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Re-imagining bill payments

Payments - the 'holy-grail' of the Fintech has seen big disruptions in Person to Person (P2P) payments bringing speed and convenience to customers with the likes of commercial payments and bill payments still waiting in the wings. It is easy to understand why. Consumers are in both the ends of P2P and consumers adopt innovations faster than the enterprises and accessibility is easier. Venmo set the trend and soon others followed, notably Zelle which is creating a niche in the P2P payments space. Zelle provides near real time, email/mobile number based payments, and is driven by a good funds based credit push model - the key selling points for Zelle. The Zelle network is set to expand with more banks and credit unions joining it and will be a major player in the P2P space. 

Another important development is the TCH RTP that will allow banks to provide real time payments and make them compete with the Fintechs. It will be interesting to see how TCH RTP and Zelle, which itself is from a company owned by large banks, can compete. It is quite possible that Zelle integrates with TCH RTP eventually. Recently, Federal Reserve Banks announced the development of FedNOW - an instant payments service for banks. Such developments are transforming the P2P payments and very soon the question will be - when will such transformation can come to commercial and bill payments, where  intermediaries a.k.a billing service providers have a major role to play. 

There are some important facets to learn from the success of Zelle and the way TCH RTP is designed that can offer disruptive solutions to bill payments. Here, we look at systemic issues with the current design of bill payments and what changes in future will disrupt the space.

Debit origination
The bill payment process is fairly simple in the case where the customer maintains a checking or savings account with the Payee - say, customer has a credit card account and a checking account with the same bank. Both the debit and credit part of the payment can be quicker, and it does not require any overhead reconciliation or settlement mechanisms. But the process becomes very complex when the customer wants to pay from an account with another bank or when there are other intermediaries involved in processing the bill payment. In such cases, the biller or the intermediary relies on debit origination, something like an ACH Debit instruction that is first sent to the bank from where the customer wants to make a payment. It is not possible to get the status of the debit transaction in real time, it can fail, and needs batch processes to reconcile and settle the payment making the whole process complex and taking multiple days before completely closing the transaction. The prevalent model is like a digital version of the same process when customers used Checks to make bill payments in the past. 

Good funds based credit push model 
A shift from debit-pull to a credit - push model will be a game changer. Bill payments should be designed to work on a good funds based credit push model - an approach that laid the foundation for the success of the Zelle and the TCH RTP approach. The model reduces the risk by limiting payment failures which in turn eliminates many process overheads and is also real time. The same approach can ideally become the backbone for how the bill payment systems must evolve in the future.

Real time posting and notification
A major benefit of designing around a good funds based credit push model is that the debit on the customer's account can be verified immediately and that will support the real time posting of the bill payment and notification of the payment status to the customer. 

Often it is pointed out that real time payments have risks particularly fraud risk and that it does not give enough time to reverse the transaction. But this fear cannot be an impediment to faster and simpler payment processes. The initial success of the real time P2P payments over the last few years and the payment infrastructure modernization by TCH RTP and the likes of Fed NOW is paving the way for building disrupting payments apps and services. New payment models will soon arrive in non-P2P payments like Bill payments. A good funds based credit push model will be the guiding factor for these emerging payment systems.

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