Access to Payment Clearings - Behind the Green Door

“All I want to do is join the happy crowd behind the green door”. So sang Jim Lowe in 1956, and we’re hearing something similar from smaller banks and non-bank financial institutions today, pressuring payment clearing systems to open up their doors – if not to all comers, then certainly to a much wider community than the clique of banks who currently have access.

European and domestic regulators are on the case, and PSD2’s Access to Account provisions are largely driven by this. Although the argument around access to clearings is important, I think it is diverting attention from a more fundamental question. “Green door what’s that secret you’re keeping” sang Jim, and I happen to think it’s a dirty little secret: 

Current payment clearing systems are not fit for the digital age.

Shaky Foundations

The point was well made, accidentally, by one speaker at EBADay. He illustrated the common view of payment systems using old-school wooden blocks – the bottom block represents settlement, and the block above that is clearing, and on top of that are some blocks representing payment instruments, and at the very top are a few decorative blocks representing ‘overlay’ services – mobile payments and the like.

The tower kept falling down – the clearing and settlement couldn’t support the overlay blocks. Which is my point exactly.

Misunderstanding The Mantra

The meme that payments need to be embedded in a wider consumer experience was chanted like a mantra at EBADay. Uber is the poster child for this thinking and (as usual) got name checked repeatedly. Seemingly most people don’t know of another example, so respect to Marion King who used a fresh example of a mobile app which solved Wagamama’s ‘9 minute’ problem (time from the customer asking for the bill to leaving), in which the payment was just one step.

People were nodding enthusiastically about invisible payments embedded in a seamless and compelling customer experience (buzzword quota now reached), but ten minutes later the same people were nodding equally enthusiastically at the old settlement/clearing/payment instrument/frilly bits model. If it’s true that the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, the room must have been filled with budding Einsteins.

Payments With No Change

Take a concrete example. In the UK, Faster Payments launched in 2008. For the next five years, the service remained essentially unchanged. Even when the Paym mobile service was designed, rather than use the same infrastructure to support the mobile phone number lookup, a whole new interface was created. That decision may have been taken because the existing service was too inflexible to add new message types, or perhaps because mobile phone number lookup is not a payment service (harrumph!). Neither explanation proclaims a system that’s rushing to embrace the future.

Distributed Services Support Innovation

If ‘clearing infrastructures’ are to stay relevant, they need to look at the world from a different point of view:

• The fundamental requirement for is for a secure, low latency messaging network with guaranteed availability.
• Messages running across the network may be payment or non-payment messages, the network should be agnostic to message format or content.
• Organisations should be able to offer services on the network which other organisations can optionally subscribe to and access using message formats defined by the service provider.
• Groups of users can agree to a set of rules covering the use of services, message formats, semantics and business rules.

And if that sounds like a real-time SWIFT network on steroids, well maybe that’s why SWIFT won the New Payments Platform bid in Australia, much to the chagrin of clearing infrastructure providers who proposed traditional centralised systems.

The model of ‘edge’ services has supported the explosive growth of innovation on the Internet for twenty years, and distributed ledgers are poised to open the floodgates for the next wave of innovation and democratisation. Despite all this, central clearing organisations (there’s a clue in the name, by the way) still cling to their traditional hub-and-spoke clearing and settlement infrastructures with restricted, prescriptive and inflexible message sets, and a change process evocative of geological epochs. Innovation in such an environment is mainly about finding ways around the limitations of the system rather than about inventing great new experiences for users.

Forget The Green Door

My advice to aspiring clearing members is to worry less about what’s behind the green door, because when you finally gain entry you will be disappointed with what you find there. The happy crowd in the old boys’ club behind the door are living in blissful ignorance, reassuring each other with delusional soundbites such as “we’ve been offering APIs to banks for years, we just need to find a way to offer them safely to other organisations” (scout’s honour, I’ve really heard that said with a straight face – it’s frightening to have IT systems run by people who can’t tell a file transfer from an API). It brings to mind a different song: “Something is happening here but you don’t know what it is, do you Mr Jones”.

Create A New Focus

You should focus instead on creating systems that will properly support the digital future, where payments are just one service among many and not something that needs a dedicated infrastructure. The ‘clearing system’ of the future is going to be something that looks a lot like the internet, and as bandwidth continues to increase and security improves, it may even be the internet. The door is open, and membership is not required.