Episode 15: Bank of America | The Impact of RTP and FedNow Instant Payments

In this episode we’re welcoming Ginger Bergman to the pod. Ginger is a senior vice president of risk strategy and payment compliance for Bank of America. We discuss the Real Time Payments and FedNow instant payment programs.

Read the full transcript below.

Episode 15: Bank of America | The Impact of RTP and FedNow Instant Payments

Deana Rich (00:09):

Welcome to It Pays to Know, the Infinicept podcast where we dive deeply into unexplored areas, payments, embedded finance, and more. My name is Deana Rich, I am cofounder and co-CEO of Infinicept, and today my guest is Ginger Bergman. Ginger is a senior vice president of risk strategy and payment compliance for Bank of America. She has decades of experience leading high-performing teams at both Bank of America and Visa. She specializes in strategically deriving change while balancing the risk-reward trade-off and has built several successful compliance, risk, and operational control programs in both the acquiring and issuing payments industries.

When Ginger was at Visa, she led the development of their ARP program, Acquirer Risk Program, which also today is known as GARS and is where I first met Ginger back in the early 2000s. This GARS and/or ARP program provided the framework of holding acquirers accountable and then subsequently payment facilitators accountable for the risk associated with supporting the payments processing system, which is what makes her an expert in the discussion today, the Real Time Payments and FedNow instant payment programs. So without any further ado, please enjoy my conversation with Ginger Bergman.

(01:37):

Hey Ginger, thanks for being here today. I’m really excited to talk about Real Time Payments and FedNow and how that affects our payments world. So with that, I’m going to start with a little bit of a definition, not even that much of a definition, but Real Time Payments and FedNow is to get money to the merchant right away. Because we’re talking about this from the payments perspective, not a consumer perspective. So we’re talking about a merchant getting their money the same day they’ve accepted a card. Real Time Payments is Nacha, FedNow is a Federal Reserve. Is there anything else that’s different?

Ginger Bergman (02:14):

No, they’re really both just credit push, pushing payments out 24 by seven, 365, almost the term instant payment out to that merchant.

Deana Rich (02:26):

How does a bank know which they’re using, or how do they choose between Real Time Payments or FedNow?

Ginger Bergman (02:33):

Part of it I think is really at this point bank preference. Some banks have not signed up for Real time Payments, others are going FedNow. It’s really a bank preference at this point. I think over time you’ll see a greater push in growth in Real Time Payments as that expands, and natural consolidation of how we’re going to operate. If you think of this from a Fed perspective, you look at Venmo or Zelle or others, those are a little more consumer driven, but they have some business application as well. I think they’re just, we’re in this, it’s almost like streaming services. You’ll see, where you’re starting to see consolidation, I think you’ll see some of that start to happen on Fed and FedNow, but really it’s about big choice.

Deana Rich (03:22):

That makes sense, and I was listening to a different podcast earlier where the speaker was saying that FedNow is more understandable by the masses or more understood by the masses, so this might push it faster in 2024. So how will those changes be seen by the payments industry as things start to push out and merchants start to ask for that faster same-day availability of funds?

Ginger Bergman (03:53):

I think the payments industry will have to react to this, but there’s a lot of work to be done to really be in a position to make this a mainstream option. When you look at the risk factors that are involved in settling that transaction to the merchant before really having opportunity to fully examine it, where now there is that one, two, even sometimes a three-day delay in payments to the merchant. There’s a lot of operational work that needs to be done within the industry to really begin to be ready to do that. I think you will see smaller players or maybe payment facilitators that will start to offer some of this sooner than a traditional financial institution.

Deana Rich (04:39):

One of the things that I’ve seen prior to RTP and FedNow is push the card or paying to a card so that smaller mom and pop merchant feels that they have the money sooner. Does that play into this at all, or is that completely separate and not an issue?

Ginger Bergman (05:00):

I don’t know if it plays into it. I think it certainly starts to set a precedent for that faster payment of merchants and begins to set more of an expectation. Certainly when we look at faster payments, it goes to liquidity for all players, merchants and financial institutions as well. And when you look at the economy, while it’s certainly very strong, everybody wants payments faster so that they’ve got more cash to burn, whether for buying new product, investment, etc. I do think while it’s been primarily small business, I think you’ll start to see that at mid-tier and even some very large clients as well.

Deana Rich (05:41):

So one of the things that is interesting to me is, the bank itself isn’t going to get the money until sometime that night, the next morning, but it’s not going to be real time. So the bank doesn’t receive the money real time. Even if they’re pushing it out real time, does this become a lending vehicle?

Ginger Bergman (06:02):

It’s really close, right? It doesn’t meet the traditional terms of a commercial loan, which is meant to cover long-term, whether it’s growth, investment, building out an organization. This is really a short-term thing, so it doesn’t meet conventional loan terms. However, it does increase the risk to the bank. It does have an impact on their liquidity and the ratings when you look at a Fed organization that’s going to examine the bank. So there’s certainly liquidity risk and changes that the bank has to consider when advancing funding to merchants. There’s also that risk of fraud that’s out there that they have to account for as well, where they’re at potential loss if they’re not able to recover these, since they do, in this type of a real-time payment scenario, settle instantly and there’s not recovery available for those funds.

Deana Rich (06:57):

It’s funny that you bring up risk, because that’s what I think of when anything new comes out. My first thought is, “Great, how are the fraudsters going to take advantage of us now?” And in the payments industry right now, we are already dealing with that frictionless, faster underwriting, which opens us up on the back end for accepting somebody in who might be using those fraudulent credentials or synthetic IDs. So it’s not just that I’ve chosen somebody else’s, taken Ginger Bergman’s ID and now I’m opening a merchant account, but it’s that I’ve cultivated and built all these synthetic IDs. And if I’m paying enough attention, I can get accounts through fairly quickly, but then they get stopped on the backside even when they make it through with normal risk monitoring. But if the money is getting paid out right away, it seems like a synthetic fraudster’s dream. Tell me your thoughts on that and how the banks or payment facilitators or ISOs would protect themselves.

Ginger Bergman (07:59):

Certainly this is a synthetic fraudster’s dream, getting on board and quickly processing transactions and getting the money. I certainly see this is something they’ll take advantage of as the buyers really begin to move more in the direction of trying to support a real-time payment out to their merchants. I think this is really where, I don’t want to go into necessarily an AI type of discussion, I think AI certainly has a lot of implications here, and how can you begin to really have stronger AI in terms of your rules and monitoring to be able to have better oversight into those transactions, really have a lot more confidence in what you’re going to settle out? I do think it does lend itself to, there is going to be times where we may have to take a step backwards and have potentially some additional holds on funds.

(08:53):

Where we’ve really tried to move away from that approach in the industry, there’s not a lot of funds that are held and that’s become the exception, as you go out to this instant funding type of stereo, if there is some fraud scheme that your transaction monitoring identifies, that’s something you may have to look at holding until you can investigate further. Because most of this is going to happen in off hours for businesses. Fraudsters aren’t going to do it during the day when there’s physical bodies and people monitoring, they’re going to do it in off hours When there isn’t that type of hands-on monitoring. It’s going to rely on those AIs and those rules engines that have been built.

Deana Rich (09:36):

It’s funny thinking of off hours for fraudsters since they come from all over the world. Heck, it’s on hours for them, just off hours for us because our people aren’t there doing anything.

Ginger Bergman (09:45):

Yeah, absolutely. Yeah.

Deana Rich (09:47):

So we’ve been in payments a long time, both of us, and there was a time when you would get a ton of reserves if there was risk, or you would hold funds, as you mentioned, a lot, and then do your investigation taking your time. And as underwriting tools have gotten better and as risk monitoring tools have gotten better, and AI’s been around in risk monitoring for longer than ChatGPT has made us all think that, right? So you and I know that AI’s been around for a while, that machine learning piece of it. So it’s really helped us speed up underwriting and speed up payout, not real time, but speed up not needing to hold things. I feel like this might push us back to the early 2000s again. What is your thought on that?

Ginger Bergman (10:37):

I agree. I think initially there’s going to be this cost-benefit trade-off. If there’s going to be this instant payment, there has to be some way to secure and prevent the banks from taking large losses. So there will be this potential for a pullback when there are those fraud situations. And then it’s that balance for this client satisfaction type of an issue. And I think where we’re likely to shake out is, for some very large clients that have strategic relationships with banks, there may be use of something like a line of credit that a bank would put in place that would cover it in the event that there was some large fraud scheme that went through, tops at the risk so that there may be wouldn’t be a hold on transactions for very large merchants. It’s really when I start looking at small merchants, some mid-tier merchants where we may have to take a step backwards until we can get enough learning and evolve more tools and controls so that there isn’t that potential hold on a what we might call a fraud bust-out scheme.

Deana Rich (11:44):

So on that small and mid-term merchant, those are normally serviced by not smaller banks, but certainly not Bank of America or Chase. Those aren’t the size of banks that you see with those small and medium merchants. Do you see those smaller banks driving RTP and FedNow faster payments, or do you see it being the bigger banks?

Ginger Bergman (12:10):

I personally think it’s going to be driven, where a lot of the change comes from is really ISOs and potentially some payment facilitators, which there are some very large, well-respected payment facilitators out there. Is this another way for them to drive their growth? That naturally feeds into small and mid-tier banks that are supporting some of these ISOs. And so I think indirectly these small and mid-tier banks will be coming into it from an acquiring payments perspective by the partner relationships they have with ISOs and payment facilitators. And I do think in that scenario those banks will have to then look at reserves, things of that nature for their ISOs or payback clients that want to support this.

Deana Rich (12:56):

Got it. So rather than going to the merchants themselves for the reserves, you go to the bigger business entity in that food chain, which is the payment facilitator, the ISO, which in our world the ISO seems to drive a lot of the innovation and change.

Ginger Bergman (13:12):

Absolutely.

Deana Rich (13:13):

Perfect. OCC or FDIC, do they have any guidance around this and how to protect yourself on the payment side?

Ginger Bergman (13:22):

They’re starting to come out with some guidance now, and I know FedNow is trying to pull out some fraud monitoring rules as part of their offering to the market. Guidance really is that you have to have controls in place to mitigate the risk. I think they’re still in a bit of a learning mode. I think as they start to examine the banks, you’re going to see, those that are playing, there’s going to be closer attention to that, but it’s really knowing your customer, standard things that they provided guidance on, really know who your customer is, strong transaction monitoring controls. And from some of the reading I’ve done, it’s really about potentially that hold in the event of a fraud situation or temporary freeze on an account until you can validate things.

Deana Rich (14:12):

Got it. So it sounds like the guidance is very similar to the guidance in payments today. And if I had read it, maybe it would say just do it faster, just click the payments.

Ginger Bergman (14:23):

Right, just bigger, faster, stronger.

Deana Rich (14:26):

Is that the $6 million man?

Ginger Bergman (14:28):

Yeah, pretty much. Well, we just dated ourselves there.

Deana Rich (14:33):

Well, that’s okay. In the intro I talked about how long we’ve been in the payments industry, so I took care of that then. I’m going to switch gears a little. Silicon Valley Bank earlier this year imploded, and it changed the payments industry on the ISV or software side of things, and payment facilitator side of things the landscape is looking different. Do you think that event will have a governing or slowing effect on other banks implementing Real Time Payments and FedNow to get the money out there?

Ginger Bergman (15:09):

I think certainly that that’s given a lot of banks a moment of pause and caution and to look and learn from it, and how to prevent and how to not be the next Silicon Valley Bank, the potential for that run on a bank and the funds and that outflow. Certainly I think you’ll see, when I think of larger banks, a stepped approach to implementing that, any type of a real-time payments process for paying out to their merchants.

Deana Rich (15:38):

When you say run on the bank, it was such an interesting event in that it felt like in the depression when there was a run on the bank with lines, except everybody did it with their phones and the electronic side wasn’t shut down. So the run could continue, where I know the stock market has governing things in place, so the stock market will shut down if it starts to do things that might push us down into a one-day run like back in 1929. Do you see those types of governing events coming with real-time payments so that if something is exploding, they all stop?

Ginger Bergman (16:17):

Whether it’s an all-stop or I would see certainly the Fed, when you look at the Fed, read through some of their publications, it appears they’re looking at how to tackle that and their monitoring piece of it, whether it’s a full stop or selective stop. I think certainly that is one of the lessons learned, is that for us, we look at it as that velocity monitoring. And when you see that large spike that something’s going on, there has to be that pause so you can understand and determine the risk and see if it really needs to be full stop to prevent a broadening of the event, failures of additional banks, the worst case scenario, collapse of the financial system. So there has to be something, whether it’s selective or a full-scale stop. I think that may be determined based on the event, but certainly something like that will have to evolve as we move further into this instant payment realm.

Deana Rich (17:16):

So we of course now when we do transaction review, when there’s a spike we’re looking at yesterday or we’re looking in the past. I think what I’m hearing you say is we have to do real-time monitoring, so not just on the offside, which is a part of real-time monitoring that occurs now, but also as it’s going through and hitting and going to be captured and through settlement, we have to stop it there sooner, which means we need more instant risk monitoring. Which goes to your, this might happen in the middle of the night, so you’d better have systems that take care of this.

Ginger Bergman (17:54):

Absolutely. I think it’s going to be all players in the payments ecosystem that will have a role in this. It’s the banks themselves, both issuing and acquiring, that have to have these controls in place to prevent a stop if they’re seeing a spike until it can be understood. I look at even the payment networks who have the data out there and what is their role in potentially having some type of monitoring that will put a stop in place. They have it for other types of scenarios when there may be a run on a bank member or something of that nature. So certainly I think they play a role as well as the banks themselves and the Fed. It can’t be just one or the other. It has to be the industry as a whole having layers of rules and controls, just the same way we layer rules and controls in place today in a standard acquiring scenario.

Deana Rich (18:52):

So speaking of the standard scenario, we all have contracts in place, the bank with the ISO or the payment facilitator, and then there’s a merchant contract that includes the bank sometimes, and if it’s a payment facilitator it may not. Do you see new impositions or requirements for all of those types of contracts because of these instant payments?

Ginger Bergman (19:16):

I think there may be some new terms, but I think in addition to that, when you look at most standard merchant agreements or ISO agreements, payment facilitate agreements, there’s always that requirement to place a hold on funds, to require reserves, deposits, et cetera. So a lot of those are covered, but I think there may be things, new terms such as, if you’re doing a real-time payment that a term that these are provisional credits subject to reversal, something of that nature, there may be requirements to really, when you look at putting your terms in big bold terms out there to really clarify requirements around real-time payments and that provisional credit or reversing holds that could be placed, circumstances will lead to it, so that there’s clear disclosure to your clients when potentially a hold could be placed and why, expectations around that hold.

(20:13):

Just so that you have that general awareness, somebody can’t come after the fact, “Well, they’re counting on the funds and they don’t receive them,” they knew up front when they signed the contract that this was a potential. Really I think it’s protecting against the loss, but also about reputational risk that happens when you have to place a hold. And whether it’s a consumer or merchant, this is unexpected and it becomes a media bit. So certainly there needs to be very clear disclosure on this.

Deana Rich (20:48):

It’s funny, the social media piece of payments that occurs when you hold funds or take an action against a merchant. Next thing you know you might be all over Reddit or some other social media forum where they’re saying how horrible you are and now they can’t buy diapers for their baby because you held their funds. And nothing about, and this is actually a true scenario, nothing about the fact that the shops shipped from California their wetsuits to Nigeria and didn’t see where the fraud was in that. So how do you see social media affecting this instant payment, real-time payments event? Do you see people being worried about having their name plastered and taking different action, or do you see it just being part of business?

Ginger Bergman (21:38):

Well, I think it certainly from a banking lens, there’s always a concern that your name would be out there, or any large corporation, that your name would be out there in a large media event, in a consumer dissatisfaction type issue, something that nobody wants to have. I do think this will become a lot more common as the industry moves and adopts towards that. I don’t think large companies will ever get comfortable with that. Nobody wants to be out there like — I like what you put out there with, “I can’t buy the diapers.” I was thinking something very similar. But nobody wants to be out there in that position in social media. And I think whether it’s a consumer or merchant, they’re very savvy that that puts pressure on companies to take actions that maybe they weren’t prepared to take to solve it.

(22:26):

So I do think social media is certainly going to play a big role in it, but I don’t think if it’s a very large event it’s going to change the situation or have immediate funds released. You’ll probably see a lot more press statements or public statements that’ll be released, whether it’s a generic one that they’re working hard to resolve this, mitigate the risk to all folks, having their account holders’ interests and protecting them. I think you’ll see that type of media response from, whether it’s a buyer or other large entity out there.

Deana Rich (23:03):

Makes sense. So it’s a new cost of doing business, or maybe a good part of doing business when they go out and say good things. But social media is not any different than any other type of dealings with clients, in that they’re always happier to tell you the bad stuff than the good stuff.

Ginger Bergman (23:21):

Absolutely. And as much as banks or acquirers want to go out and tell the full story, they’re certainly not going to do that. But it’s just a piece of doing business of the times that we’re in, and we certainly still have the responsibility to protect the shareholders, the harm to the payments ecosystem as well.

Deana Rich (23:40):

Well said. So as we look into 2024, maybe beyond, but I’m going to start with 2024, what is your prediction for instant payments?

Ginger Bergman (23:51):

I certainly think you’ll see, this really started with, as you noted earlier, the small merchants. I see it as that gig economy worker, whether it’s the Uber, the Lyft driver, you see that and that’s really driven it. But I think you’ll start to see, as we talked about, some ISOs that are going to go out there and use that as a leverage point to really attract those small merchants who are looking for that faster cash turnover. I think you’ll see a lot of that. I think there may be some large merchants as well that are going to go to their acquirers. You’re going to see some of them that are going to start, when they have a RFP, their next RFP is going to include that faster pricing. And so I think as those larger merchants come up for RFPs, you’re going to see a demand for that. You’re going to see the small merchants start to drive it. I think you’ll see growth. How fast it will grow in 2024, not certain yet, but I think over the next five years it really will become more of the norm.

Deana Rich (24:54):

That makes sense. And you reminded me of one question, which is about pricing. Do you see real-time payments, instant payments being priced higher than normal next-day payments?

Ginger Bergman (25:09):

As much as I would love to say yes, I have to say no. And I think that’s just a factor of where we are. Especially what I look at large clients, I don’t ever see that being a reality. I think it just becomes one of the factors that goes into the deal and how you manage to support those types of strategic relationships. I think potentially for small merchants that there could be an incremental cost increase, and that’s really risk-based pricing because of the ability to recover in a fraud loss situation.

Deana Rich (25:45):

Fair. And before we close our discussion, Ginger, is there anything that you wanted to make sure our listeners know, understand, or hear about instant payments?

Ginger Bergman (25:59):

When we look at instant payments out to acquirers, the important thing that everybody should remember is that it really can’t be recalled. Once it’s been approved and it’s out there, it’s gone, it’s done. There is not a way to recall it. When I think of similar products, if I think of even a Venmo, a Zelle, a lot of those, they’re out there, they’re near real time, but some of them are considered somewhat provisional. Where this is really a, once you hit send, it’s gone. There is not time to stop it. And it really is intended to be a one-way street route. The Fed is not going to, it’s just a push on the payments, it’s not a pull. Where you look at others where a business can request it and send it, this is really a push type of payment. I think that’s an important distinction for folks to understand.

Deana Rich (26:49):

Well, thank you very much for your time today. I appreciate it. Sharing your decades of industry knowledge is important, because as things change, they stay the same. And we can look back at past fraud and events to know what we’re going to be dealing with tomorrow, and I definitely picked that up from today. So thank you very much.

Ginger Bergman (27:11):

Oh, you’re welcome. I appreciate the time and opportunity.

Deana Rich (27:19):

Thank you so much to Ginger Bergman for joining us today, and thank you for listening to us on It Pays To Know. To hear more from us, please head on over to infinicept.com, where you’ll also be able to learn more about our PayOps platform as well as our newest product, Launchpay, where we are a payment facilitator. We help software companies get the payfac experience with all the transparency and openness of becoming a payfac without the expense and the lift. We meet you where you are on your payments journey. For Infinicept, this is Deana Rich. Thanks again for tuning in, and we’ll see you real soon.