An 'instant-in-essence' electronic debit instrument

The ‘faster is better’ fad will never fade. When in the late nineties faster films of ISO 200 and above came about abundantly in the photography market, consumers simply stopped buying slower films without even realizing if they really needed fast films. Slower films were cheaper and had high image quality, yet were considered sub-standard in the minds of consumers. No doubt the film makers made more money riding the wave.

Look around and you will see this phenomenon evident in many aspects of our life. Trains, buses and cars have become faster and sleeker, compromising much of the space and comfort compared to older ones. The comfort of reading a newspaper is compromised with e-papers in electronic devices. Gone are the days when you could buy a small 8” TV that nicely sat on the kitchen counter. Cameras have such high resolution sensors that it generates enormously large data files when in reality the consumer never prints them big enough to utilize the size.

Simplicity is clearly not priority in the new age.  This is exactly what is happening in the financial industry with debit instruments. The simplicity of writing a cheque and passing to someone will soon be a thing of the past. An example is of the trader who happily lived in the cheque world is now being forced to do an expensive RTGS payment for his every purchase with supplier.

What will also drown with cheques is the numerous other advantages of a debit instrument, as noted below, that can never be satisfied by a credit transfer instrument, be it even made at the speed of light.

1)      Cheque can be tendered to be settled not earlier than a certain date

2)      Payment can be stopped between issuance and settlement

3)      Payer can choose to make a guaranteed payment (draft) or non-guaranteed payment

4)      Payee can choose to draw the money or not (say, to get out of a proposed deal)

5)      Cheque can be discounted, purchased

6)      Cheque can be used to make payments that can expire

7)      Beneficiary has something to hold on as a guarantee when he has a  physical cheque in hand

8)      Cheque can be en-cashed if the payee is unbanked

So the question really is – why should the simplicity and flexibility of a debit instrument be sacrificed in the world dominated by ‘faster’ credit payments? Won’t the consumer awaken one day to realize he pays more than what he really needs?

OK, so there is the banks, just like the camera makers or car makers, who have a justification for not supporting or encouraging cheques. The cost of making, inventorying, distributing, clearing, settling is clearly not worth the simplicity and flexibility that the instrument offers. Cheque truncation (imaging) seems to have not helped much either.

So what we need is an electronic instrument that is easy for consumer, inexpensive for banks, provides all the benefits of a debit instrument, totally secure, and be competitive in the real time payments world. Here is a concept paper where I have detailed about a new possible electronic debit instrument, called ‘reserved funds reference’ (RFR).

The instrument is riding heavily on the psychology that during a payment transfer, majority of the times, what is only needed is the payer to be able to prove his solvency, and the payee gets a guarantee of the payment - whereas the payment itself can happen on a slower and low cost medium. To prove this point is the example that even large value transactions such as you selling your house, the sale is made with a demand draft being offered by the buyer. So it’s not the immediacy of the payment but the guarantee of the payment that matters.

The way RFR operates is simple. The payer, using his mobile phone, connects to his mobile banking app, and request for a ‘reserved funds’ reference for a given beneficiary account or ID. The App creates a 16 digit hash (the RFR), earmarks the amount against the hash in debtor’s account. The mobile App automatically, or even the payer himself manually, pass the RFR to the beneficiary. The RFR in the hands of the beneficiary is a guaranteed payment that he can choose to get paid anytime, just like a demand draft, according to his individual/business use cases, using a slower and cheaper clearing. When RFR is received at the payer's bank, it unlocks the earmark and payment is settled.

In summary, while cheque is flexible and cheap for customer, it is slow and non-guaranteed. Whereas payment modes such as RTGS are fast and guaranteed but not flexible and cheap. RFR can provide the advantages of both, with an additional possibility of decreasing the ‘ever increasing’ volumes on the real time rails.

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