What kind of Doughnuts will we need?

Emerging challenges and solutions for ACHs

Nick Senechal, Strategy Lead

ICCI, Sofia, October 2014

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VocaLink: central to the UK economy

£6 trillion of value

10 billion transactions

BACS and Faster Payments infrastructure

VocaLink’s safe and efficient services allow over 60 million bank accounts to work every day

Customer accountsCustomer accounts

Banks Banks

Partnering to create commercial networks, deliver industry innovation and transform digital

1968-19852002IP-Based Payment Capture Service

2008UK Faster Payments Service

2012Immediate Payments (Singapore),Domestic clearing (Sweden)

2011National Mobile Proxy Database

Mobile Platform

6 billion BACS transfers 1 billion Faster Payments

2011 – 99.999% availability

3 billion ATM transactions

2006OneVu

2007Mobile Phone Top Up

£6 trillion of value

10 billion transactions

BACS and Faster Payments infrastructure

VocaLink’s safe and efficient services allow over 60 million bank accounts to work every day

Customer accountsCustomer accounts

Banks Banks

Partnering to create commercial networks, deliver industry innovation and transform digital

1968-19852002IP-Based Payment Capture Service

2008UK Faster Payments Service

2012Immediate Payments (Singapore),Domestic clearing (Sweden)

2011National Mobile Proxy Database

Mobile Platform

6 billion BACS transfers 1 billion Faster Payments

2011 – 99.999% availability

3 billion ATM transactions

2006OneVu

2007Mobile Phone Top Up

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The (American) Donut model

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The doughnut: is it ready for a comeback?

Bank

B

Bank

EBank

C

Bank

D

Bank

A

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The ACH – traditionally more like an English Doughnut?

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Centralisation, simplification, efficiency

Bank

B

Bank

EBank

C

Bank

D

Bank

A

ACH

7

The difference: Jam in the middle…

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What was the jam? Why are we here

Advantage when

ACH set up?

Advantage

now?

Liquidity efficiency through netting YES YES

Single connection to all banks YES ?

Simplified routing for banks YES ?

Consistent service levels for all users YES ?

Predictable cycle times YES ?

Cost-effective shared services for

banks

YES ?

Defined resilience YES YES

Is efficiency for banks still the answer, or something more?

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Regulation

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Regulators attracted to ACHs like cops to a donut shop

• Focus increasingly on competition in retail banking and access to payment

services in order to benefit the customer

• At the European Union level – access for third party providers

Focussed on the banks

Answer may lie in the ACH (the “Payment System”)

• At a national level (UK as an example) – access for new “challenger banks”

Focussed on the “Payment System” directly

Existing bank control seen as a barrier

Regulator sees circumvention of the ACH as, potentially “a good thing”

In short, ACHs must learn to serve new as well as traditional customers

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Innovation

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Innovation – let a thousand flowers bloom

• Competitive innovation is driven by entrepreneurs at the beginning

and end of the value chain

• Focussed on the customer, and what she wants to do

Payments are just a part

But need to be there

• Payments need to enable, not constrain

Cycle times

Opening hours

Uncleared funds

Available channels

If the ACH doesn’t measure up, Innovators will find another way…

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UK – an example of “Overlay” innovation

Barclays

“Pingit” (2012)

UK mobile PayM

(“proxy

database” 2014)

Zapp e/m

commerce

(2015)

Zapp Bill pay

service

(2015)

Zapp small

business (SME)

service (2016)

Faster payments

Direct Corporate

access (2009)

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Overlays use the ACH, but are separate

ZappRequest to pay

service

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Competition

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Competition…

• Has ACH vs ACH competition materialised?

– Is collaboration a better path?

• Are ACH models competing for cards business?

– Ideal, MyBank, Zapp

• Are cards competing for ACH business

– Cards vs Direct Debits for utility payments

• Are alternative payment providers competing for ACH business?

– Aggregator models (PayPal)

• Do ACHs have the capabilities to compete?

– Interfaces for easy access

– Multiple customer propositions

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Internationalisation

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Internationalisation

• Cutomers are increasingly seeking a global payment solution

• New payment innovations and uses look to roll out internationally

• Card Schemes have seamless global coverage

– Payments method of choice for new developments – ApplePay

• ACH systems are still primarily domestic

– Although others using “overlays” to link ACHs – Earthport

– Linkage through bodies such as EACHA become increasingly timely

• Key issues:

– Standards

– Settlement models

– End customer proposition

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ACH interconnectivity must be a priority…

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Real-time interoperability model

R/T

ACH

1

R/T

ACH

2

Participant

1c

Settlement agent 1

For:

Participant 1a

Participant 1b

Participant 1c

R/T ACH 2 (2a,2b,2c)

Participant

1b

Participant

1a

Participant

2a

Participant

2c

Participant

2b

Settlement agent 2

For:

Participant 2a

Participant 2b

Participant 2c

R/T ACH 1 (1a, 1b, 1c)

Reciprocal

participation

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Real-time “hub of hubs” model

R/T

ACH

1

R/T

ACH

2

Participant

1c

Participant

1b

Participant

1a

Participant

2a

Participant

2c

Participant

2b

Common Settlement Agent/Service

R/T

Link

ACHFor VocaLink the emphasis is on

real-time interoperability

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Real-time is a true domino effect…

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BEHAVIOURS

-Connected,

- Self-service,

- Instantly gratified

- Multi-mode

- Mobile

TECHNOLOGY

ENABLERS

- Processing power

- Bandwidth

- Mobile access

- Security

MARKET NEED

- Platform renewal

- New services

- Financial inclusion

- Regional pressure

- New participants Real -

time

Real-time, why now?

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Substitutes

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Substitutes are emerging now: are they viable?

Technology is challenging the role of a central ACH

• New ways of settlement – open ledgers

• New ways of participation – protocol-based crypto services

• Anonymous exchange via the internet

• Cheaper faster commoditised processing – why centralise?

The challenge is not yet mature, but must be faced. ACHs must ask:

• What do they offer the customer?

• How is our offer better?

• Are there elements of these new technologies the ACH should employ?

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In ten years time will we still be enjoying this?

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Will ACHs still be here in ten years? Yes if…

Required now?

Liquidity efficiency through netting YES

Single connection for all PROVIDERS YES

Simplified routing for PROVIDERS

including INTERNATIONALLY

YES

Consistent service levels for all users YES

Consistent REAL-TIME services YES

CAPABILITY TO SUPPORT NEW

SERVICES and INNOVATIONS

YES

Defined resilience CONTINUES YES

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