Many in our industry are watching in fascination as the United States inches towards a real-time payments solution. There are three recent developments: the Fed’s Faster payments task force has defined effectiveness criteria for a new payments system, NACHA has received the Fed’s approval for its same day ACH rule, and most interestingly, The Clearing House – the high value clearing network for the larger banks – has announced a letter of intent with Vocalink to develop a new real-time system.
Judging by the Chicago Payments Symposium hosted by the Chicago Fed last month, there is still nothing like consensus on the “right” outcome, and the US is still some years from new mainstream payments services that are “cloud ready”.
Time may be running out. The keynote at the symposium was delivered by Thomas Koulopoulos, a futurist (my description) who thinks and writes about “the cloud”. His particular focus is what might be called hyperconnectivity – the observable phenomenon that automated person to person and device to device connections are growing at a geometric rate. It is now relatively easy for us to imagine a world where every person in our society – or at least each person who wants to – is real-time connected to every other person in multiple complex ways through social media and other elements of the cloud. Many analyses of digital disruption explore the implications of this.
But what Koulopoulos is really interested in is hyperconnectivity amongst devices. His 2012 book, “Cloud Surfing” projects that the number of machine-to-machine connections will grow from 100 million in 2011 to 50 billion by 2020. So: it’s not just that your phone talks to the payment terminal when you are in a shop, but your fridge will talk to the deli (when it needs restocking), your car will talk to the tyre shop (when its time to rotate the tyres), and even (somewhat alarmingly) your health monitor will be able to check each piece of fruit you buy (actually, its certification chip), to ensure the fruit is organic, pesticide free and was picked within the last two days – or whatever. The challenge to the payments community is obvious: can we keep up?
If mainstream payment services can’t keep up, that will obviously add cost, risk and delay to the evolution of the cloud economy. But I think more importantly than that, there is a risk of a plethora of alternative solutions developing along the lines of cryptocurrencies like Bitcoin. Each one in isolation may be a sensible response to the problem, but if they don’t have scale the sheer proliferation adds cost and risk. This is not a new problem – before the establishment of the Federal Reserve System in 1913, the US “enjoyed” multiple competing currencies, both privately and publicly issued. There were discount rates to convert from one currency to the other, and the risk of loss from a bank (ie issuer) failure was ever-present. Rectifying this state of affairs has been a driver of modern fractional reserve banking in many countries, going back centuries.
Of course, the existence of hyperconnectivity and high levels of automation may mean that its relatively easy and cheap to deal in multiple cryptocurrencies. But it still feels like the extra complexity creates new risks to manage, and potentially less regulatory protection than now exists in developed economies.
So in a way, it’s back to the future. But this time, it’s digital.
