"Financial Inclusion Is Very Important": A Conversation about Payments
Charles Davidson: Welcome to another Economy Matters podcast. I'm Charles Davidson, staff writer with Economy Matters, the Atlanta Fed's digital magazine. Today I'm chatting with Nell Campbell-Drake. Nell is vice president of strategic business relations and outreach with the Fed's Retail Payments Office. Nell, thanks for being with us today.
Nell Campbell-Drake: Thank you so much, Charles, for inviting me.
Photo: David Fine
Davidson: Yes, sure thing. So we're going to talk about payments. There's a lot going on in the payments world—technology is advancing quickly, faster payments, a huge topic—so we'll jump right into it here. Nell, can we start with a couple of baselines, first off? Can you put in a little perspective just how big the payments industry is, and how important it is to the economic life of the country?
Campbell-Drake: Charles, that is a very good question to start with. As we think about the globe, payment services are nearly a $2 trillion-a-year industry, accounting for about a third of bank revenues, according to a McKinsey study. And to put some more perspective on just the U.S. payments landscape—the Federal Reserve Payments Study revealed that in 2015, consumer, business and government agencies executed about 144 billion non-cash and non-wire payment transactions—and that totaled about $178 trillion. So that puts some perspective on how big the payments landscape is.
And something else that's interesting, too, is that about 550 million payments, worth about $680 billion each day, actually go through the U.S. payments landscape. So if you think about check transactions, which we have experienced a great decline with that particular payment instrument—we saw about 17.9 billion check transactions to occur from the 2015 payments study .
And then, lastly, talking about those transactions that flowed through the automated clearinghouse network, which we call ACH: NACHA revealed that in 2017, there were about 21.5 billion transactions that were processed in the U.S. ACH network, and that was worth about $740 trillion—so that was an increase of about 5.7 percent in transactions, and about 6.9 percent in value.
Davidson: Right. So, Nell, just for folks who aren't payments experts—ACH, what kind of payments typically go through that system?
Campbell-Drake: That's a good question, too. ACH—again, it stands for "automated clearinghouse. Think about your everyday life payments. If you are working, you usually get direct deposit, so now many businesses do not issue checks to their employees. So if you have direct deposit from your employer, that is going through the ACH network.
Davidson: Okay, all right. I think I mentioned faster payments in the intro—big topic right now in the payments universe. So, Nell, what does that term really mean, and why is it a concern for the Fed? Why are we interested in faster payments?
Campbell-Drake: "Faster" encompasses a number of elements associated with a payment transaction. It includes such things as the origination and the clearing of the payments transaction, which allows a consumer or business to have funds availability that goes to the respective beneficiary. It also includes the settlement of the transaction—that is, the transaction finality between the two institutions, and this includes the originator of the transaction and the receiver of the transaction. So you think about the U.S. In the U.S., we have various platforms for making payment transactions, and what we've seen is that we need to improve our technology, because there are so many advances taking place now that we're having to look at our technology to make sure that we're meeting the needs of the end users, and those end users include us as consumers as well as small businesses and corporations.
And back in 2015, you may recall that the Fed did a study to identify what we needed to do to improve the U.S. payments landscape—because we were behind some other jurisdictions, and we thought it was important for us to take a really good assessment of what did we need to do so that we could remain relevant, and we could make sure that our U.S. payment channel stayed safe, secure, accessible, and resilient. So one of the key things that we were looking at was the opportunity to improve the speed in our payments landscape. It wasn't that it was slow, but there were still opportunities for us to improve areas with regards to the flow of the transaction, the data flow that supported the transaction, and the availability of funds to the beneficiary.
Davidson: Right. So, Nell, the Fed was part of—I guess we were one of the central players in creating the task force, the Faster Payments Task Force that, I guess in a nutshell, has called for a faster, ubiquitous—meaning everywhere—inclusive, everyone can access it, and safe payments system. As you mentioned, the payments system we have now is not exactly slow, so why does it need to be faster?
Campbell-Drake: That's a very interesting question, and I will tell you—you will get different perspectives in regards to that. When you think about just the overall general public and the payments landscape, everybody has different preferences, so it's all about the end users' experience. And so we're not saying that some of the channels that we have in place today are not meeting those needs, but there are opportunities for improvements to accommodate those who want things a little faster. So as we began to look at our U.S. payments landscape, we realized that there were opportunities to enhance the existing technologies that we have, as well as opportunities to look at new opportunities, and this is what created the formation of the task forces that the Federal Reserve facilitated. And there were actually two task forces. One was the Faster Payments Task Force, and the second one was the Secure Payments Task Force.
A lot of emphasis was initially placed on the Faster Payments Task Force, and it had three objectives—the first one was to represent the views of the industry stakeholders in the U.S. payments landscape. Our landscape is completely different than many other jurisdictions. In our database that we maintain here at the Federal Reserve, we have over 12,000 routing numbers representing over 8,000 organizations that are part of the payments landscape, so that reflects some complexities that we have in just trying to make sure that we hear all voices and work as a cohesive unit in the U.S. around improving our payments landscape.
Davidson: So, Nell, if I can stop you very quickly—when you say "jurisdiction," basically you mean other countries, right?
Campbell-Drake: Other countries, yes—that's what I mean.
Campbell-Drake: And then the second piece that was important as we began to assess what did we need to do as far as improving our payments landscape from a faster perspective is we had to assess the capabilities—those that were there, and those where we still felt we had gaps. And then the third one was to look at the opportunity to bring all of the stakeholders together to have that collaboration to determine what did we need to do from a faster perspective, and identify any other effort that they felt was important around our payments improvement efforts.
Davidson: Right. So to a normal consumer, what will faster payments really mean? How will they see that in their day-to-day transactions and regular life?
Campbell-Drake: So for consumers, faster funds availability—who doesn't want their monies faster when they have been posted to their respective accounts? And then look at the opportunities where you can have same-day [settlement] for bill payments and not be charged late fees. So those are the two biggest benefits that I see from a consumer perspective.
Davidson: Right. So what else is going on, Nell? What keeps you awake at night, other than all this faster payments business?
Campbell-Drake: Now in all honesty, I really do try to get my rest at night, okay? [laughter]
Davidson: Good, we all need that.
Campbell-Drake: Because my days are already packed with interactions with colleagues across the district and System, and our role as a leader catalyst, a network operator, and a service provider in this payments landscape. But with this evolving payments landscape, there are a number of things that I think about as we look at the many choices that are available to consumers, large corporates, and businesses, regarding the opportunities for their financial services experience. You think about some of the options that we have now—you have Zelle, you have Venmo, you have Cash App that's offered by Square, you have PayPal, which actually owns the Venmo choice.
But these choices for some have created chaos, and for others it's just created an improved payments experience. But they still align with the opportunities for us in the Fed, and our role to really embrace the needs that are in the market, and then work with our industry stakeholders to look at the opportunities for a digitalized, faster, cheaper, and more transparent experience for those end users.
Davidson: Right. So what you were talking about there I think falls under the heading of what we refer to as fintech—"financial technology," squeezed together to form a new word. So what is it that you and other Fed payments leaders track most closely when it comes to the financial technology sector?
Campbell-Drake: Yes, that fintech footprint is definitely changing and shaping the payments space. So when we talk about fintech, they are looking into that niche market where they can focus on faster funds availability, the supporting information that goes with the payment instruction, along with cheaper fees and security from an authentication perspective. They are really focused on that digital-savvy user, offering that experience that's faster, cheaper, and transparent.
Davidson: Right. So, Nell, here at the Fed we often point to our role as what we call a convener—bringing people together, basically, to talk about stuff. So in the payments industry, especially at a time like this when things seem to be in a real state of flux, and things are changing quickly: can you talk about why that's important right now in the payments space?
Campbell-Drake: As I previously stated, we play a big role in the U.S. payments footprint, and we are a respected, neutral entity because we are that convener of stakeholders, and you have to be mindful that many of these stakeholders have different interests and different perspectives. But we are recognized as that leader in influencing the evolution of the improvements of the payments system, and that is very complex. But we can convene those stakeholders where they feel that they have a voice.
So as we look to work with the thousands of institutions, the millions of individuals, the millions of businesses that we have, we want to make sure that we bring everyone together so that we can ensure that the needs of the end users are being met. Now, if we see that the market cannot meet those needs, that is when we step in and look at those opportunities where we can provide services to make sure we're keeping the market competitive and that the consumers' needs are being met.
Davidson: Right. So, Nell, now turning to some internal Fed payments material here—the RPO, the Retail Payments Office—we call it the RPO for short, we like acronyms—is working on a major, multiyear upgrade of its core Fed ACH processing "machinery," I'll call it. So what are the main things that folks might want to know about that?
Campbell-Drake: Yes, we are moving to that next-generation platform to focus on driving future costs and operational efficiencies, but still providing for that flexibility and adaptability to market changes and our customers' needs. Our efforts have basically included three work streams: one is activities to strengthen our retail payments technology processes that we have in place, because again—we are an ACH operator, and we provide check services on behalf of the Federal Reserve System.
We're also looking to upgrade the ACH infrastructure, and then that third work stream is where we're looking to identify a solution that will provide a modernized ACH platform for us that's agile in order for us to be able to meet the needs of our customers, which includes financial institutions and service providers in the payments space in the US.
Davidson: Right. Well, Nell, now if I'm not mistaken—and you mentioned earlier some of the newer payment services, but they still use the same basic sort of "plumbing" or infrastructure to process and settle the transactions, I believe? So in the payments industry, I think people refer to those as rails, the "old rails." Can they handle it? Can the old rails handle this stuff?
Campbell-Drake: Yes, the old rails can handle it. But I must say this—"old" and "legacy," I actually call them "mature, proven rails."
Davidson: I like that. I'm going to refer to myself that way—"mature and proven." [laughter]
Campbell-Drake: Yes [laughter]. And these rails continue to be trusted rails, too. But with the various faster payments options that we have—especially on the front end—that are available to customers and businesses—such as the Zelles, the Venmos, the Cash Apps—these solutions are users of these mature rails, and those mature rails are the ACH rail and the card rail. The clearing and settlement for those front-end tools that allow for faster options for funds availability on the back end, they use those mature rails for settlement.
But enhancements are continuing to occur with these more mature rails. For example, same-day ACH is a good one to share, from an ACH network perspective. As you begin to look at the opportunities to have faster clearing and settlement, which helps with funds availability, the ACH network decided that they wanted to look at other additional windows to allow for the same day of payment transactions that were originated, to be settled on the day of origination. And NACHA worked very closely with the two ACH operators in the U.S.—us and the private-sector operator—and starting in 2016, they began to implement additional windows in the U.S. ACH network.
Now, for the Fed, we were truly a thought leader and an influencer in that work, because you may remember that back in 2010, we were actually the first to test the waters for same-day ACH transactions. It was an opt-in service, but it did allow the industry to get a taste of what same-day in the ACH network would entail. And then when NACHA decided that they wanted to pursue something that would encompass the industry in the U.S., this is when we partnered, in our role as an operator, to support those efforts. But again, we really were the thought leaders and the enforcers in working with NACHA and the industry on bringing same-day more holistically to the U.S. ACH network.
Davidson: Now when you say "NACHA," that's the trade association, basically, for the payments industry, right?
Campbell-Drake: Actually, NACHA—which stands for National Automated Clearing House Association—is the rulemaking body for the ACH network. So their focus is on ACH, but they work collaboratively with industry stakeholders in looking at opportunities for things to be leveraged in the ACH network, with other payment channels as well.
Davidson: So going back for a minute, Nell, to the Faster Payments Task Force—so it recommended that the Fed explore some other roles that we might need to play to support ubiquity, competition, and equitable access to faster payments. So where could that lead? What could come of that?
Campbell-Drake: Well, one of the recommendations of the task force was definitely centered around infrastructure, and there was a request for the Fed to enhance its settlement mechanisms. This was embraced, and on October 3, 2018, the Board of Governors published a Federal Register notice requesting public comments on the potential actions that the Fed could take to improve interbank settlement from a faster payments perspective.
Davidson: "Interbank" meaning bank-to-bank, essentially?
Campbell-Drake: Bank-to-bank, right. So the notice actually outlined two areas that the Fed wanted to obtain comments from the public on. One was a service for real-time growth settlement of faster payments that would be available 24/7, 365 days, and the second one was a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24/7/365 basis, to support faster payments provided by the private sector and the Reserve Banks.
So what this meant was...currently, we do not have settlement processes that accommodate 24/7/365, so this means that now we would really have those tools necessary to accommodate a real-time process in that faster payments arena. This is being explored. Comments were due by December 14 , and now the Board of Governors is compiling and assessing those results, and they are looking to come out with a response on the direction that the Fed will take, if any, around next steps.
Davidson: All right. So that's the Federal Reserve Board of Governors. So in the documents from the task force—the reports and so on—there's a lot of language about equitable access and ubiquity, access to the payments system. Can you talk a little bit about why that's important, Nell? And are those real concerns, that some people might not have access?
Campbell-Drake: That is a concern. Financial inclusion is very important, because you want accessibility amongst the masses as you begin to look at the overall U.S. payments landscape, and financial services in particular. And then, think about our payments landscape—one of the things that we definitely have a mission here at the Fed, in working with our industry stakeholders, is ensuring that the payments landscape stays efficient, safe, and faster payments stay safe and secure, and we don't have any type of quality issues with regards to the flow of those payment transactions in the U.S. landscape. You also have to think about a very secure and efficient payments system also boosts economic growth and global competitiveness, and that is something that we want to continue to look at. And then, again, the unbanked and underbanked...that is very important, because financial inclusion also helps with economic inclusion.
Davidson: Right. And when we say "unbanked," it means basically people who don't have a traditional bank account, right?
Campbell-Drake: Yes. People who don't have a traditional bank account, and they are going to look at other alternatives to accommodate their financial services. And then the underbanked are those who are still challenged in being able to have the opportunity to participate in the whole financial services footprint.
Davidson: Right. And some of those people end up accessing vehicles that aren't necessarily, in the long run, healthy for themselves financially, right?
Campbell-Drake: Correct. And it's also important to understand, too, that some make a choice to be unbanked and underbanked. It really depends on the decisions that they are looking to make in their day-to-day lives. But we still, as the central bank, want to make sure that there is accessibility for all.
Davidson: Right, so that's very important. So, Nell, in the U.S., I think our system is a little bit different from, say, the UK or the EU more broadly. We have various competing faster payments products and services. Are there pros and cons to our approach?
Campbell-Drake: Well, I will tell you that my view is that multiple options are good, and we do have a variety of options that are available to our end users. And again, that's on the front end, to help them if they are handling their services through a financial entity. And on the back end, to help those who are playing in this payment space, to be able to complete settlement of those transactions. What's interesting here is around preferences, and I always think about the four generations that are in the workplace, and when you think about that, we all have different preferences. And just to share a few, you have—
Davidson: Don't call me old [laughter].
Campbell-Drake: I'm not going to call you...I'll never call you old. [laughter] But when you think about it, just think about what those who are playing in this space, what they are challenged with. You've got the four generations—baby boomers, simplicity is very important. They still use cards, but they are the generation that still uses cash the most. Then you have Generation X. Efficiency is very important for Generation X, but that's also the generation that has the highest debt, because many of them are paying off school loans—but they love to use their cards because of the rewards that come with it.
Then you have the millennials. This is where fintech is coming in quite heavily, because they are very digital-savvy. They are not heavy users of credit cards, but they do use their debit cards. They are addicted to mobile apps, and they love social media—so influence, via social media and word of mouth, is very important. And then you have the Generation Z—profound interest in visuals, so if you're trying to attract you've got to have images, you've got to have color, because that is what attracts them. They are very budget conscious, and they are heavy online shoppers, and the key thing you have to remember about them is they go through life with a smartphone in their hand—so digital savvy is really an important attracter for them as well.
Davidson: Right. So Nell, another term that you see in the literature—and specifically, in the Faster Payments Task Force report—is "data-rich payments." What does that mean, and why is that important?
Campbell-Drake: When you think about yourself and you've had a payment processed—if you had to visit a doctor—and you would get an explanation of benefits in the mail, or sometimes you may get it electronically. It includes remittance information that is important to the visit that you had. So data-rich payments relate to that information, or remittance information is what we call it, to support that particular payment transaction. That is very important to the finality and the reconciliation process that is associated with a payment. It also helps an audit, and it helps with those who are part of the compliance processes in the respective institutions—because information can help, in the payments front, mitigate risk and mitigate any type of fraud.
Davidson: So this is basically telling you, "Oh, I remember this transaction now. I spent $78 at CVS," or whatever.
Davidson: So it can help the consumer, too, obviously, keep records.
Campbell-Drake: It can help the consumer, and it can definitely help businesses and corporates. What we are really focused on now, through a number of efforts that we have under way, is standardization of that remittance information—we'll call it messaging—because we don't have a lot of consistency now. So just think about certain entities. They send some level of information, while others may send another level of information, and that creates a lot of challenges around interoperability and being able to complete some consistency in the back-end reconciliation processes. So standardizing the data that flows, allowing for some interoperability and consistency, is very important in the payments front.
Davidson: Right. Okay, Nell, one last question here—and this may be one that's kind of a simpleton sort of question to ask, but I have to. Are we going to see paper money disappear in our lifetime, good ol' U.S. dollars?
Campbell-Drake: [laughter] I don't believe it's going to occur any time soon. I really will say, it's a long ways off. I will tell you, I have conversations with my family members and friends and with my professional colleagues about the evolution of payments, and cash will come up. But what also was interesting is, in that conversation there's always something about data security, cybersecurity—the risk, the fraud that's occurring in the financial services landscape. One thing you have to keep in mind is people are saying now, "Privacy is gone." But with cash—and the anonymity that occurs with cash—it's getting a lot of traction again.
So that's why I say it may be a long ways off before we become a cashless society. You know, we're supposed to be a checkless society by now, but as I stated—in the 2015 study there are still 17.9 billion checks that were written during that time, so I think we've got a long ways before we become a checkless—and a cashless—society in the United States.
Davidson: Yes. So things are changing, but some things are not changing as quickly as some figured they would.
Campbell-Drake: Well, I have a little cash in my pocket now [laughter].
Davidson: Yes, I think I've got about $3 in my wallet. Well, Nell, thanks so much for your time—that was really interesting. Thank you.
Campbell-Drake: Okay, thank you so much for the time as well.
Davidson: All right, and thanks for listening. Come back to frbalanta.org to find more research and information about the payments system, and tune in next month, when we'll have another Economy Matters podcast. We're going to visit with one of our research economists, Julie Hotchkiss, and we're going to discuss some fascinating research she's done on something called "high-pressure economies." It takes a little bit of explaining, but basically that's when the labor markets get super, super tight, and those periods tend to be followed by recessions. So anyway, tune in—a lot to learn there. Thanks so much.