API Links FinTechs To Fed Payment Rails
If done right, the expansion into high value, real-time B2B payments will be a “huge game changer,” Reserve Trust CEO Dave Wright told PYMNTS, pointing to the multi-trillion dollar opportunity that exists to digitize, modernize and democratize this largely untapped slice of the market.
“Our focus is pretty strongly on business-to-business payments,” Wright told PYMNTS’ Karen Webster in a recent conversation, adding that the plan was to offer the same type of “developer-first” access to Reserve Trust customers as it has done in the past with other rollouts.
For example, Wright said, in the initial months after being granted its Master Account status from the Federal Reserve in 2018, the focus was mainly on cross-border B2B payments outside the U.S. between foreign banks or broker dealers that wanted access to the U.S. banking network to settle transactions. But now, he said, half of the activity is domestic.
“Many of the companies we're looking to support you wouldn't even think of as payment companies,” said Wright. “They're simply companies that want to embed payments in their products and services — and they include shipping companies and invoicing and payment companies.”
As Wright put it, the company has the opportunity to straddle numerous corners of the payments landscape — as part of TCH’s real-time payments initiative, as part of the Fed’s real-time payments roadmap and through partnerships with any number of FinTechs that are seeking to innovate outside of those rollouts, through connecting unregulated systems to regulated rails.
“We have the access that the banks have, but we have the incentives and the alignment that FinTechs have,” he said.
As has been widely reported, the Fed is mulling the development and introduction of a “FedCoin,” mirroring efforts by peers worldwide to develop central bank digital currencies (CBDCs).
“We know the Federal Reserve is going to have to move into digital currency,” Wright said. “Our view of it is we don't know exactly how they're going to do it. How they're going to act within the ecosystem, but the path of least resistance for them is going to be to keep the status quo, to keep the banks as the gatekeepers to that digital currency.”
By status quo, he expects the Fed will require banks and other Master Account holders (like Reserve Trust) to handle the know your customer (KYC) and anti-money laundering (AML) and other compliance aspects for FinTechs who want to be part of this digital currency ecosystem.
The connectivity with Fed rails, explained Wright, fills a gap that has bedeviled FinTechs for over a decade as banks de-risked their balance sheets and turned their attention to areas other than B2B services.
As he explained it, banks exist primarily as depository and lending institutions and the majority of their money is made off balance-sheet-related activity. Helping FinTechs get payments completed is relatively lower on the list of priorities.
Banks’ slowness to tackle B2B’s pain points and the current limitations of their technologies and legacy systems “has created an opportunity to offer an alternative to traditional banks for partnerships in the payment system.”
Reserve Trust’s status as a private company with a master trust account status represents “a legal and regulatory idea that had never been explored before,” he said. It’s a disruptive model, Wright told Webster, one that has taken shape over several years. The company worked with the Fed’s banking division and with regulators through the years after its 2016 founding to become a non-depository, Colorado-chartered trust company.
Enter The Master Account
Drilling down a bit, the master account allows Reserve Trust to process payments directly with the Fed; its customers store funds in custodial accounts that are, in turn, backed by Reserve Trust’s master account.
The funds are transferred using automated clearing house (ACH), Fedwire, SWIFT and other payments infrastructure.
The goal, he said, is for Reserve Trust to broaden and democratize access to the payment system, which was, until now, filled with winners and losers that the banks largely chose.
“The reality is Stripe is large enough. They have strong relationships with a number of banks and they get to steer the ship to some extent,” Wright said. “We really see ourselves as powering the next thousand folks that want to get into that, that can't get a Wells Fargo or a Chase or a Goldman to pick up the phone when they want to get access.”
But by linking with Reserve Trust’s application programming interfaces (APIs) and cloud-based payments systems, FinTechs and smaller banks can offer payments functionality embedded in their own services. They connect with those rails — through the backing of Reserve Trust's master account — without having to partner with sponsor banks or correspondent banks.
Fresh Funds, Big Plans
Looking ahead, Wright said the company plans to use some $30 million in recent fundraising to enable a hiring spree, to beef up its operations, compliance and engineering teams to deal with a growing customer backlog in an evolving payments landscape with increasingly large players.
Investors included QED Investors with participation from FinTech Collective and Ardent Venture Partners and Flywire CEO Mike Massaro. Wright noted that many of the investors in the most recent round invested in Reserve Trust because of the “personal pain” they’d experienced in cross-border payments friction.
The urgency is there to digitize B2B payments, of course, which are still dominated by paper checks. There are billions of dollars in inefficiencies and untold wasted hours of employee time in a corner of the payments ecosystem that, in the U.S. alone, is worth as much as $21 trillion annually.
Recent PYMNTS data show that as many as 42 percent of B2B payments are done by check, making them the most popular payment method.
With the added complexities of foreign exchange (FX) rates and currencies and compliance processes, cross-border payments are marked by even more friction.
“I look at the accounting group in our own company and how much time and effort we spend processing invoices and payments [from other companies],” he said, pointing to untapped market potential: “Multiply that by millions of companies worldwide.”