Real-Time Payment: The hacker-free system
There’ll always be hackers – people aiming to get into your account and steal your money. But with real-time payment (RTP), hackers will have to stick to old-time payment methods to succeed. Real-time payment is instant, giving thieves no time to get their hands on it. Operating on a set of financial international standards, called ISO 20022, the RTP schemes in America will also eliminate the miscommunication and inconsistencies that are common between countries with their different settlement schemes, further hindering hackers from getting their paws onto your funds.
Here’s how it works.
What is real-time payment?
Wouldn’t it be great if U.S. citizens could wire funds anytime, anywhere, and within two minutes after someone has sent you money, you get it, problem-free? Better still, you can watch the transaction as it travels real-time, from the donor to you – so you can make sure you receive the full amount. This real-time payment system is friction-free, no bank holidays or weekends or political or economic events hold it up. There’s no KYC or AML verifications (or the like) that detain the funds. Best of all, the transaction is free. Well, that would certainly harm mobile payment services, like Venmo and PayPal. But you, the consumer, profit!
Real-time payment (RTP) has made its way across more than 20 countries, with Japan, Brazil and India grabbing the limelight, with their RTP-oriented incentives and functional “instant payment” platforms.
The Clearing House and Real-Time Payment
Four years ago, The Clearing House (TCH) came out with the first new payment rail in over 40 years – a scheme for instant payment. Within a matter of time, this RTP rail has attracted more than 120 stakeholders – the largest banks, credit unions, community and regional banks among other depositories and financial institutions. To date, TCH has more than 150 participants that hold 70% of demand deposit accounts (DDA) in the United States, making this organization exceedingly powerful. Whether its system will be ubiquitous – meaning actively involving even the smallest banks – is another question, since the TCH seems to be dominated by 25 of the world’s largest banks that want to retain power.
The Federal Reserve and FedNow
Last month, the Federal Reserve introduced a set of financial standards for its real-time payment line due 2023 and called FedNow. Piloted along a three-year timeline, FedNow will be directed by these ISO 20022 standards that will help the Fed implement end-to-end banking efficiency, ensure financial stakeholders comply with finance regulations, help the Fed interact with other real-time payment systems, and rush your money, among other items. The ISO Standards also help them communicate with different RTP rails, so accounts flow from one account to the other within a matter of minutes. The messaging guidelines would also help them deter hackers. (More on that later).
Exactly how this interoperability and ubiquity will occur is up for grabs, but FedNow hopes to achieve its objectives through dialogue with TCH and other RTP entities.
Three schemes for hacker-free funds
Fast frictionless money means safe money, protected from hackers. The U.S. Faster Payments Council (FPC) is the organization that advances faster payment in the United States. In its most recent white paper, the FPC suggests three ways how the Federal Reserve can send, or make sure you get, your money problem-free and in its entirety:
- Point of origination, where the payment originator uses two or more clearing and settlement networks to process your funds.
- Network to network which basically works on a two-tier setup where one clearing and settlement network feeds the funds to an additional processor for additional processing.
- Through an intermediary, where each leg of the transaction is cleared and settled separately, much the same as wire transfers and checks are processed.
Whichever method they eventually choose, you can be sure your fund will get there faster than PayPal’s standard two days without fees, faster than EFT or wire transfer with stops over the weekend and holidays, definitely faster than a mailed check, Western Union, or Traveler’s checks. The transaction will be free. At the same time, the messaging will be transparent, which means you and the other party could peek in and monitor the money flow, as it makes its way to or away from you.
How ISO 20022 protects against hackers
The International Standards (ISO), in this case for payment, is a single system prepared by the Technical Committee TC68 Financial Services that will be used by all financial institutions to protect your money. Think of it as a homogeneous language that all entities involved in settling your funds will use to communicate with one another to achieve the following benefits:
- Friction-free: All stakeholders communicate on one platform in real-time unsnarling possible problems.
- Complete money transfers: Different national and international money systems have resulted in miscommunication with those responsible for settling the funds. One standard helps all financial stakeholders interact more consistently.
- Compliance: One messaging format breaks down the miscommunication that’s so common between regulators from different countries, each with its own scheme.
All of that guarantees that your money becomes hacker-free and reaches its port of destination safely.
So what’s next?
We’ll let the Federal Reserve proceed with its three-year timeline. It plans to unfurl some educational programs to instruct consumers and companies on the benefits of RTP, as well as (for Financial institutions) the intricacies of the ISO standards.
From the consumer point of view, there’s no problem. Which of us doesn’t want free instant funds! We had enough griping with the Government when the stimulus checks took a month or more to reach us, and even then their arrival was uncertain.
For banks and credit unions, the stakes are higher. One key problem is: How are they going to monetize the situation? Credit schemes, for instance, help them profit, as do programs like EFT that cost. That’s a problem they’re going to have to figure out. (And they’re hard at work on that).
But for us, instant money is like instant coffee. It’s easy and doesn’t take time.
