Are Payments Fast Enough Already?
Some say yes, some say no. But it seems clear they are going to get faster. How that happens and at what cost is less clear.
America is awash in money.
Each business day, nearly a trillion dollars moves around the country in the form of noncash payments, according to the 2016 Federal Reserve Payments Study. This torrent of mostly electronic currency—for groceries, clothes, mortgages, utility bills, salaries—flows largely without incident.
The system works well. For example, FedACH®, the Federal Reserve's engine that handles millions of transactions daily, was available 99.98 percent of the time last year. It processed and delivered virtually every transaction by the scheduled time. The Clearinghouse, a huge payments network owned by a consortium of large banks, is similarly reliable.
Some industry watchers see no broad-based demand for "faster" or real-time payments—they think it's a solution in search of a problem. Yet the nation's payments system is changing fast. Propelled by ever-advancing telecommunications power, dozens of digital payments services have sprouted in recent years. In the view of many payments experts, consumers have come to expect instant digital transactions.
So the Federal Reserve, among many interested parties, wants the country's payments apparatus to speed up. To that end, the Fed in 2015 assembled a task force of more than 300 people from all corners of the payments universe—banks, credit card firms, consumer groups, academia, technology companies, and retailers such as Netflix and Starbucks—to try to figure out what so-called faster payments in the United States should look like. The task force issued the first part of its final report in January.
Is the United States falling behind in faster payments? And does it matter?
About two dozen other countries have instituted or will soon institute faster payments systems. The United Kingdom's nine-year-old system is often cited as a model. The United Kingdom's trade promotion agency co-sponsored a recent payments conference at the Atlanta Fed at which the British payment network was prominently discussed.
Many observers warn that the United States risks falling behind not only the United Kingdom but also other nations in the faster-payments world. Like much else related to faster payments, how much that matters is a matter of debate.
What's clear is that most other countries have an easier time of it, notes Julius Weyman, vice president in the Atlanta Fed's Retail Payments Risk Forum. More than 10,000 financial institutions and 1.2 million businesses with 10 or more employees operate here. Those figures compare to fewer than 500 financial institutions and about 200,000 companies with double-digit workers in the United Kingdom, the world's fifth biggest economy. The United States also has no single payments regulator, unlike the United Kingdom, and thus no single entity to impose standards for faster payments.
This difference matters. Regulatory authorities oversaw or established many of the newer payments networks around the world. In the United Kingdom, a government-driven initiative was initially responsible for that nation's faster payments system, said Paul Smith, head of policy at the U.K. Payment Systems Regulator, at the Atlanta Fed conference.
New payments products are blossoming
In the United States, numerous individual payment services like Zelle, PayPal, Dwolla, and Ripple are continually coming online. Plus, various studies point out that Americans are increasingly conducting most of their business digitally.
Real-time, or nearly instantaneous, payments will be elemental for financial institutions aiming to deliver a "compelling digital experience at the heart of their customers' lives," says a 2015 study by the consulting firm Accenture. The study's authors add that rising use of person-to-person digital payments services "signals rising demand for immediate payments."
Not all payments watchers are convinced. Nevertheless, a consensus is emerging that faster or real-time payments are inevitable, so it's wise to steer the industry toward an orderly future. Too many choices could result in fragmentation that would ultimately hinder progress toward a meaningful solution. The aim, then, is to ensure that the fastest payment methods in the United States will be ubiquitous, efficient, safe, and secure. Hence, the Fed created the Faster Payments Task Force and a companion group, the Secure Payments Task Force.
To many consumers, the way we pay for things now probably seems fast enough. Payment "messaging"—the instructions on who is to be paid, by whom, and how much—happens virtually instantly in many cases. It can take hours for transactions to post to online bank accounts, however. And the actual transfer of funds from payer to payee, the settlement, can take up to three days, even in this age of smartphones and instant messaging.
For example, a monthly utility bill payment from your bank account probably goes through either FedACH or the Clearinghouse. Your tablet screen shows your payment gone, but your transaction is bundled with millions of others and processed by ACH as one huge transaction at day's end. Then the money you've sent will be available to your power company to use the following day or perhaps the day after that.
So faster payments can mean faster settlement or faster payment information posting, and at times both.
Payments a trillion-dollar business
Certainly there are compelling business reasons to pursue faster payments. First, payments services amount to a nearly $2 trillion industry globally, and those services account for roughly a third of bank revenues, according to the consulting firm McKinsey & Company. Banks don't want financial technology—or fintech—start-ups and other nonbank rivals to usurp that business. Small banks in particular will likely face a dilemma: invest in a faster payments network or "risk Facebook taking your payments and retail deposit business," said William Schoch, president and CEO of WesPay, at the Atlanta Fed conference. Facebook in 2015 introduced a payments service for its users.
Second, making person-to-person payments with something besides cash remains clunky for most people. For example, many people find it easier to write the babysitter a check or pay cash, points out Douglas King, a payments risk expert at the Atlanta Fed. A slicker method of real-time electronic payments could remedy that. About half of consumers in a 2016 Accenture survey said they have used "peer-to-peer" payment apps.
On a grander scale, the immediate transfer of funds allows better cash management for companies and consumers, Kansas City Fed senior economist Fumiko Hayashi notes. For instance, you're less likely to overdraft an account if money is withdrawn instantly rather than if that money appears to remain in the account—because the payment has not yet been posted. Faster payments networks may also carry rich payments data that financial institutions can mine to craft other, highly targeted digital commerce offerings, payments experts say.
Faster payment notification and posting could speed the delivery of goods and make it easier to make and receive last-minute payments, Hayashi writes in a 2015 paper. Faster payments would also help eliminate the last bastions of inefficient paper-check writing, promoters say.
Many businesses still write checks to pay suppliers, for instance, Fed studies show. The Faster Payments Task Force has identified a significant opportunity to improve the efficiency of such business-to-business transactions, including invoicing, payments, and the exchange of remittance details. "Most businesses have not yet adopted e-invoicing solutions for a variety of reasons such as lack of IT resources, lack of common standards or software, and dependence on practices of business partners," says part one of the Faster Payments Task Force's final report. "Many businesses rely on check payments because they are unable to send or receive detailed payment data in a standard way and reconcile payments and invoices electronically."
To replace checks, faster payments may need to offer benefits in addition to speed, Hayashi figures. For example, to encourage businesses to switch from checks, faster business-to-business payments could provide straight-through processing from invoicing to payments, include remittance and other information along with payments, and better protect against fraud.
As much as their numbers have dwindled, checks are proving hard to kill outright. The United Kingdom's government in 2009 declared its intent to phase out paper checks by 2018. That plan has been postponed, however, after a backlash from check users. Meanwhile, in the United States, declines in check writing slowed from 2012 to 2015, compared to prior years, according to the Fed's Payments Study.
Back to the future
While plentiful arguments favor faster payments, a school of thought maintains that, for now at least, the nation's payment system is good enough. Schoch of WesPay says he is not convinced that banks, particularly small banks, see real-time payments as an urgent need, though they are increasingly intrigued. Many American financial institutions are indeed just starting to hash out exactly what infrastructure and expertise they need to offer real-time payments services, panelists at the Atlanta Fed conference observed.
Moreover, the cost, and therefore the price, required to support a ubiquitous, always-on payments service in the United States remains unclear, Weyman notes.
Faster payments are not necessarily an end in themselves. However, they are central to building a system that would in a sense take us back to the future. "In the United States," Federal Reserve Governor Jerome Powell said in a March 3 speech, "a faster payments system that operates around the clock and provides the capability to hold and transfer deposits ... in real time would go a long way toward providing the low-risk and flexible payment arrangements that paper currency historically provided."