Supporting Fast Payments for All – and Economic Freedom
October 9, 2018 4:56 AM   Subscribe

Democratising online payments – and the digital economy - "When Berners-Lee and his team were building the world wide web and designing HTTP and HTMP standards, they included error codes such as '500: internal server error', or '404: page not found'. In the early 90s, they were trying to realise Licklider's vision and setting out the rules for how we were all going to interact over this information network. One long-standing error code is '402: payment required'. The original intention – the reason 402 is reserved for future use – was that this code would be used to transact digital cash or micropayments. It has never been implemented – and the Collisons argue this is the reason tech is turning from an equal access opportunity to an oligopoly controlled by five companies now worth more than $3 trillion."
“The idea driving 402 was that it’s obvious that support for payments should be a first-class concept on the web and it’s obvious that there should be a lot of direct commerce taking place on the web,” says John “In fact, what emerged is a single dominant business model which is advertising. That leads to a lot of centralisation, because you get the highest cost per clicks and with the largest platforms. A big part of what we’re trying to do with Stripe is continually make it easy for new business to start, and for new businesses to succeed. Having commerce and direct payment succeed on the internet is a very important component of that. It’s the final piece in the Dream Machine.”
Social media are poisoned by two original sins - "Why the mere existence of a permissionless decentralized alternative, one not financed by ads, one not ruled by any central titanic company, is important."
The first is advertising-driven media. This is creepy enough in and of itself: it leads directly to user tracking, browser fingerprinting, ad retargeting, clickbait farms like Outbrain / Taboola, ads that crash mobile browsers or obscure the content you actually wanted to see, autoplay interstitials which make TV commercials seem inobtrusive, etcetera. But it’s catastrophic for social media, because it incentivizes ever more engagement, which in turn incentivizes outrage generation, fake news, demonization of “the other side” whoever that may be, etc. — because those things lead to greater engagement, which lead to more advertising income. No matter what social media executives may say, the black hole of more money, higher profits, hitting their targets, and getting their bonuses will keep tugging at them, inexorably, so long as their business model is driven by advertising.

The second is the simple fact that, unless you design against this from the very beginning, technology tends to centralize power, courtesy of Metcalfe’s Law and other winner-takes-most effects. Which leads inevitably to the situation wherein a Facebook bug (an inexcusable but honest error) compromises the accounts of 50 million people, and in many cases their Tinder and Spotify and whichever other third-party accounts, as well … because Facebook has grown to be a centralized identity power on the Internet. And what can these people do? Which alternatives can they switch to? If they’re very upset and very resolute, they might be able to change to … other, equally centralized, similarly advertising-financed identity providers. But don’t count on it.
In Pursuit of a Better Payments System - "A safe, efficient and broadly accessible payments system is vital to the U.S. economy. The Federal Reserve, in its role as central bank, leader catalyst and payments services provider, is committed to collaborating with a wide array of stakeholders to enhance the speed, safety and efficiency of the U.S. payments system."
  • The Fed Proposes an Always-On Settlement System for Faster Payments - "Details of the plan are contained in a 47-page notice published in the Federal Register, the official record of the federal government. The Fed is taking comments until Dec. 14. The RTGS plan accommodates the non-bank tech companies that have become so important in the Internet age by enabling them to become agents of participant banks and submit payments into the system... Steve Ledford, senior vice president of product strategy at The Clearing House, a bank-owned New York City-based service provider and processor, tells Digital Transactions News that the Fed's... RTGS idea, however, would compete with his company's new Real Time Payments service, Ledford says... The Fed already offers some services available through the private sector. For example, both the Fed and TCH operate automated clearing house switches. Exactly what the central bank will do after Dec. 14 has not been determined, according to Susan Foley, senior associate director at the board."
  • Wait, What Did the Fed Just Say About Real-Time Payments? - "The Fed referred to the service they are proposing as a Real Time Gross Settlement or RTGS system, which confused the audience further since to most industry participants, this nothng but the Fedwire system. What is being sought is the banking community’s interest in having the Fed as a point of interbank settlement; but also on the table is is at least an inkling that the Fed also provide a real-time payments platform to compete with The Clearing House (TCH) RTP solution... Now that is interesting. And surprising to many... TCH has eight of the largest banks live on their system already. Several other financial institutions are far along in their efforts to integrate with TCH; collectively they would represent the majority of accounts in the U.S."
  • The Fed Wants To Know How It Can Make Payments Move Faster - "The Federal Reserve banks provide payment services to more than 11,000 banks nationwide, stated Brainard. A 24/7 real-time gross settlement option provided by the Reserve, she added, could 'significantly improve' equitable access to infrastructure, which can foster faster payments."
  • The Federal Reserve and Payments: Governor Brainard Discusses Payments and the Federal Reserve Seeks Public Comment on Potential Actions to Facilitate Real-Time Interbank Settlement of Faster Payments - "This common infrastructure would support connections across banks, and faster payment service providers acting as their agents, with the potential to weave together the current patchwork of systems."
Supporting Fast Payments for All - "The nation's first 150 years were frequently disrupted by panics in the financial system that extended into the payment system, which was highly fragmented and inefficient. Before the Federal Reserve took on a role in the payment system, a check recipient could not count on receiving the full value written on the check and faced long and unpredictable delays in getting access to the funds... The fragmentation of the payment system imposed costs on American merchants, households, community banks, and, ultimately, on the overall U.S. economy."
Ensuring a reliable nationwide payment infrastructure was one of the motivations that led the Congress to create the Federal Reserve after the severe financial panic of 1907. Fostering a safe, efficient, and widely accessible payment infrastructure has been a crucial aspect of the Fed's mission from its founding in 1913. By creating a new core infrastructure for clearing and settling checks, the Fed was able to boost confidence in banks and America's payment system, ensure Americans received the full value of their checks, and speed up payments.

That was the first, but not the last, time that the Fed played a central role in transforming America's retail payment system. By the 1970s, the payment system was staggering under the weight of paper checks. In 1973, Governor Jeffrey Bucher of the Federal Reserve Board described the exponential growth in check volume and the time-consuming and expensive process to clear paper checks as a "time bomb." The Federal Reserve and payment system stakeholders faced a choice: continue making incremental changes to manage the growing avalanche of checks, or look to technology to facilitate transformational change.

Working with the private sector, the Federal Reserve chose transformation, and the effect was dramatic. In partnership with the private sector, the Federal Reserve supported the implementation of the automated clearinghouse, or ACH system...

Today, our payment system is again at a crossroads... While we are seeing a growing demand for payments to be as instantaneous as the apps on our smartphones, in reality, under the hood, these payments currently rely on a patchwork of systems that can result in inefficiencies and delays, as well as uneven access...

Nascent faster payment services are emerging to address this demand from individuals and businesses for the capability to manage their finances more efficiently in real time. These faster payment innovations are striving to keep up with this demand, but gaps in the underlying infrastructure pose challenges associated with safety, efficiency, and accessibility. In many circumstances, the underlying infrastructure in place today cannot ensure that a fast payment is fully complete before the recipient seeks to use the funds. To complete a payment, the banks behind the transaction need to transfer funds between each other. Until this happens, the payment between them is like an "IOU."

Today's systems that transfer funds between banks are not set up to work in a 24/7, real-time world. Instead, most faster payments settle funds between banks on a deferred basis. Deferred settlement entails a buildup of obligations--like IOUs between banks--that could present real risks to the financial system in times of stress...

24/7 payment-by-payment interbank settlement in real-time--what we refer to as real-time gross settlement (RTGS)--offers clear benefits in minimizing risk and maximizing efficiency. A 24/7 economy with 24/7 real-time payments needs 24/7 real-time settlement, and RTGS is the way to achieve this. That is where we believe that the Federal Reserve and the private sector together need to make investments for the future. In this regard, the U.S. retail payment system lags behind some other countries: the Reserve Bank of Australia and the European Central Bank have already implemented or are on the cusp of implementing RTGS systems to support private-sector faster payment services...

As technological change continues to drive payments innovation, we continue to focus on the same basic objective that motivated our initial engagement in the payment system a century ago: promoting a safe, efficient, and accessible payment system that serves the interests of all Americans. The Fed has the unique ability to provide the infrastructure to reliably settle obligations between banks using balances at the central bank. As such, we have a responsibility to serve the broad public interest by providing a flexible and robust payment infrastructure on which the private sector can innovate.
World After Capital: Economic Freedom - "If you were to quit your job right now, could you still afford to take care of your basic needs? Could you pay for food, shelter, clothing, and so on? If you are retired, what if your company suddenly stopped paying your pension? If you are supported by a spouse or partner, what if you left that person? If you could no longer meet your basic needs, then you are not economically free."
Crucially, if you are not economically free, you are not free to participate fully in the Knowledge Loop. Hence economic freedom is a cornerstone of the Knowledge Age. We must make people economically free so that they can participate fully in the Knowledge Loop. We want more people to be free to make music and create art that has the power to inspire. And we absolutely need people to have the time to learn new knowledge, from practical skills such as gardening to the latest theoretical physics. We need more people to create new knowledge using what they have learned. And finally we need more people to share their knowledge with the world for others to learn.

We have massive problems, such as climate change, to overcome and we need more participation in the Knowledge Loop than ever. To free us up to do so, we must be able to embrace automation, not fight it for fear of losing our livelihoods.
posted by kliuless (19 comments total) 42 users marked this as a favorite
I've worked in payments before, and let me tell you payments is hard and international payments is even harder. The worst thing you can do in the payments industry is to believe that the world transacts money like you do, because everyone does it differently. You have to deal with local rules around banking, taxation, and law enforcement while at the same time building systems that work with local payment practices.

Are you charging the right amount of VAT for that transaction? Did you remember that one random province charges a special tax you are required to collect? Are you printing out facturas in Mexico and nota fiscals in Brazil? Do you plan to accept mobile deposits in parts of Asia where people do most of their banking with their phone company? Can you build all of that at scale so you can accept $0.001 micro transactions for your website?

You know who understands international payments? Large companies - like those who buy ads. They know how to read and write contracts for ad purchases and transact funds across borders wherever they need to go. That's why ads won over direct monetization - you can't build an international media presence and do subscriptions at scale with nearly the same reach or impact.
posted by fremen at 5:58 AM on October 9 [19 favorites]

Forgive me if this is unbearably naive, but isn't this a move towards unregulated commerce on the internet, and if so, what stops it from repeating the horrors of the dark web and bitcoin transactions?
posted by MiraK at 6:44 AM on October 9 [2 favorites]

That "knowledge loop" bullshit is incredibly obnoxious worship of the cult of the amateur. It's always telling that the answer to "we need more people creating art and science" is never "well, how about paying for the labor?"
posted by NoxAeternum at 7:05 AM on October 9 [5 favorites]

Some background on the thing that the Fed is trying to replace -- ACH. ACH is the system that provides direct-deposit and bank-to-bank transfer services for most US bank accounts is run by the Federal Reserve. It's explicitly designed as a process that runs once a day.

This, among other things, is why bank-to-bank transfers take several business days to process.

The process is amazingly quaint from a technological standpoint. Banks drop a bunch of text files on a FTP server operated by the Fed, wait a few hours, and then check back on that same server for another text file containing the results.

Upgrading this system is effectively just putting the Fed in the business of operating a debit card network (which isn't at all a bad thing). This kind of thing could be considered a prerequisite for certain visions of web payments and open-payment systems, but it's only one piece of the puzzle (and may very well end up being irrelevant, depending on how it's implemented).

Obviously, the current state of affairs with ACH leaves much to be desired. Nobody's really happy with it. There are also a lot of banks/businesses that make a ton of money by working around these problems, so it'll be interesting to see their lobbyists lose their shit over this proposal.

The slowness of the current system also provides a meaningful (albeit unintentional) layer of security (ie. there's time for humans to step in and fix mistakes). A real-time system is, IMO, kind of scary from a security perspective.
posted by schmod at 7:14 AM on October 9 [26 favorites]

I haven't read the articles yet, just skimmed the very first (Wired) one. I'll read the others when I've recovered from jet lag.

To expand on what fremen said, having spent now a decade working on backend payment systems - payments systems are a nightmare, and the fundamental reason for that is they are either built on legacy banking systems or they are built on systems owned by the large card companies.

The problem with the first (legacy banking systems) is they make it all but impossible for anyone but larger companies or PSPs (payment service providers) to integrate with. Want to transact with a card issuer in the UK? You'll need access to the correct X.25 network, via a BT provided gateway, and then implement the APACS 70 or ISO 8583 communication protocol. Spend several months being accredited and also go through level 1 PCI compliance at the same time. There are no shiny new RESTful JSON APIs for this stuff down in the depths - that's what Stripe, GoCardless, et al, have spent the last n years doing: wrapping all this stuff in shiny new tech.

The open banking regulation to force providers into opening up their systems with APIs is not going to solve this problem as that's aimed at the front end account details type stuff, and not the backend traditional "making payments" type stuff.

The second problem (systems owned and run by the large card companies) is why "402" and micro transactions never got anywhere, and probably won't for the foreseeable future - you can't take micro payments when the card providers set a minimum of $0.10 + 1% fee per transaction. The *only* way you can get around that is by batching up transactions[1]. That's what Flattr, et al, try to do and it's why you often see a "minimum purchase $x for card transactions" when you're paying with a card. Monzo recently disabled topping up accounts via a debit card, as it was costing them several million pounds a year just for their users to move money from one database to another.

[1] or maybe you're a big enough merchant that you can negotiate the fees, but you're not a big enough merchant.
posted by lawrencium at 7:51 AM on October 9 [13 favorites]

"I have created a new payment system to liberate the web!"
Narrator: Two seconds later, Russian hackers had pwned everyone and all the money was gone forever.
posted by qxntpqbbbqxl at 8:00 AM on October 9 [7 favorites]

payments systems are a nightmare

This is the very problem that John and Patrick Collison's company Stripe solves. I don't know that they've quite solved the micropayment problem yet, but they do an excellent job helping merchants take payment via credit cards and other systems online. Great consumer experience too. If anyone is in a position to tackle payments for web content, they are.
posted by Nelson at 8:13 AM on October 9 [1 favorite]

Social media are poisoned by two original sins

The third, and most critical, original sin is: most people are assholes.
posted by Chrysostom at 8:28 AM on October 9 [6 favorites]

This is the very problem that John and Patrick Collison's company Stripe solves.

Stripe sort of solves this, and they're doing it better than most people. But there are real limits to what you can do as a US located company that wants to accept international transactions while settling (getting paid) exclusively in US dollars (USD). It's been a while since I've looked into their capabilities, but I see they claim a long list of popular local payments mechanisms across 135 currencies, which is really great.

One big caveat: I don't see a mention of fees for transacting in those systems, for either you or your customers. Transacting from one currency to another raises a lot of friction (fees) in a whole lot of invisible systems, not to mention hidden taxes and tariffs imposed by many countries for exchanging their less popular currencies for more popular ones. I don't know how Stripe handles this, but accepting currency X and settling to USD can be expensive. Many, many companies want to avoid that and deal strictly in a local currency, which means having a local bank account, which also means having to follow local tax laws and regulations.

They do expressly call out support for 25 countries for "subsidiary support," although the countries they list are mostly the easy ones for supporting international transactions. Sophisticated SMBs can usually figure out how to open a subsidiary in the US, UK, Japan, and Eurozone if it really matters to their business. The "invite only" countries (India, Mexico, and Brazil) are harder but also doable. Wake me up when they claim subsidiary support for China, Argentina, South Korea, or Nigeria.
posted by fremen at 8:52 AM on October 9 [3 favorites]

By the way, I don't want to sound too dismissive of Stripe. What they've done for the payments ecosystem has been incredible, but they're not a panacea. They've improved a ton of interesting problems, but the global ecosystem is still a giant mess.
posted by fremen at 9:04 AM on October 9 [4 favorites]

Some background on the thing that the Fed is trying to replace -- ACH. ACH is the system that provides direct-deposit and bank-to-bank transfer services for most US bank accounts is run by the Federal Reserve. It's explicitly designed as a process that runs once a day.

I'd like to note that it runs once a day, only five days a week. No processing on Saturday, Sunday or Federal Holidays. Since every bank gets one vote in a system change, the smaller banks who out number the larger banks push back because they don't want to staff any IT folks (or even deal with issues) on the weekends in case something goes wrong.
posted by jmauro at 9:14 AM on October 9 [3 favorites]

Yes, ACH is designed as a batch process (and uses net settlement to reduce per-transaction costs by requiring fewer settlement payments), but there is nothing stopping banks from running ACH batches many times daily. Many already do.
posted by wierdo at 10:23 AM on October 9 [1 favorite]

So how does this intersect with notional Postal Banking in the U.S.? Could the Fed's system be the back-office platform for the USPS Bank?

Because I would love to see folks have a choice besides only "payday lenders" or "Citi/WellsFargo/TBTF/etc." fo where to put their paychecks and pay for their gas and Netflix.
posted by wenestvedt at 10:27 AM on October 9 [2 favorites]

They do already, at least in the sense that they aren't transacting directly with the banking system. In addition to prepaid debit cards (some of which are a better value than most banks and are not at all abusive), there are a fair number of online payment services that are as good as a bank account for anything but paper checks.
posted by wierdo at 10:37 AM on October 9 [1 favorite]

I'm sure there's a lot of pain points but I hear "FTP'ing specially formatted plain text files around" that just seems pleasingly simple and it could be so much worse.
posted by vibratory manner of working at 10:48 AM on October 9 [6 favorites]

Come to think of it, that's still how most EDI systems work (FTP or a similar, more secure, replacement that works pretty much the same way) and I don't really have a problem with that aspect of any of them. Issues abound elsewhere in the stack, but the basic idea of processing "specially formatted text files" (like, say XML or JSON or FSM help us, CSV) when they show up and prove to be validly formatted works as well today as it did 20 years ago and is not a bottleneck or pain point in implementing effectively real time processing of any sort.
posted by wierdo at 11:29 AM on October 9 [3 favorites]

You know who understands international payments? Large companies - like those who buy ads.

If I want to find someone who knows how to do international payments, I'm going to call a bank, not an advertising company. A central bank within a currency union would be a pretty logical choice. You know, like the ECB or the Fed.

Using ads as de facto micropayments is a crummy work-around for a broken payments system, attributable mostly to high fixed fees on transactions that make small-denomination payments uneconomical.
posted by Kadin2048 at 12:49 PM on October 9 [2 favorites]

It's also not like ads are micropayments either--you get a bill from (say) Google once a month adding up all those fractions of a cent.
posted by hoyland at 3:05 PM on October 9

The hidden assumption here is that the only people in a position to build out banking systems are private enterprise. In practice, private enterprise aren't going to do it unless they see the opportunity to hold a monopoly, like PayPal did in the 90s and Stripe does today. The existing systems mentioned in one of the articles are, not coincidentally, in countries where the concept of the government serving the public good still has (ahem) currency, and the central bank has been able to drive IT changes and force them on the industry.

This kind of system also exists in the UK, but because banks were charged to use it, they were usually presented as a premium option.
posted by Merus at 4:37 PM on October 9

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