Earlier this year, New York City based fintech Tassat Group Inc. earned headlines when it announced it was initiating the roll-out of its Ethereum-based blockchain platform TassatPay. The platform is architected to enabe real time payments (RTPs) for select “forward looking” banks seeking innovative blockchain technologies to improve B2B payments for their business clients. Up until this past week, it had been reported that existing TassatPay customer, New York based Signature Bank (NASDAQ: SBNY), was already transacting digital currencies on the blockchain platform (since January 2019) under the brand name Signet, and California based Silvergate Bank was in cue. But that has changed. As of Monday, Customers Bank, the $19.6 billion subsidiary of Customers Bancorp, Inc. (NYSE: CUBI) announced its own, private blockchain, running on TassatPay, went operational. Customers Bank calls its new platform CBIT, for Customers Bank Instant Token.
If nothing else, this latest development highlights the amazing time we’re living in, when a wellspring of nascent financial, blockchain, and software technologies are converging to form the foundation, upon which the future ecosystems of banking and payments will be built. But as it pertains to the present, what TassatPay and its banking partners are proving is that the power and efficiency of blockchain to solve one of the financial system’s most pressing problems – real time, secure, payments and currency transactions – is here.
A little background…
At this writing, real time payments infrastructure in the U.S. is very much in its infancy. The only operational real time payments network in the U.S. is a mere four years old, launched in 2017 by The Clearing House Payments Company, a banking association and payments company owned by a consortium of the nation’s largest commercial banks. The platform is called the RTP Network and allows financial institutions (FIs) to connect directly. For those FIs and applications that don’t have the resources or the need to connect directly, there are a number of third party service providers (TPSPs) to work through: familiar names include ACI Worldwide on the commercial side, and Venmo on the consumer side. The RTP Network allows customers of financial institutions, both consumers and businesses, to make payments and move money 24 hours a day, 365 days a year. Attributes of the RTP Network include per transaction costs, transaction limits ($100,000), and push (credit) transactions only (as opposed to pull (debit) transactions which leave greater opportunity for fraudulent activity). The real time payments are also instantly settled and irrevocable.
Also in the works is a RTP system from the Federal Reserve named FedNow. The system is supposed to launch in 2023 and leverage the twelve banks that comprise the Federal Reserve. The idea is that the FedNow platform will create greater competition in RTP, and drive down costs for users.
Together, these two systems address the main value drivers of real time payments and money movement: around-the-clock transactions, and immediate settlement and availability of funds. But neither of these systems rises to the bar of an elegant, end-all-be-all solution. Reasons why include prohibitive integration and usage costs to smaller FIs, the aforementioned caps on transaction size, and security challenges. As such, the existing (and incipient) systems leave room for an RTP scheme with greater security, lower costs, and minimal constraints on transaction size and types.
Enter the Ethereum blockchain and Tassat…
The innate attributes of blockchain technology make it an elegant solution to solve for the inefficiencies and security constraints described above. In regards to RTPs and TassatPay’s platform, let’s start with the security piece.
Tassat has designed and built a private Ethereum-based blockchain. Further, it’s a permission-based private blockchain, meaning that TassatPay, and by extension, the FIs and TPSPs that elect to host their blockchain technology, are the only ones that can code it. This means that no person or entity can access the blockchain, and modify the coding of the blockchain, unless they are properly credentialed and authorized. Though not fully decentralized like a public blockchain, Tassat’s partially-centralized, private blockchain, even with the smaller number of nodes, is highly secure and customizable. And like any Ethereum blockchain, the transactions and/or smart contracts executed on TassatPay’s blockchain are immutable.
TassatPay’s scheme also employs the tokenization of USD. For the purposes of this article, I’m using a very specific definition of a token used in the context of a blockchain payments scheme – “a digital asset or an independent valuable object (as perceived by some community that uses it)…that exists as an entry in a distributed registry, shared and mutually verified among many nodes (software installed by participants)”. As such, TassatPay’s use of tokenized dollars, at a 1:1 ratio, moving from one customer’s account to another’s, on the same private blockchain, never carries the customer’s primary account information (PAN)
It’s the combination of the permissioned, private blockchain and tokenization that creates an extraordinarily secure system, that in theory, eliminates the constraints on transaction type and size native to FedNow and Clearing House Payments Company RTP networks. Relating to transaction type in particular, TassatPay’s architecture will also allow for debit pulls – which are more prone to fraud – which will in turn open the door for recurring payments from B2B billers.
In regards to efficiencies gained by transacting B2B real time payments on TassatPay’s platform, the significant ones are the removal of an intermediary between FIs and customers, and the ability for banking regulators – like the FDIC and OCC – to audit transactions in real-time. Financial intermediaries between payers and payees create a lot of “friction”. This manifests itself in higher transaction costs, and more time needed for authorization, settlement, and funding. When the two parties are connected to the same private blockchain, as they are when operating on TassatPay’s platform, there are no intermediaries. This necessarily accrues to the benefit of users in the form of lower transaction costs and instant auth/settle/funding.
The other important efficiency captured, especially for banks, is the ability to meet compliance obligations with regulators through real-time audits. Again, because TassatPay is a permissioned, private blockchain, regulators can access (see) transactions by being granted permission to connect to the blockchain, or even better, perhaps, hosting their own node of the blockchain.
A Fintech / SaaS investment bank’s take…
Different blockchains possess attributes that lend themselves to different applications. The Ethereum protocol is designed for builders, and innovative ones at that. Tassat is an innovative builder and the TassatPay platform, in my opinion, truly is a revolutionary solution for real time payments. A “tip of the cap” too, for the avant-garde banks – Customers, Signature and Silvergate – for investing their own time and capital in leveraging this cutting-edge technology for RTPs. These banks are “all-in” on digital, and I believe in retrospect, will prove prescient in their collective recognition of the need to solve for real time payments, and the technologies (and technology providers) they utilize to achieve the same.
The outstanding question for me, though, is adoption.
There’s an excerpt from TassatPay’s website that keeps gnawing at me (below). Emphasis on “network effect” is mine.
“Future-proof your bank. Acquire new customers by giving them powerful digital capabilities and keep more assets on deposit. Leverage TassatPay’s network effect to drive growth as new customers join.”
Realistically, I have to question the timing (how long?) it will take for a network effect to be realized. The answer to this question is tied inextricably to the adoption question. That the growth of usership of this payments scheme is a function of a network effect is (I believe) indisputable: the more customers who use TassatPay’s blockchain, the more value the TassatPay platform will have to each customer. But, as mentioned ablove, there are other RTP schemes in play, and still in cue. Additionally, large financial institutions – JP Morgan for example – are also implementing RTPs by leveraging the bank accounts of their own internal depositor base.
So, given the soon-to-be numerous choices for RTP solutions, the corresponding competition may make achieving a network effect a difficult, short-term objective.
Regardless, I love the technology, and even more so, the banks with the hutzpah use it.