Episode 5: From Payment Rails to Connectivity | Payments Cannot Fail ft. David Watson

I am welcome to payments cannot fail. I'm your host, Mark Fieldhouse, and we have an incredible podcast lined up for today. We're going to be talking about from rails to connected value. For decades, that infrastructure has been built around the predominant rails in the United States, but we're entering this new chapter where we're seeing this incredible emergence of tokenized deposits, stablecoin digital currencies, where we're no longer just moving on the traditional rails, so we're moving new forms of money movement now, and the demand is only increasing. And it's about connecting that value wherever it exists. While preserving the trust, of course, the reliability and the scale, because that is only compounding year-on-year. And a few people are better placed to talk about that than today's guest. And I'm very excited to welcome David Watson, who is president and CEO of the Clearing House. While many people know the Clearing House as the organization behind RTP, as a network, it's only part of the story for the Clearing House. They also operate something known as Chips, which is one of the world's most important and high-value payment systems on ACH. David, it is fantastic to have you with us. Thank you for joining. Thank you. It's a pleasure to be here. I'd like to start with something that you said recently. So you described banks as providing this infrastructure that underpins the movement of money throughout the global economy. And I liked that phrase because it feels like it's just bigger than payments, and that it impacts us all. And that talks to trust, of course. And at the same time, the Clearing House has announced these plans around future connectivity and this layer between traditional rails and emerging on chain money as well. So as we move to this new world of tokenised deposits on chain money and these new forms, does your mission actually change? Or is it still about extending the same trust and reliability that people expect anyway? Yeah, I mean, our mission hasn't changed in 170 plus years. You know, I mean, the banks got us together to provide a safe place. In those days, it was a beautiful marble building near Wall Street where banks could exchange bits of paper that were representations of money. We provided arm guards, we gave a safe place to do it, careers couldn't get lost or end up in a downtown bar in Manhattan when they should be working. And instead, like, it enabled this sort of 9am to 4pm efficiency in the exchange of bits of paper. And that was revolutionary for the 40 plus banks that started that. We do exactly the same thing 170 plus years later, just for thousands of banks, not tens of banks, and we do it electronically. Be that sort of ECH, be that wires, be that instant payments, be that images of those bits of paper checks that we still do 170 years later. So our mission or our goal around what role we play to support that infrastructure that are the banks has not changed, actually a safe secure, reliable infrastructure still. So let's, if we just reflect on that, let's go to the next chapter for the clearinghouse. One thing that strikes me is that people never notice when it's working. It's when things don't work in the industry generally, right? So when it operates perfectly, you're almost invisible as an organization. As a CEO for the clearinghouse, does it make you smile that success is measured about, no one knows who you are or that you are? Yeah, so it's a funny one. My head of IT and operations always says, you can tell how good a job he's doing based on how close he sits to me in meeting because if he has to sit right next to me, it means we have some issues and he has to talk. And it's funny, like when I look at him and the way he thinks about it, sort of you only talk to me when there's a problem, I actually like that. And I like that, you know, people will only give us light if there's a problem. And I suppose the personality of people that work in a market infrastructure that supports the US and the global economy, hidden away in the back, it kind of plays to your strengths that, you know what, if there's a problem, we will lean in and we will help. But if we're doing our job, we don't need the limelight. Our job is to run the pipes in the plumbing so that others can be innovative and be creative and drive things. And it's been that way for a long time. It definitely takes a certain type of personality to thrive in that environment. But it's one that when there is an issue, you also have to be prepared to roll up the sleeves and deal with it because there's no worse feeling for a person than going into their bank account on payday and the money not being there. And while we all expect our wages to be there, we don't get excited that they, you know, came in other than we just like getting paid. But if the money isn't there on the day it's meant to be there, there's a huge problem. And then you have to be ready for the call to arms to deal with it. And then we get excited for all the wrong reasons. Yes, very much so. So when you look at running the level of infrastructure that supports such a large part of the US economy, it must come with this incredible sense of responsibility and ownership. And again, it's about the trust that you're giving people that use that. When you think about the next five years and it's changing dramatically, of course, that landscape, you focused on resilience, cyber threats, AI or something completely different. Oh, all of the above. I mean, working at the clearing host is both an honour and a privilege. When it comes to the services we provide to banks, to every single citizen in this country, to the role we play in driving global trade. And all of that means that the only thing that keeps me awake at night is indeed resiliency and security. That's something that never goes away. And actually, if you look at the resiliency statistics that we actually have, compared to your average company or average bank, they're amazingly impressive. And that comes with some real, concerted effort to make that constantly priority number one. And it will always be priority number one for the clearing host. But as part of that, of course, the world is changing dramatically, not least of all the introductions of AI, particularly into the cyber threat environment, which obviously is someone who's entire job is to keep the money safe that flows between banks that enable the money to flow around the country and the world, means you really have to be on top of your game in terms of how you understand those future state threats and engage of them. And that's been confounded actually by the fact that the White House and the Treasury brought us the clearing house in very early to the recent sort of mythos analysis. And has the definition of resilience changed? Do you think? You know, if you go back a decade ago, resilience meant something completely different. Our environments are very ephemeral, they're containerized, they're very highly skilled in resilient. Has that definition changed, do you think? That's a really good question. I think it's changed for me personally, maybe from a different lens, and that 20 years of banker, resiliency was very much, you know, what's your backup? What's your business continuity plan? You know, if this one breaks, where does it go? If this one breaks, where does that go? And every time you had a failure in your secondary environment, regulation told you you needed a tertiary. And then if you had an issue in your tertiary, the answer was, well, you need a fourth or a fifth or a sixth. When I came to the market infrastructure world for a swift and now the clearing house, you don't really have that option. Your first one has to work. And it has to work in an active active environment. So this idea of failover and go to these backups, you have to be continually on. And it has to be a situation that no matter what the outage, no matter what the issue, you have to perform regardless. And that's a very different lens of resilience, I would say, versus maybe more sort of backup continuity, how we used to look at it. And I think Garner once termed as this bimodal state, how do you balance innovation with reliability? Because what one would say you have to continually be innovating, looking at the future horizons, balanced with reliability? Is that a difficult thing? No, but in fact, I often say to my team, the best innovations are the ones that help us increase our resilience. The idea that to be creative and to be innovative always has to be to the detriment of your core or to the detriment of your stability or I don't buy that. You know, the most innovative employees I have are the most junior ones working on sometimes the oldest pieces of technology. And they find ways to be incredibly innovative to make that work and operate and be resilient in a modern environment. So I don't necessarily see this as like a dichotomy between the two. Actually, I see our role as the sort of the place for collaborative innovation across the infrastructure of the industry, which means I have high expectations for me, my team and our partners in the banks and the broader industry, that if we want to roll out a unchained tokenized deposit settlement and clearing, not only are we the right place to do that, but we're the best place because we have that foundation of resiliency and the ability to use that for innovative solutions. Great. So it's always balancing the speed of innovation with reliability and resilience. And we can't have any conversation in the industry today without reflecting on AI, and you mentioned mythos briefly. When you look at it through the lens of critical infrastructure, how do you see AI and fraud evolving? And when you look at the next five to ten years out, what excites you the most about having to handle that and how you handle it? Oh, the same thing that excites me is the same thing that makes me nervous because, you know, the light side and the dark side have access to the same tools. So I think while there's all an amazing array of potential benefits from AI, and some will be proven real, some will disappear and be a little bit hot air, but I honestly believe that the simple fact that I've probably used it about 25 times a day alone myself, and I'm not the person doing the coding or the real running of the infrastructure, there's real benefit to us all in our personal and professionalize from AI. But in the same way that sort of, you know, 15 years ago, we all had to start hiring hackers to fight against hackers. We're gonna have to use AI to protect ourselves from AI in a similar way. So it also makes me very nervous that if abused or used in the wrong way or designed in the wrong way, actually, as it is its own intelligence, it could actually go through more to the dark side, as they say. So I'm making sure that we are prepared for that, but also we're prepared for that using AI itself to compete against that. I think we'll actually, what we'll get us through this, but also enable us to leverage the benefits of it. - And how is fraud evolving on that landscape as well? Because again, you said it's been a long step ahead. - I think it's really too early to tell, I would say. I mean, it's still mostly being used in classical ways. You know, okay, through AI, I can be a little bit more clever in how I do the spearfishing. I can find then, I don't need to just go to the CEO, I can maybe find the assistant's email and I can go through that way. And I can be a little bit more, you know, and much faster on a much more rapid scale on whether it's spearfishing or various other types of existing fraud capabilities. It can't take over other things. So I think from that perspective, it's almost like, it's making a little bit harder and faster to compete against the traditional fraud or the existing fraud mechanisms that we all have to be wary of and conscious of. But more worryingly, for me, is indeed this AI's ability to link together all these small loopholes and turn them into something big. This idea that, you know, patching's the most common one right now, if we all want to patch our payment systems, we have the high-medium low and we de-prioritize the low 'cause there's a tech spend in a timeline. But if AI is able to take those lows and turn them into something huge, well, you don't have that luxury anymore to say high-medium low. You have to dress everything and address it really quickly. And that definitely is exciting and nervous in this seeping in when I think about those challenges. - And you can't just hire another hundred people, right? You have to use one technology to scale. - Yeah, exactly. - I mean, you still need humans involved? - Of course. - For sure. I'm a big believer in that. It's the two together of this hybrid that they can incredibly powerful. But no, through a sheer size scale and speed, you cannot fight against AI with, you know, a few people working sort of usual business hours. - No. And looking ahead to some of the different forms of money coming in. How important will interoperability be for that? And how will they cause it? - Incredibly, incredibly. I mean, there is, to my knowledge, no history in the last hundred, two hundred years of a new or different form of money coming out that wasn't in some way shape or form tradable with the existing world. You know, going back to the buttons and stones we used in many old times all the way up to sort of the introduction of coins to sort of where we are now. It's gonna have to interoperate. Money makes the world go round for sure. And whether it's commercial bank money or central bank money, that's still true. Whether it's on chain off chain, whether it's electronic or paper, whether it's, you know, it all has to interoperate. Because that's how we trade, that's how we barter, that's how we pay for services, that's how we get help, that's how we get people to solve our problems. And we all have different preferences, different mechanisms, different countries, different environments. Therefore, everything will have to interoperate. Sometimes it can be a question of when and how. So if you do have a closed loop payment mechanism, it can still work. It'll still solve something of a problem. But you always need, always need an on-ramp and an off-ramp. - And I guess the genesis of this podcast is that payments cannot fail. There is something incredibly powerful about people just expecting what you do to work every second of every day of every year. - 24 by seven. - 24 by seven. - No, no days off and weekends anymore. No, it's until it fails. But what is the one thing that the industry do you think still misunderstands about where payments are heading generally? Do you think there is a misconception? - I think there is and there isn't. I think if you're in the business, I think there's very little. I think if you're outside the business, maybe you don't quite understand how important it is as much. But I think also there's many people in the business who think that it's some kind of large money-making cash cow business, when actually it's a mechanism to support other types of business, really. You know, payments when I first started my career in payments, payments was a back office function. It was, you know, hey, you had this product or service and here's the invoice, pay in 30 days and then back office took care of gathering the money. Then we all realized that actually getting paid is a bit more important and you might not want to wait for it. So payments became this sort of a little bit more important. Then it became a product and its own right. We started having payments product managers whose job it was to work out what's the best and the fastest and the easy way to pay and get paid for yourself, for your clients, for whoever. I think we've evolved another stage further that payments are now embedded into the actual products and services themselves. You know, we've spoken about in other forms, the refrigerator that tells you your short of milk and then you can order your milk through the refrigerator and it pays for it there and then that embedded payments model. I think now we're taking the next stage and we'll see how it plays out. But this next stage of well, actually when you layer in the capabilities of blockchain and programmability and other things, you can take those embedded payments to the next level. But at the end of the day, all of that involves the movement of money from A to B. Whether it's the delayed check 30 days after you bought the service or to the programmability, agentic AI, all the buzzwords, kind of fancy payment, at the end of the day a payments payment, which really goes on how it flows, whether it's time bound or not, whether it's batch or not, whether it's on chain or off chain, a payment as a payment and that doesn't change. And before we move on to, I always have a section at the end about the one big thought to discuss. That's good you're giving me a heads up then to start thinking about it. Yeah, exactly. As an end customer, so a consumer, the URI sat on the end of our phone or making a payment. What should we be looking at, actually, think or what should we be excited about that's coming down the line in the future? Oh, great question. As a consumer, I'm very excited about increased choice. There's a lot of choice in the US around cards. It's a bit different from many other countries. We are addicted to our cards. I won't tell you how many I have in my wallet and how many different point schemes. But they're widely accepted, they're around everywhere. I think there is an opening for non-card payments, more and more, to come in and compete in that space. How that plays out and whether it makes its way to point of sale or not, let's see, but definitely very, very interesting here in the US. I think the other thing I get excited about is actually getting to a stage where there's a lot more knowledge out there in the mainstream around what the different types of on-chain money are and what they're not dispelling myths as well as benefits and understanding how interoperable they can be. At the moment, you want to play in crypto, you go in and out using a stable client, it's 90% of the business. Some believe that's all it'll ever be. But actually, the ability to better interoperate in that whole sphere and the better ability to actually have money freely move between those things is going to be incredibly exciting. And I think particularly, maybe more so on the wholesale side, more exciting, particularly in the short term. But I think it's going to make money move faster around the world and it's going to make actually more money available in the world. And I guess for the consumer, they don't even need to care to they've got some money that they want to move. It's either time or cost of doing that. They shouldn't care what rail or-- No, they shouldn't. Do I want to pay as early as I can, or as late as I can? Do I care when it happens? There's nothing more frustrating than you tried to do something and you're waiting to see if it happened. It's July 4th. You remind me I owe you 50 bucks for last week's golf game. I can ping you those 50 bucks immediately there and then you see it in your account there and then the world has changed. This idea of I give you a check, it gets delayed, it gets lost. Or hey, I've sent you a payment on my portal. You'll get it in four days and you don't even see anything on your rent. Actually, the true benefit for me of a lot of the modernization of payments is that instant confirmation. Not the instant payment, it's the instant confirmation. The feeling of, OK, that happened. That money is there. It's done. That's a little bit more real than the actual seconds or milliseconds it takes for the payment to go in. The entire idea behind real-time payments, of course, is it instantaneous and in the other room? And all on-chain payments as well, similar logic. Similar market problem being solved. So you're looking at the same methodology for on-chain stuff as you are as real-time as well? Yeah, I mean, a payment is a payment as a payment. I honestly look at it as what extra features do you get from being on-chain programmability, different transfers of information. Is that enough to use that rail versus an instant payment rail that's already 24x7 and pretty robust? Or do you know what, I don't care. I want something cheap. It can be batch and I can send the payments and if they settle two weeks later, I don't care. I'll go ACH or, you know, I'm just choosing your mode that you think is right for your clients. And actually, most of your clients, the further down the stack you get from the big MNC to the consumer, the less they care about the rail and the more they care about the features. So they're not choosing, does it go this rail, that rail, that rail? But they'll know if they want it 24/7. They'll know if they want to be able to make a payment at night. They'll know if they want it to be instant or don't care. They'll know that. They just don't care what rail it's on, like you said. No. It's really interesting. And I'm going to take a slightly different direction. I like to end all of these with a really big thought. When we look through the conversation we've had, we've spoken about trust and resilience, interoperability and how these new on-chain methods are going to be able to connect to value for people. And I think that's the key phrase that the connecting of value. It did make me wonder though whether we're reaching one of those incredible inflection points. It only comes around once every, you know, a few decades. Perhaps even the first generation of infrastructure connected banks, this entirely operational financial fabric, if you like. Do you think that next generation of connected trust and value deposits real-time payments is something that we haven't even imagined yet? Do you think if you look through four years into the future it's something entirely different to what we think now? I honestly believe it'll be a yes and no answer to that. And I also think it'll be longer than three to five years. I'll be more like five to ten. But I think yes and no because I think we will see a completely new and different environment. I just don't necessarily think it'll replace the existing environment. You know, as a company that settled checks for 170 plus years in different ways, shapes and forms. We do it very differently today through images and fancy technology instead of bits of paper. But we still do it. That said, we've implemented wires, you know, batch payments, instant payments, you know, on-chain payments. All these other things that come over and above, I think now actually just add to the environment which is why that interoperability question that you raised earlier is so important. Will checks eventually go? Yes. But then we'll talk about batch payments as the sort of the legacy way. And by then there's probably five more ways to do payments over and above on-chain that we know currently seeing as a great opportunity. So I do believe there will be dramatically different ways to do payments in ten years time, particularly accelerated by the on-chain world. But I think their synchronization, and I choose that we're pretty carefully, their synchronization with the existing fiat world, will be key to their success as well. No, sure. And for those that don't know much about the clearinghouse, maybe if you could just take a few moments to talk about what responsibility the clearinghouse has in that kind of future and what role they'll play in how significant that role is. Sure. I mean, I took over as CEO of the clearinghouse three years ago, and I remember asking when I first joined, like, so, you know, you're the new CEO, you think, oh, let's do some strategy work. Let's define our purpose and future state vision, and we did a lot of work and came to this great answer of we provide safe, secure, and reliable infrastructure, and we shape the future of payments. And then someone dusted down some old book from the 1870s meant. That's kind of the same as what we said back then. And it kind of gave me, after the initial disappointment of realizing I was not particularly innovative, it gave me a lot of comfort. And do you know what? That's cool. That itself is really cool. And whatever the way that money moves in the future, it's going to require a safe and secure place for interoperability to happen. And here in the United States, and in many countries in the world, you know, there's a mix of public and private that does that. And we are the primary, primary, and we are the primary private provider vis-a-vis the government who has their own public offering. By having two, we can keep each other honest, and we can accelerate innovation. And as long as we continue to work together at the infrastructure level, again, as we do between the Federal Reserve and the clearinghouse, I think it gives a much better model for the future. That role I see as playing back then, I see as playing today. And honestly, I believe we'll play it in 170 years' time as well. Look, I mean, we could go on for a long time, David. It's been really exciting to kind of go between, you know, the history of the clearinghouse, the future, what we are excited about with innovation. I think what still sits with me is one of your early statements that behind every single payment and transaction is this incredible heritage of engineering, resilience, reliability, and that doesn't change, doesn't change whatever we do with payments in the future. And as we evolve from just operating single rails, we're going to start connecting multiple, almost multi-asset connectivity fabrics as well. I cannot thank you enough for joining us on this panel. No, thanks. Thank you for inviting me. It's been a great conversation. Thank you very much.