TCH – Real Time Payments

TCH’s RTP service is capable of much more than just P2P, particularly given its role in tokenization of all cards. I was rather surprised to hear 5 of 6 top banks would rather work with PayPal than Visa/MA on this.. (And this was a KEY reason I moved to buy Paypal stock 24 mo ago).

Its been 18 mo since my last TCH update. As a quick refresh, the reason everyone cares about the TCH project, is that TCH is the ONLY place that the top 6 bank CEOs get together to collaborate on payments. TCH operates CHIPS (the largest private ACH network in the world), settling around $1.5T of payments PER DAY (think stock market, B2B, V, MA… everything). Within the ACH scheme every member bank has a settlement account and a nightly Net Settlement process is run. 

TCH membership represents the top 20+ banks, however the top 6 banks are at either the sending or receiving end of about 60%+ of all ACH transactions. For example, V/MA are messaging systems, Visa had used Chase as their primary bank and all US Visa transactions had settled through JPMC and TCH (at least 2 years ago). These same banks are also members of other payments associations (see NACHA list) to provide settlement with other non TCH banks (ie rather than maintaining correspondent relationship). 

Faster Payments

Real Time Gross Settlement (RTGS)  have been a Central Bank (or regulatory driven) initiative in most of the world

As I outlined 9 yrs ago in “Real Time” Funds Transfer, most transfer systems are messaging only, and are dependent on Bank ACH processes (in the US). Within the US, At the bank level, there was only one standard RTGS system: Fedwire. Closed networks like Paypal’s Venmo offer real time transfers, as they maintain their own settlement accounts (but are dependent on ACH for “cash out” to a bank). 

The problem with an RTP service is that there really isn’t a compelling need. It is a “build it and they will come” approach. For example, the 2013 Fed survey identified emergency bill payments as the primary consumer need (see my 2013 response to Fed). P2P is the top consumer use case for RTGS, and the banks have created a clear winner in Zelle with over $187B in P2P, with Paypal’s Venmo a close second at $102B. The key challenge for RTGS is not the payment messages, it is the fraud/risk/Identity data. Zelle is built by Early Warning, the bank owned consortium that manages account fraud. They combined this asset with what was ClearxChange/Pariter to build the top Bank Innovation of the last 20 yrs (IMHO). 

The challenge for Zelle is that it uses an RTGS asset for settlement with large banks, but card based OCT/AFT messages for others, pushing settlement into the ACH process for many transactions. TCH needed an excuse to build Real Time Payments (RTP), and it has thus focused on P2P.  Unfortunately, TCH had a minimal track record for services beyond CHIPs. They have made substantial investments in team and technology to enable a real time payments (RTP) service. Selecting Vocalink (now owned by MA) for core RTGS settlement infrastructure and Bell ID (now owned by V) for tokenization (see blog for background). 

TCH’s operational pilot is with Paypal and Venmo (see 8.2019 article). Thats right, the TCH banks created a pilot that competes directly with Zelle. Why? They couldn’t find any other high volume volunteers. TCH is certainly angling to consume Early Warning, and they have begun Zelle integration, but my strong recommendation for the owning keep them seperate. 

TCH RTP – The New Debit Network?

TCH’s RTP service is capable of much more than just P2P, particularly its role in tokenization of card transactions (see blog). While ApplePay uses VTS/MDES, Google was told “no” and pushed to use TCH tokenization (2016-18). TCH had nothing operational, so Google had to build their own proprietary tokenization service (blog). eCom or a mobile wallet is the primary user of tokenization, and with Apple and Google committed, TCH’s only option was PayPal.  I was rather surprised to hear 5 of 6 top banks would rather work with PayPal than Visa/MA on this.. (And this was a KEY reason I moved to buy Paypal stock 24 mo ago). 

Vocalink is the backbone of UKs BACs, the integration of tokenization and EWS’s fraud data, AND the tokenization (token vaulting) of all cards, makes this a compelling RTGS system. RTP is capable of becoming the primary debit network in the US. This is a variation of the vision laid out by the consortium of 27 banks 8 yrs ago (under Paul Gallant). 

Owning the token vault allows TCH to serve as the central routing engine for all payment types, and “see” all payment interactions (for fraud/data purposes).  The implications for credit transaction routing our minimal given the network rules on routing bins (see wrapping). 

In a world where RTP takes on role as the new debit network, there would be no need to re-issue debit cards as a they would operate as a PIN debit (blog), consistent with Durbin routing rules. This move would also align to my 2013 view on debit network consolidation

My assumption is that Mastercard’s team clearly saw the tea leaves here, and purchased Vocalink to secure both UK and US debit/RTGS infrastructure. How ironic would it be that MA’s Maestro fiasco would be resolved with a master class move in a Vocalink acquisition. 

Implications?

TCH’s RTP will not move into debit in 2020. While live and operational, I believe they will grow first into high value B2B flows and bill payments (low fraud) to gain operational experience, and expand fraud prevention insights (as they manage the consolidated P2P volumes of Venmo, PayPal, and all card based schemes). However, I do believe selective rollout of TCH RTP as the new US debit network will take place in 2023-2024. Today, large merchants like Walmart are asking banks if they can accept Zelle today. The demand is there. I can tell you with certainty that the banks want to “own the payment pipes”. It has taken them 10 yrs to build this.. And it is now running with the tech, team and operating model to move forward. 

RTGS, RTP, TCH, Visa, Debit, Venmo, Paypal, EWS

Across the world, domestic payment networks are closed and bank run (CUP, Interact, RuPay,…) . This is likely to be the US future as well. For networks, Visa has the most debit exposure, with growth rates of around 8.5% (4Q19). I’ll leave it to the analysts to discuss earnings exposure. TCH’s RTP should also be viewed as the likely winner in any US B2B future for domestic remittance/exchange.

For investors, the key questions to ask in assessing debit volume loss:

  1. TCH RTP barriers
  2. Bank incentives
  3. Merchant Interest
  4. Merchant Acquirer Interest
  5. Fraud Data Integration
  6. TCH RTP expansion to bill pay and high value B2B

3 thoughts on “TCH – Real Time Payments”

  1. As always this blog post is a very thought provoking article. Thank you for posting it. I do not want to come across as nitpicking but I did see a couple of typos however.

    First, the last sentence in the paragraph beginning “TCH’s operational pilot…” does not make sense. I am not sure I understand what you are implying here. Second, the word “our” in the paragraph beginning “Owning the token vault…” I think should be are.

    Thank you again for sharing your domain expertise. It has been incredibly valuable as a generalist investor and MA shareholder.

  2. Great article – Question below might be naive, but I’m only 2 years out of school and am looking for ways to assess the space more thoroughly and address any biases I have (big MA bias since my Dad worked there since I was a child – but it hasn’t steered me wrong yet).

    Do you have any other posts archived away on Mastercard/Visa exposure in the US. I get tons of clients asking about threats to the card companies but with MA/V making massive acquisitions (cross-border and faster payments, APIs etc.) It seems to me that MA/V are 5 steps ahead of everyone and continue to demonstrate their ability to ensure a permanent place in payments — Not disagreeing with anything you’ve discussed – just want to know what I’m not seeing in the bigger picture.

    Apologies for the long post — just excited to have had your blog recommended to me by a friend of my dad. Been looking for this readings like this for a long time.

Leave a Reply

Your email address will not be published. Required fields are marked *