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Leaders In Payments
Leaders In Payments
David Watson, President & CEO of The Clearing House | Episode 348
Can real-time payments revolutionize your grocery shopping experience? Join us as we sit down with David Watson, President and CEO of The Clearing House, to uncover the transformative journey from its 170-year history to becoming a modern-day alternative to the Federal Reserve Bank. From high-value payment wires to ACH transactions and instant payments, David breaks down the extensive range of services The Clearing House offers and addresses the persistent myth that checks are disappearing.
David's professional odyssey, spanning two decades in banking across various countries, offers a unique lens on the critical importance of user experience in payment technologies like Apple Pay and Zelle. We also explore the potential role of crypto and blockchain in the payments ecosystem, emphasizing the stringent safety and regulatory standards these technologies must meet.
Passionate about fostering innovation and creating a secure environment for financial institutions, David provides invaluable advice for aspiring professionals in the payments or fintech industry: pursue what you love and remain open to change. Tune in for a deep dive into the dynamic and ever-evolving payments landscape and the exciting opportunities it presents.
Welcome to the Leaders in Payments podcast, where we talk to C-level leaders from across the payments landscape. We'll be discussing the products and services that impact the payment space today, as well as trends and predictions for the future of payments. We will also hear stories from our guests about their journeys to the top.
Speaker 2:Hello everyone and welcome to the Leaders in Payments podcast. I'm your host, greg Myers, and today's special guest is David Watson, the president and CEO of the Clearinghouse.
Speaker 3:So, David, thank you for being here and welcome to the show. Thank you.
Speaker 2:Greg, it's a pleasure to be here, so let's go ahead and dive right in. If you don't mind, tell our audience a little bit about yourself, maybe where you grew up, where you went to school, where you currently live, a few things like that.
Speaker 3:As you can probably hear from my accent I Probably here for my accent I'm born and raised in Scotland where I spent all my early years, and that's actually where I went to school at the University of Edinburgh. Around about 2011, my wife and I decided to try something different and we emigrated to the United States. So we've been living in New York City ever since and absolutely love it here.
Speaker 2:Awesome. Well, let's talk about the Clearing House. I think most of our audience will know what the Clearinghouse does, but just for those who don't, can you just tell us about the company?
Speaker 3:Certainly, the Clearinghouse has been around for over 170 years.
Speaker 3:The way to think about us is. Long before the Federal Reserve existed, the private sector got together to create a body to both A provide a safety net to financial services but B also provide a place to have safe and secure settlement between different financial institutions. So we were created to both help print money, hold gold, step into financial markets when there was times of turbulence, as well as provide a literally back then a physical room where banks could send delegates with pieces of paper to swap and settle payments and securities transactions. We were actually one of the biggest lobbyists for the government to take over that role in the very early 1900s and we're very happy that they did so with the creation of the Federal Reserve Bank.
Speaker 3:But the role we play now is more to be the private sector alternative to the Federal Reserve Bank in terms of payment services and payment settlement services for the financial industry. We settle around $2 trillion a day clear and settle that through our different networks, whether that's our high-value payment wires, our ACH offering for bulk and batch transactions, our instant payments or real-time payments RTP network the most recent of our core offerings and, yes, we still do check, image clearing as well for many financial institutions, but really our goal is to drive how we can have low-cost, safe and secure services for the US economy, regardless to whether you're at the biggest bank or the smallest community bank or credit union, to enable you to transact with the US economy. The last thing we do as well is provide a lot of educational services and associational services to support banks, community banks, credit unions on that journey as well.
Speaker 2:So your customers are all financial institutions.
Speaker 3:Yes, they are all financial institutions. Obviously we think long and hard about how we help those financial institutions serve the end consumer, corporate, other financial institutions. But our direct membership is banks, community banks, credit unions. So yes, financial institutions.
Speaker 2:And do you want to dispel the myth that checks are dying?
Speaker 3:What I can say is that last year we had growth across all four of our products, whether it be wires, ach, instant payments, of course, the fastest growing and our check image clearing. So we still see some growth. However, I think that was a bit of an anomaly. What we do tend to see is a percentage around about 5% reduction in checks every year. However, it's still a very important and fundamental service that we provide, as there are a variety of checks still happening in the US economy today.
Speaker 2:So I had a scenario this is a personal story, I don't always share those on my podcast but my wife had bought groceries and I won't say where, and they were out of stock of half of the order, so obviously asked for a refund and it was like 150 bucks, so it was a decent amount of money, and this retailer said it would be four or five days before we would get the money back in the account. So I'm thinking as a payments guy and real-time payments. It sure seems like the technology would be there to do that quicker. Is this a business rule that this retailer had, or is there really a technology challenge that it would take four or five days? Yeah, I mean I can't speak for that specific. Is this a business rule that this retailer had, or is there really a technology challenge that it would take four or five days?
Speaker 3:Yeah, I mean I can't speak for that specific retailer, but what I can say is it's hard to change infrastructure. It costs money and it takes time, and I think you know us here in the US are the best example of that. Whether it's the railways, the roads, the telecommunications networks, you can't change them overnight to upgrade them to something different. Payment infrastructure is a little bit the same. So when we launched the real-time payments network six years ago the first new payment settlement network in 40-odd years in the US and of course we've been recently joined by the Fed's offering as well what we see is that it doesn't matter necessarily if we have the settlement rails ready.
Speaker 3:We also need both financial institutions, but also corporate the treasury departments and payables receivables departments, to also be able to both send and receive money in real time. And that does require process changes, sometimes technology changes, and that's what takes a little bit of time and some see that as a chore. I think what you see is the first movers who are seeing that as a real benefit for both A their end consumer who's able to, in your example, receive that refund instantaneously, or their own payables, receivables and treasury department to better manage cash flow. It is the future. I would say it's here today. It's the future for everyone, medium to long term. But it is a long journey because of that infrastructural change that it takes, and I think that's something where we in the US are a little bit behind some other markets, but we're well positioned to not only catch up but step ahead of it.
Speaker 2:And do you guys play the role sort of as a consultant for financial institutions that are trying to understand maybe use cases around RTP and things like that?
Speaker 3:What I would say is we're not a consultant in the sense of we charge to give advice, but most certainly we spend a lot of time working either to educate financial institutions, to help them understand which are the most pervasive use cases for instant payments, because there's a place for every payment.
Speaker 3:Some payments it makes sense to be a batch payment that takes three days. If you get a monthly or a biweekly salary, you don't really care how it got there. Was it sent three days before or one day before or 10 seconds before? You care that the money's there on your payday. However, if you work in an industry like the service industry, you actually want to be paid at the end of your shift. Well, in that case an instant payment makes a lot of sense. So there's different use cases, if you like, for different kinds of payments, and I think that's the important part where we spend a lot of time with our financial institutions, Although actually I think more recently, having spent five years doing that, we spend more time jointly with financial institutions talking about that with their corporate clients.
Speaker 2:You may not necessarily have and I'm putting in air quotes like direct competitors or a whole bunch of direct competitors, but obviously you have some competition. So what makes the clearinghouse unique or different?
Speaker 3:That's a great question. I mean, we have a variety of different types of competitors. I think, in terms of exact services, people have a choice to use the government or they can use us as a private company, and I think that's a choice that institutions can decide. Many decide to use both, so they have effective resiliency, and that's a good answer for them and for the economy. But you, in essence, have to choose between whether you can use the Fed services, our services from a private company, or a combination of both. However, in addition to that, when it comes to instant payment, settlement or other payment mechanisms, you also can choose to take other routes, for example, pay by card or other types of offerings, if you like.
Speaker 3:And I think for me, when I look at the account to account space, which is the primary area that we operate in, whether it be wires, ach or real-time payments, what we strive to do is to help clients optimize their liquidity, help clients maximize their cash flow, help clients maximize their payable receivables flow, and we do that as, in essence, a consortia that, while owned by financial institutions, is managed in a way that we are not here to make profit. So my goal and how I managed, is to have safe, secure and reliable services and to drive those prices down as much as possible over time from a provision perspective. So I don't look to hold large amounts of capital or build up huge amounts of revenue into profit. What I try to do is when we start making money on products, we try to reduce prices and when we invest, we invest in safety, security, resiliency and invest in the innovative future of those payment rails. And that, I think, is one of our USPs, versus maybe a commercial company that's driven by profit for its shareholders.
Speaker 2:You mentioned the future, so let's talk about that. Where do you see the payments industry as a whole headed, say, in the next three to five years?
Speaker 3:Look, it's a great question and it's a question, I suppose, that I've been asked many times over the years, and I'm sure you've asked many other payments leaders and the answer to me has probably been the similar answer for the last five years, which is interesting when you think that five years ago I was saying this will be the future and I'm seeing it again now and if you ask me in five years, I'll probably still say the same again Because of that length of time the journey takes.
Speaker 3:However, where I see this industry going is very much more towards that real-time availability. Now, whether we talk about real-time payments, the aspect we provide, or real-time liquidity or real-time credit, right, people are not necessarily thinking that they ask for it, but actually what they are asking for is the ability to do things much faster and quicker, and the plumbing behind that needs to follow suit and happen at the same pace. So my expectation is that we will have a lot of choice in the payments landscape in the future, but that choice will all be based on instant and real-time capabilities. But I do believe it'll be a journey to get there.
Speaker 2:Do you think that, yes, everyone wants the instant gratification, but they also want it with very little to no friction. So do you feel like that user experience is going to become even more critically important?
Speaker 3:I think user experience can be everything. If we think about 10 years ago, it was that Apple Pay was launched. Now Apple Pay in essence is built, you know if I'd be flippant. It's the ability to pay instead of using a piece of plastic over card rails to pay using your phone. So the rails in that instance are often the same. Today they are anyway.
Speaker 3:What I would say is they made it much easier for people to do things and without that ease of use mindset you really will not have the same sort of take up, no matter how innovative, creative or how much of a great problem solver your product is.
Speaker 3:So the ability for a client to do something, whether it's a consumer or a corporate, really easily, I think is definitely key. If we look at the success of Zelle, where the ability to pay using a phone number, which is much easier than trying to get someone's routing number, their account number it reduces the risk of you keying things in wrong much more now I think, has definitely seen a huge uptake in Zelle volumes and many of those are settled over the RTP network Real time. You actually see that by making something easy to use you actually can explode its growth. So it has a huge impact and factor, and people want that with payments. They want them to be incredibly easy to use, little to no friction, incredibly low cost or no cost for the ability to do it, because, at the end of the day, you're paying someone for a reason. That reason has other connotations. Whether it's paying a bill, splitting a check, moving money between your own accounts, getting money to your brokerage account. You want that to happen easily, quickly and at little to no cost.
Speaker 2:Do you think that in the future, things like crypto and blockchain have a place in the payments ecosystem?
Speaker 3:I mean, I would argue they have a place today. I think crypto is there. I think it's used. Sadly, it's used for a lot of nefarious activity, bypassing the controls put in place by governments, financial institutions, market infrastructures. That is enabling some activity that I think none of us would like.
Speaker 3:Does that mean all activity in crypto is bad? No, definitely not, but I do think what we need to see is that if crypto is here to stay, which I think it is, then it needs to be brought to a level playing field with how we manage fiat currency today, which has a lot more safety, security and control around it. It also, I think, we need to understand, you know, the movement of money over crypto's impact and linkage to money supply and governmental fiscal policy, which I think we need to also see how it plays out, both here in the US as well in other countries and globally around the world. What I will say is that our focus is very much around where problems can be solved, and there are a lot of instances where I see how crypto is being pitched to be used is actually just a safe, secure and reliable payment that happens instantaneously at a low cost. I can do that over the RTP network today.
Speaker 2:So I suppose we have to look long and hard at what problems we're trying to solve and with what Well, let's switch gears a little bit and talk about you, so maybe walk us through your professional background and how you got to your role there today.
Speaker 3:Sure, I mean I'm a 20-year banker. I spent that career in a variety of countries around the world, both in Scotland, germany, the Netherlands, italy, england, and then settled here in the US, as I said, back in 2011. And the majority of that career I've spent in a combination of the payments and security space, looking at the consumer side of the business, the wholesale side of the business, the investment banking side of the business, but really very much a product mindset. So my roles from my very first role, which was stamping faxes that came in that needed signature authorization, all the way many years later to running business line in the cash management side I've really had the mindset of how do you solve problems, the real product idea that if I can solve your problem and solve it for multiple people, then that's a product I can sell, articulate and help with. And that's really how my mindset has been driven, both professionally and privately.
Speaker 3:Actually, I love to be a bit of a problem solver. So when the opportunity came to come to the Clearinghouse via Swift, where I actually helped out on the new strategy of Swift as a market infrastructure internationally, it really was a role that I was incredibly interested in, the role where you can help shape the future of payments for the US economy is one that's hard to turn down and, despite my 20 years of incredible commercial focus in banking, the ability to do that in a consortia that is backed by the largest players but, at the same time, not driven by profit, driven by how we further the economy and further the services and provide that resiliency. There's an incredibly interesting one, one that I've been doing now for a year and a half and enjoying very much.
Speaker 2:So you've been there for a year and a half. What have been your main priorities?
Speaker 3:Sure, I mean our biggest priority, I think, has been and always will be safety, security and resilience. So number one priority always for us is how we control and protect the movement of $2 trillion a day for US consumers, corporates and financial institutions and that will always be our number one priority. And that's an ever changing landscape in terms of both the resiliency, the cyber protection. That will always be number one and, if you think about it, that's why we were created with a safe and secure room down near Wall Street in New York in the 1870s for people to swap over bonds and deeds and various things with the right levels of security protection. The differences there they tended to be a lot of people in uniforms carrying batons and guns. What we have today is a very different kind of security to help move those money flows in the cyber and the technical landscape.
Speaker 3:The second priority for us, I would say, has been very much the growth and expansion of the real-time payments network. We take second quarter this year 82 million payments, $55 billion over the network. We had our first billionth payment. We're going to have sorry, our billionth payment come over the network very soon. We have hundreds of thousands of businesses originating payments. That's growing every day. We have over 5 million consumers originating payments. We're going to see 40% growth this year versus last year. However, it's still almost a blip in the ocean in the grand scheme of payment volumes. So I can pitch to you all these wonderful stats, but it's just the very beginning of its potential. So that's been a huge focus for us as to how we can help, as I mentioned, financial institutions, corporates and consumers really come on that instant payment journey and understand that it's not about just having an instant payment, it's about what that means for you, your business, offering your customers Various things like that. So that's been a huge focus for us.
Speaker 3:And I suppose my third priority I would say has been around our chips wire network. We recently this year in fact migrated it to the ISO 20022 data format. So that's a huge piece of business for us. You know, I think of the 2 trillion, 1.8 of it is cleared over the chips network every day. 95% of those are cross-border. So if you think about the impact of those flows on world trade, on the position of the US dollar internationally, the $5 billion annual liquidity savings that that product gives our banks and enables back to the industry, it's huge.
Speaker 3:So, then, changing its data format to ISO 20022 was a massive piece of work, and not many people heard about it unless they worked in the back office of teams, because it went so smoothly and so fantastically that the first day after the migration we settled $1.8 trillion. So we didn't see flows move, we didn't have issues, it was 100% participation. So that was a huge piece of work and that was those number four. Priority for us across all of my networks ACH wires, real-time payments, checks has been how we help the industry continue to battle fraud and not just have a safe and secure network, but how we can support our clients in terms of bad actors out there that continually, unfortunately, target people, particularly individuals, on their payment landscapes.
Speaker 2:Earlier in the conversation you mentioned the educational aspect, but we haven't talked a whole lot about that. Do you mind kind of explaining that a little more so the audience kind of understands that? Sure.
Speaker 3:In addition to running networks, we actually also run what we call associations. So we have a few. Some are focused on how we can advocate, position different things in DC and elsewhere to help educate the government on what's needed, how we ensure fairness and equality in the economy and the industry, how we can help further the US economy and its industries. We spend a lot of time on that and using our expertise, both alone but with our banks and with other trade associations. We also provide specific payments association work and, in particular, check association work with Echo, where we provide education on how to process, how to engage with different and other players in the marketplace, how to get things done in essence, and that can be from the very basic of product education all the way to understanding your options, whether it's services you use from us or services you use from other people as well. And that's again something we've done in various shapes and forms for 100 plus years in our very program.
Speaker 2:Well, let's turn back to you for a minute. What are some things you're passionate about? So, maybe one work-related passion and one personal passion.
Speaker 3:I suppose my work-related passion has to come down to how I ended up moving from banking to market infrastructure, and that was when an old friend of mine sold me on a vision, which is why would you want to change a corporate P&L when you can help change an industry move forward?
Speaker 3:And that really, I think, is my passion and that's why I love the Clearinghouse. Our role is to be a safe place for the industry to get together to drive innovation and drive change positive change in the industry for consumers, corporates, big banks, small banks, credit unions, community banks, regional banks. It's a great place to be and it's probably why I love my job and therefore, by default, it's what I'm most passionate about. If you ask me what I'm passionate about outside of work, I think if you'd asked me about 10 years ago, I'd have given you a list of a variety of things I would be involved in, from sports to supporting the local community to a variety of different stuff. I have a six-year-old and a nine-year-old and I got to tell you I'm passionate about them. They are what keeps me going.
Speaker 2:All right. So obviously, as someone that's been in the payments industry for 20 years, as you said, if someone came to you and maybe they're right out of school or maybe it's their first kind of job out in the real world and they said, david, I want to build a career in payments or fintech and I see it as the great place to have a career, what advice would you give them to be successful in this industry when asked that question.
Speaker 3:I always tend to get two pieces of advice, and the first one is about if you don't enjoy something, don't do it. So dip your toe in the water, get involved. Payments you think you're interested in, get involved. But if you stop enjoying it, realize that it's okay to change and do something different. And that goes from the tasks to who your manager is, to who the company is. Enjoyment is the most important thing in a career.
Speaker 3:When it comes to payments specifically, I cannot stop talking about the level of change we have and how. You know the exciting introduction of not just the instant payments and the RTP network, but many other things that are happening in our industry in the last five years and in the next five to 10 years. It's an industry that is rife with change, but that change is about real things. It's actually tied to your real day-to-day activities of you, of others around the world, and that is where you can have real impact in different ways. And that to me, I think, is the most exciting part and my encourage for people to get involved, whether it's here at the Clearinghouse, whether it's with financial institutions, with corporates who are looking at payment tech-centric aspects to help consumers or other corporates. It's such an exciting industry to be involved in.
Speaker 2:Okay, great Thanks for sharing that advice. So, David, we've covered a lot of ground, obviously, about you, about the Clearinghouse and the industry as a whole. Is there anything else you'd like to add before we wrap up the show?
Speaker 3:No, I mean I think just thank you for your time, greg.
Speaker 2:I really enjoyed this and I really enjoyed the podcast. I listen to many now, so thank you for your time. So, david, thank you for your time. I know your time is very valuable, so I really appreciate you being here. Thank you, and to all you listeners out there, I thank you for your time as well, and until the next story.
Speaker 1:Thank you for joining us this week on the Leaders in Payments podcast. Make sure you visit our website at leadersinpaymentscom, where you can subscribe to the show and where you'll find our show notes. If you enjoyed listening, please share on your social channels as well.