Wade Hanna:
Welcome to the First Business Bank Podcast. I'm Wade Hanna, and I'll be your host for today's session. Today, I'm joined by Alan McAfee and Chuck Peterson and I'll let you two introduce yourselves.
Alan McAfee:
Sure. Thanks Wade. I'm Alan McAfee. I'm chief banking operations officer here at First Business Bank so I work with all of the behind the scenes teams that support our commercial and consumer clients
Chuck Peterson:
Morning. Chuck Peterson, vice president treasury services here at First Business Bank in Kansas City. Been helping companies with their receivables and payables for 24 years now so happy to join. Thank you.
Wade Hanna:
Great. Thank you both. So maybe to start things off, we hear lots of different terms when we're talking about payments, P2P, B2B, same day, next day, faster payments. Alan, would you start by maybe just laying the ground rules of what are these different payment types that we're hearing about today and kind of what the difference might be just to get us started?
Alan McAfee:
Sure. Yeah, it's a really great question because there are lots of names out there and lots of acronyms used to describe these solutions. Probably the most notable names are the ones that you would hear every day, like PayPal, Venmo, Apple Pay. Those networks are really pre-funded networks so that's where you have to fund those networks to make those payments. You're also starting to hear some other newer solutions like Zelle, which is a bank sponsored payment network. And you're soon to be hearing more and more about real-time payments. And then there's a new product out there called FedNow that should be out early next year, midyear 2023.
Wade Hanna:
So I feel like in the last couple of years, just about everybody has become familiar with the Venmo and certainly PayPal. I think originally if we're out to dinner, we're sharing the tab and things like that so that's been very simple, I think and popular. Why have we not seen the same kind of availability for businesses to use those kinds of apps, Alan?
Alan McAfee:
Yeah. Those networks are really created consumer first and typically when you have newer payment technologies, that often goes towards those consumers first and then will eventually move into the business world. The second thing is businesses typically, historically pay themselves via check and that check writing is declining. So I think businesses are looking for alternative solutions, ones that are more electronic and so we'll eventually adopt some of those consumer payment systems.
Wade Hanna:
And one more for you quick here Alan. So with these electronic payments, are there risks that we should know about?
Alan McAfee:
Yeah, definitely. The main risk is the speed in which you can initiate a payment. So with consumers, you do have consumer protections that protect you but it still can be difficult from a consumer's perspective if you're in one of those pre-funded systems. It might be difficult to find support if something goes wrong. If you're using a bank sponsored product through your bank, you have a bit more leverage contacting your bank and finding out what you can do if an error happens. With the faster payments, the speed is the main risk. Once it's gone, it's gone and you typically can't get it back very easily. So always make sure you know who you're sending it to and confirm that they've received their payment.
Wade Hanna:
Okay. Yeah, that makes sense. So it sounds like it's a little bit of kind of balancing the desire to have faster payments and receivables with the security, is that right?
Alan McAfee:
Yeah, absolutely. With the speed in which technology is changing and the speed in which these payments are occurring, the risk is just a little bit higher because a fraudster could come in and try and take the money quicker.
Chuck Peterson:
Yeah. And if I can jump in Wade, I think there's a lot of talk recently with the need for faster payments, immediate payments. With any type of electronic payment, there's always a fraud risk. So you definitely do have to be careful like Alan mentioned, and make sure you're paying the right person. If it's not somewhere that you would pay a hundred dollars in cash to face-to-face, then make sure you know that everything is confirmed and that you do confirm everything before you hit that send button.
Wade Hanna:
Yeah, that sounds good. So I was going to ask you Chuck, given what Alan said about how a lot of these things start on the consumer side before they make their way to the business side so you work with a lot of businesses. So if those types of things haven't been available yet, what are your business customers using for electronic payments Chuck?
Chuck Peterson:
Sure. I think probably the most widely used one is ACH. I mean, ACH has been around for years and years. They've made some enhancements to that such as Same Day ACH so although it's not immediate payment, ACH is there usually the next day or two days after. So I would say ACH and of course, wire is always a very popular one for bigger ticket items.
Wade Hanna:
And it seems to me too with a business, that's saying about how it takes a while to turn a big ship. Is that part of the, I guess, resistance why we haven't seen some of these kind of real-time payments Chuck? Do these businesses just have kind of a set way of doing things?
Chuck Peterson:
I think a lot of that is true Wade. Yes, most definitely. Same Day ACH for example, was something that came about and Alan, you may need to correct me in here but it's been probably, gosh, 10 to 15 years maybe, if not more than that. But with Same Day ACH, it was very slow to take grasp and people were not sure that they wanted to use that and just not sure how to use it really. So yeah, I think it's a long process for companies to enhance their payment processes.
Wade Hanna:
So you mentioned a couple different acronyms to add to my list from the beginning there, ACH and Same Day ACH. Can you describe the difference?
Chuck Peterson:
Sure. ACH, Automated Clearing House. Usually used for direct deposit payroll, but in paying vendors as well. So there's a send a file one day to your bank and you choose the effective date. There's usually a one day lag, 24 hour day lag between a regular ACH item and the same day, which the same day will go that same day. It's not immediate, but it'll be in the bank by the end of business day.
Wade Hanna:
Okay. So that's an example that next day lag where that we're talking about, kind of the new frontier is going to take that away and make it more immediate. Is that right Chuck?
Chuck Peterson:
Correct. Exactly, yeah. Real-time payments in the FedNow both will be immediate so within seconds compared to hours.
Wade Hanna:
So Alan, when I'm thinking of my Venmo account, I'm usually paying one person or maybe two or three but for a business, they're going to need the capability to pay, I think, several at a time. Don't they want to do a whole batch of payments? So do you have an idea or maybe it's too early to know how that technology will look?
Alan McAfee:
Yeah. The early signs are, it will typically be these newer, real-time or faster payments like FedNow and real-time payments will be a single payment at a time. It's typically like a wire. That's the initial instructions. Now I do think there will be other use cases where in the future they could do a batch process similar to what a business would do with, for example, direct deposit payroll. They do that all at once with all of the payroll recipients. And I do think these newer payment systems as they enhance will probably do something similar.
Wade Hanna:
Okay. That makes sense. So who's providing this new technology? Was this a governmental thing. We hear a lot about Fintechs. Are they the ones coming out with this? Or what does that look like, Alan?
Alan McAfee:
Yeah. So I'll try to keep this simple so I don't use a lot of techy terms or acronyms. So the Fed did a bunch of research and did find out that there was a need for a faster payment system. So the Fed is one of the people that clears ACH transactions like we just talked about. Also, clears all of the Fed wire payments so if a business sends a wire, it does go through the Fed. So this is the newest payment system that they're developing. I believe it's been 30 years since they created a new payment system so it's a very big deal and the Fed will be sponsoring this system.
Wade Hanna:
So I think in the old school way, when we're talking about checks, we've always talked about businesses having that float, couple days to write the check, drop it in the mail, it takes the post office a while, all that kind of thing. So I can't imagine that payers are super excited about this. Is it the other side who's kind of demanded these faster payments or do you have an idea on that Chuck or?
Chuck Peterson:
Yeah, I would say that's definitely the case. Wade. I mean, we as consumers want everything real-time. We want to be paid as soon as we can. If you go out to dinner with your friend, you want them to pay, split the bill or whatever, but that immediate gratification and immediate payment is top line for people accepting those payments, you bet. And the same for businesses now, yeah. They want to get paid for services rendered as soon as possible.
Wade Hanna:
Are there any side benefits to this? I'm thinking for example, when I receive a Venmo from somebody, they usually tell me what it was for. Is any of that going to be available in this new world of faster payments for businesses? Alan, do you have an idea on that?
Alan McAfee:
Yeah. Both of the new real-time payment systems will have basically addenda information or information that can be shared from business to business. And it is in the new standard format that's used actually worldwide. So I do think as these continue to develop and evolve, we will see more and more instances where for example, invoice information can be shared from business to business so the recipient would know what the payment is for.
Wade Hanna:
Great. Thanks Alan. Chuck, were you going to add something?
Chuck Peterson:
I was Wade, thanks. Yeah. As part of another component to the RTP and FedNow systems, what they will offer is something called request for payment or RFP, where as part of I can request payment from you Wade with your company for payment of invoice 56789 for $300 so that they'll know exactly what they're paying to make the reporting a lot better and cleaner.
Wade Hanna:
So Alan, I'm going to take a step back real quick. We've talked a little bit about fraud and preventing fraud on these new payments, but how about today with ACH and some of these methods? What are companies doing today to help mitigate fraud?
Alan McAfee:
Yes. Especially on the receiving side if you receive a payment, we have a system called ACH Positive Pay where you can put a list of approved vendors out there. And if a payment comes in outside of what you would expect, you can decision that and potentially return it. We have a system similar to that with checks so that's Check Positive Pay. Similar system, making sure all of the checks that are clearing your account are approved by you. I will also just add another plug as we look at other faster payments and as you originate payments, the best way to prevent fraud is to authenticate the recipient. So we accept emails all of the time in today's world. It's a great communication tool, but fraudsters are very smart and can pretend to be someone and email you. So always pick up the phone, call that vendor and confirm that they want to receive a payment. And I would say that's a tool that can be applied across any of these payments.
Chuck Peterson:
Oh, also if I can Wade, just ACH block is also available where we'll complete block of your account from anybody trying to ACH debit your account.
Wade Hanna:
So in other words, if I say, "Hey, I'm not going to have anybody debit my account. You can just block the whole thing."
Chuck Peterson:
[inaudible 00:13:32] You bet.
Wade Hanna:
Yeah. Got you. So we kind of mentioned at the beginning too, some of the reasons why this push to faster payments that's come up, it starts on the consumer side. I think of Amazon, immediate gratification, those kinds of things but I got to believe the pandemic played a little bit of a part in this too. Did you see that Chuck with your clients?
Chuck Peterson:
We did, definitely Wade. Yeah. Everybody not being able to go into the office or ways that they couldn't pay by check. So they were looking for different methods in order to pay their employees for payroll or pay the vendor. So yes, definitely the pandemic, I think, sped up a lot of the need for immediate payments for sure.
Wade Hanna:
Yeah. That makes sense. So let me ask kind of a big picture question here to kind of get things toward the end here. Alan, I'll start with you, but given what we've talked about, in the next three to five years given the pandemic, this desire for faster payments, kind of where do you see the payment landscape in general, do you think?
Alan McAfee:
Oh, that's a big question, but I'll look into my crystal ball and see if I can provide some insight. What I think will happen is all of our payment systems will probably continue to survive. So I think checks will still be out there, just used very sparingly. I think ACH is a great tool to use, especially when you are paying a lot of people all at the same time, such as payroll. I think these other faster payments fit into that middle ground, like the real-time payments or the FedNow, where you want to pay someone quickly almost immediately. So as a business, you might want to do an immediate payroll so like a spot payroll.
Alan McAfee:
And then the wires I think are going to be for those really large transactions where you need to know payment is final. For example, if goods are sitting at a warehouse and need to be shipped, you often want final payment before you can ship them. So I think there's going to be this spectrum of choice. Now as a business owner, I don't know that you really care about the name. I think you're going to choose it based on this situation at hand. And I think that's the beauty of the future is you'll have an array of payment tools at your disposal.
Wade Hanna:
Hey Chuck, before I let you chime in on that. I wanted to follow up Alan with something you just said. You said when goods are waiting to be shipped and payment is final. I guess we didn't really talk about that. Are you suggesting with some of these other methods other than wire that maybe it's not so final?
Alan McAfee:
Oh yeah. Good question. Yeah. The beauty of a wire is you can't really take it back so once you send the wire, it's final so that's why it's typically used for those larger dollars. Now the real-time payments are faster payments like FedNow and real-time payments network are going to be final. There might be a few cases where you could try and request to get the funds back but probably not that easy to do that. So that would be a close to final payment as well. Now on the ACH side, those are final, but you can always send a reversing transaction or try and take the money back as well, so that's on the spectrum. Wires is the large value final. Real-time will be immediate payment, somewhat final, mostly final and then ACH can be modified so that's the spectrum of final payments.
Wade Hanna:
Great. Thanks. So Chuck, back to you then, kind of big picture a few years down the road with your customers, you got a lot of customer interaction, what do you think they're going to be looking to do with this payment landscape?
Chuck Peterson:
Yeah. Wade I think checks will always be around. I know that there's stats that's showing decreasing, but I think checks are always going to be around. ACH is always going to be around, but the need for that immediate gratification, that immediate payment such as RTP and FedNow, I think it's going to be widely adopted by all our customers. I really do. We're lagging a little bit behind internationally, real-time payments. Last I saw, I think there was 130 and more than that. No, excuse me. 56 countries that had adopted in RTP already, so. The needs there for both domestically real-time payments as well as internationally, across border as well. So I think it'll be widely adapted.
Wade Hanna:
Thanks Chuck, for mentioning the international component to this. I know Alan, you've done a little research on kind of what Europe has been doing. Can you mention that real quick?
Alan McAfee:
Oh sure. Yes. The eurozone, has had real-time payments for several years now. I think almost 10 and they're actually working on the second generation of faster payments or real-time payments. So the US systems are looking at those systems and trying to mimic them so in a lot of ways, the eurozone, is much farther ahead than North America. And for example, Canada is going to implement a real-time payment system next year as well so I think we're catching up to what the eurozone is already used to.
Wade Hanna:
Yeah, great. We're behind Europe in fashion and I guess in real-time payments too as well, huh?
Alan McAfee:
Exactly.
Wade Hanna:
Yeah. Well, great. Well, Hey thanks for both of you for participating in this discussion and kind of laying out all these different things that we're kind of still figuring out, but excited to see faster payments coming up. And thank you to our audience members for listening today. Be sure to visit us at firstbusiness.bank to check out other resources we offer to businesses and their owners. We invite you to experience the advantage with First Business Bank. If there's a way we can help you with your business, please reach out to us. Thank you.