payment, that's where the payee, they're initiating the pulling of the funds from the payer's account. So we have this push versus pull type thing.

Maia Bittner:

One of the things I'm always telling people with push versus pull is, from a bank's perspective, they have all of the risk of payments. Well, let's see I want to be careful of how I say this, but OK, well, generally they have the risk of payments that they initiate, right, and they hold more liability for those and ensuring that they're not fraudulent. And so sometimes when people say you know push versus pull and you're talking about payer and payee but this is relevant even when you're transferring money between two bank accounts you own, or two wallets you own People complain. They're like, oh, I'm trying to transfer and you're transferring money between two bank accounts you own or two wallets you own. People complain. They're like oh, I'm trying to transfer in $5,000 from my other bank account and it's taking forever. And I tell them that's a much riskier transaction.

Maia Bittner:

Yes, if you want it to happen faster, right, because slowness is always friction introduced to reduce fraud and risk. It's always friction introduced to reduce fraud and risk. You go to your bank account that has the money and you push the money from your bank account to the destination bank account and that is almost always going to get your money transferred faster just using traditional ACH rails than if you are at your destination bank account and that's where you initiate pulling that transfer in, and so this is a way that the push versus pull even comes up are at your destination bank account and that's where you initiate pulling that transfer in, and so this is I mean, this is a way that the push versus pull even comes up before we have RTP or FedNow, because banks introduce delays along the way to mitigate their fraud exposure.

Sam Maule:

Yeah, and again, I can't stress that enough it's you're introducing friction to again reduce fraud, right, Because that's what we were talking about. You're talking about real-time payments, but then you've got to include real-time fraud, right, Because, trust me, the fraudsters are on top of this. They know the regs, they know ISO 8520 better than any of us. They're really damn good at understanding messaging protocols and everything else. So, yeah, they're really damn good at understanding messaging protocols and everything else, so yeah.

Sam Maule:

So again with poll payments, now we're talking like direct debit, preauthorized payments or standing orders. That's typically the categories we're talking about. We're doing those. So right there, you know. We're talking about push versus pull. So now you got to talk about ACH versus RTP, versus FedNow, because with ACH, one thing you've really got to take into account is that ACH is bidirectional. It offers both push and pull payments, and it's very important to get in your head. We just talked about what those are, right, when we're talking about RTP and FedNow, that's push payments. So it's different. But the funny part is that RTP and FedNow are really the only two in the US are operating in real time. So ACH is still subject to everybody's favorite thing banking hours Monday to Friday 5 to 7. We're talking batch processing. I was going to say we're talking batch processing Batch.

Maia Bittner:

I was gonna say it's the batch system, right, there's just only so many files and only so many windows and they've probably got 70s era computers just running through, cranking through those files. You either make the cutoff to get into the file you want or you don't, and that batch processing I think is really hard for don't. And that batch processing I think is really hard for people to understand because batch processing doesn't make sense to us as people. Right, it's like I sent a payment and it showed up, you know, right away. Or but like then I sent a payment later and it didn't show up for a day. And it's like, well, well, the later payment, you initiated it outside of banking out, right, it's subject to all of these like um concepts that I don't think should necessarily apply in today's always on 24, 7 digital age yeah, I mean, we constantly get that right.

Sam Maule:

I can. I can go on whatsapp and sit there and talk in real time. Facetime I can send, I can, you know, take a picture and send it instantly. Yet when we're talking about moving money, especially from that US perspective, we do have these friction points or delays built in. And if you understand the system and you hit that first batch file, you're in good shape, right, you hit it a little bit earlier in that morning.

Sam Maule:

It might be next day. It's somewhat like doing your taxes in the US. Hey, irs, how much do I owe? I don't know why. Don't you go figure that out? Take a mini guess. We are pretty funny when it comes to how we do this. So FedNow gets interesting, right. I mean RTP man. I'm trying to remember numbers here and I don't have these on top of my head, so listeners, don't hold me to this. I want to say with the clearinghouse. Well, actually we should define what the clearinghouse is, but essentially we're talking about the clearinghouse. I think we're talking about what top 20 banks in the US that make that up. If I remember right Maia hold me to that it's a group of the largest banks. Essentially that is the clearinghouse. So again, a little bit different when we're talking about what this means.

Maia Bittner:

Well, the clearinghouses exist, because without the clearinghouses, basically, you know, there's thousands of banks in the United States and if I write you a check from my bank, which is called the Whatcom Educational Credit Union, and you go deposit it at your bank, what's your bank called?

Sam Maule:

I bank at this really unknown one called USAA.

Maia Bittner:

Love it. I'm such an old veteran here. Usaa has to go call up Whatcom Educational Credit Union and draw the money from them. It turns out this is a well-known concept in computers. It's like if you've got 5,000 banks that all need to interact with 5,000 banks. It's a lot of connections and is a real pain in the ass. The clearinghouses are intermediaries that help facilitate that, so that every bank doesn't have to be able to draw funds from every other bank in the country.

Sam Maule:

Yeah, and it's an important point, because the clearinghouse we're talking about a private sector player in here. It's not the federal government, it's the private sector that is doing this, which is a very American thing. I'm a capitalist, I've got no problem with that happening. But that's what makes FedNow interesting, because it gets back to like FedWire. Fedwire, if I remember right, was launched in 1970. So again introducing a rail that more or less is backed by the federal government, that's what makes this interesting. What will make it even more interesting is adoption, because it sounds great.

Sam Maule:

You've launched it, but how many banks or credit unions are actually on it? Because in the US this number always gets tossed around. There's somewhere in the neighborhood of about 9,000 banks and credit unions in the US. We are definitelya freak show as compared to any other country in the world. What is it? Canada? They have like five. I think you can stand in Toronto and like slap all of them, you know, with a very long stick at the square. In the US that's impossible. Something like 4,400 banks and then another 5,000 credit unions, and they have to implement the FedNow standards in order for that to be used. So that's very important. If you're using FedNow to move money, the other bank or credit union has to be set up in order to move that money. It's back to messaging.

Maia Bittner:

What's involved in implementation? Right, Like at a technical level, does it mean that their core has to support it? If their core does support it, do they just sign a doc and they're on it? Does their business team need to set up risk policies for this new type of money movement? You introduced this conversation by saying that the chair was talking to Galileo. Right, that's a issuer processor. Is Galileo going to be supporting FedNow and then all of Galileo's clients will immediately have access to it? What does it look like from a technical perspective?

Sam Maule:

Yeah, that's a really good question and I'm going to preface this with at Move we don't support FedNow yet, so it isn't something that we currently have implemented. Right, we get asked this a lot, right, do you support FedNow? Can you do FedWire, you know? Can you do OCT or ACT or these other methods? And the answer is for all the others, yes, we don't have FedNow yet.

Sam Maule:

So I think part of it that makes it interesting is understanding the actual payment transaction flow for FedNow. So again, I apologize everybody, I told you we're going to get in the weeds, but the weeds are fun, everybody, sometimes you need to be in the weeds. So let me walk through the transactional flow for this. A couple of steps. The first is, shockingly, authorization. I don't think that's shocking to anybody.

Sam Maule:

So when you're initiating the FedNow payment and again we're talking about messaging protocol here, whoever the individual, the entity, they have to obtain authorization from the recipient to debit or credit their bank account. So that consent is going through the messaging layer. And then you jump from there into the initiation. So the sender, which could be a business or an individual, is initiating a payment via the financial institutions interface. There you go, Maia, so the financial institution has to have an interface, has to have the modality, a way for you to actually initiate this and kick it off. So for smaller banks, yeah, that would make sense. It'd be like a Q recipient's bank account information amount to be transferred purpose of payment.

Sam Maule:

And that's all. You're still outside FedNow, by the way, this is just prepping in order to get this system. And then you have what are two phases of the transmission Transmission phase one, which is the sender institution, so that's a bank or credit union, and that's it. By the way, the bank or credit union is going to submit the payment message. For all you payment geeks, that's an ISO 222 format. Man, I was blanking out on what the ISO format was Somewhere. Wade Arnold, the founder of Move, is just shaking his head. He's so disappointed in me right now that I forgot what the format was. I apologize to all you other payment geeks. There's so many different ISO standards. Give me a break.

Sam Maule:

So they're going to initiate that payment message via the FedNow service and it's going to validate the payment message and they'll actually make sure it's in a proper format, the specs complies with all standards, all information is provided in that. And then it goes through a second phase, which is they're going to send the contents of the payment message to the recipient's FI to seek confirmation, and basically that's where the handshake is going to happen, where they accept the payment. And then we get into the wonderful settlement and clearing. So they're going to settle the payment debit and credit the master accounts within the FIs. What's interesting is the timeout right now is set at 20 seconds. So if it doesn't occur within 20, there's your real time, everybody. If the messaging doesn't sync and everything happened within 20 seconds, you're going to get the error message to do this, but then the settlement is going to occur. It's communicated by the Fed now. So that's the flow for this. So wonderful flow.

Sam Maule:

But you got to remember that the FI does have setup it needs to do. You're going to have to create the equivalent of, if this was business, a wire desk or something like that. You're going to have to have the capability to initiate this and do the authorizations there and push them through. So what's interesting? I took a look this morning. I think it was 470 banks and credit unions have now signed up. This was rolled out what July, I think, of last year, fednow, remember right. So you're up to about 470 banks and credit unions out of 9,000. Doesn't sound like a lot, but to be honest, the take-up rate on RTP is not huge either.

Sam Maule:

It just tends to be some of the bigger players.

Maia Bittner:

Right, right. My question is you know so the take-up rate hasn't been that high, although you know, and you've got to look at all the different interactions because both the sender and the recipient need to have it. I've got to admit, sam, the first thing I thought of was fraud, right? What does this do? Well, we should.

Sam Maule:

It should always be the first thing you think of. When I was at Google, when we talked about Google Cloud, we always started with this concept of zero trust right, which I love, love that. Which is yeah, it's a cloud computing terminology, and, when it comes to payments, the very first thing we should consider is fraud.

Maia Bittner:

Zero trust. I mean, I feel bad about that. I feel like the first thing we should consider is consumer value and what benefits people are getting. But that's not the first thing I think of. The first thing I think of is fraud. How little space there is in this new system to review and account for fraud. I got really hung up. You said like consent, and I'm like, oh man, I wonder about all the details of that. What recourse do you have if you say I didn't actually consent to that?

Sam Maule:

Wonderful. The FedNow transactions are final and irrevocable. God, I can never say that word, but you went to a better school than I. By design they are. So it's again. I agree with you. There's your pressure right, it's please understand. This isn't like using your credit card where you can do disputes and chargebacks. This is, you executed it, congratulations.

Maia Bittner:

So Zelle payments started at what I would pronounce as irrevocable and I don't know if you saw they just kind of clawed that back because it was unsustainable, it was not meeting customer expectations and people were losing too much money on Zelle and they were losing trust as a platform.

Sam Maule:

And the take up for Zelle has been let's be honest, it's been a success, right, I know I made fun of it when they named it People love Zelle.

Maia Bittner:

A terrible name, but when?

Sam Maule:

it first came out, we're going to call it Zell and I'm like, as you know, as is typical, we're like that's the best you could come up with. How much money did you pay for that? And, by the way, I was in the car with my 22 year old daughter from school and we were talking about moving money and she goes that's her preferred method for P2P is Zelle. So congratulations for them and I think that movement toward you know how do you? You need those safeguards. Let's just be honest, right, because the reality is, anytime you introduce a new payment modality remember when Apple Pay came out, the fraud rates were pretty damn high.

Maia Bittner:

Yes, I remember that yes.

Sam Maule:

And you're talking really the gold standard when it comes to technology companies, and they took a massive hit.

Maia Bittner:

They were able to withstand it because they're such a big company. I actually think there could be a really cool opening here, for you know, there's so many fraud startups. Is one of them going to specialize in RTP? Oh, I think that would be a big potential, because my guess is that, without really investing in that, when banks implement this RTPp standard, man, they're gonna start like losing their shirts until they learn, and you know what now I'm gonna have to go do some research.

Sam Maule:

I mean, what's happened with, like pics and upi and all these other systems globally? Have there been startups? I don't know the answer to that. This is why we're the perpetual interns. Everybody you should see our faces, like Maia usually kicks us off. We're like like, oh my God, what a good idea. So now you're going to make me go down the lines of are there these one-off fintechs around picks or UPI or you know, you take your pick that have been introduced to manage that?

Sam Maule:

Hmm, I'm now stumped. That's a really, really good question. Well, here's what I would say. It's still early days, right. It's not even been a year yet. You know we used to joke around that FedNow was going to be FedNever, or you know that was the running joke, right, and I know when they targeted for it to go live, we were all like you know it's not going to be FedNow, it's going to be FedLater. I was one of those that choked. Too Good on them for actually getting this out pretty much on time or fairly close to it. I think this is a wait and see it's optionality and I'm okay with it.

Maia Bittner:

I don't have an issue with it? All right, so back to our what are even the basic use cases for FedNow. Are payroll processors jumping onto this?

Sam Maule:

I don't think anyone's, I wouldn't say jumping on, but yeah, definitely from a payroll standpoint and from a here's. Where I think it gets interesting is from federal distributions right by the way, the federal government disperses a lot of money. It's like the bulk of the ACH system disperses a lot of money.

Maia Bittner:

It's like the bulk of the ACH system.

Sam Maule:

Yeah, if you really want to see some money flow, check out your federal government and even states, right? I mean, if you look at EBT programs I love programs like that because they're repetitive, right Every month you know what that churn is going to be. So, yeah, I do think those are going to be where you're going to see more adoption, right? This could be interesting for, like, gig workers Right, to get their money a heck of a lot faster, which we've. You know there's been discussions around this over and over and over again. You know what's it going to be. I think where it gets interesting is what are the use cases for SMBs. So you know, businesses, that cash flows, everything. That's where I think this is going to be interesting.

Maia Bittner:

I feel like gig workers already get all their payouts instantly now using push to debit.

Sam Maule:

Yeah.

Maia Bittner:

But that is quite expensive for the platforms to provide. So if they could switch, they're saving money, which means they're either making more money or, you know, maybe the gig workers get better rates in more money, or, you know, maybe the gig workers get better rates and so that could be really interesting as if um like I, I think that's going to be the um. I think one of the biggest impacts will be probably hurting visa and mastercard by cutting out push to debit revenue yeah, well, that and the uh, what is it?

Sam Maule:

um, what is it? Uber and Airbnb have now right the bank payment side of this. Use my bank. I forgot how. What do they call that? Is it use my bank? I can't remember what they call that terminology, but that optionality to basically just debit my account in real time.

Sam Maule:

Yeah Right, so there you go. Watch interchange just disappear. As an ex-TSIS person and I will tell you that 15 years ago we looked at payment processing as a commodity and going to continually see shrinkage around revenues there. It's fascinating to see the world where the world of payments is going um, which is why geeks like you and I just get so excited when we see stuff like this roll out, and it'd be great to see what adoption is like for this. Let's give them a little bit more time and I'll check back in with you after the conversation this week with the team and some of the questions you're able to ask them, but I think, if we go any farther, down this.

Sam Maule:

This will be used as somebody trying to go to sleep at 10 o'clock or 11 o'clock at night. Listen to Maia and Sam talk about ISO standards and messaging layers. All right, so that's it for this show, fednow. What do you think, everybody? Is this going to be the next Zelle? Is it going to take off? Is it going to be the next UPI, or did we just get it wrong? Love to get your feedback on it. You want to reach out to me. Linkedin is always fun, or Twitter, same with Maia. I know that Everybody thanks for listening. We love having you here and, hey, give us some topics. What do you want us to go deep on? As long as it's not ISO 8520, we'd be happy to do it.