Why Faster Payments Matter
Most of us are unaware of how money progresses through the U.S. payments system and just how slow the process usually is. It can take more than three days for funds to transfer between bank accounts under the current Automated Clearing House system, in which transactions are batched and sent during prescribed business-hour windows. The current payments system in the U.S., in terms of overall speed, pales in comparison to countries like the UK, where payments can be processed by a nearly instantaneous service. The Federal Reserve is looking at ways to change the U. S. system, and it has convened a Faster Payments Task Force, drawing on expertise from industry participants, consumer advocates, regulators, and other stakeholders (including the Milken Institute) to look at how the country could adopt a real-time payments system.
Why should we care how quickly payments are processed? The truth is that for many of us there isn’t a compelling reason, or at least there isn’t a compelling reason yet. However, in many cases there is a very real benefit to faster money movement, ranging from splitting the restaurant check to emergency payments in case of disaster. Perhaps the most compelling case is for people who live paycheck-to-paycheck, who are often unable to wait for their paycheck to clear before they need to use the funds (e.g. needing to pay rent before your paycheck has cleared). In those cases many consumers turn to check-cashing services to get cash quickly, usually at a high cost. The ability to have money move from employer (or another source) to a user’s bank account to the account of a landlord or other creditor, in real time, would allow the formal financial sector to better serve a previously underserved client base. Speed would also diminish the need for arguably inferior options.
Of course, there are additional opportunities created under a faster payments system. The ability to confirm good funds and to clear and settle nearly instantly could give merchants a viable alternative to credit cards, something large retailers have been looking for. Faster payments could also change the way we are paid our salaries, moving from batch payments at pay periods to daily or even hourly payments. This would certainly benefit those who do not have adequate savings. It could allow employees to earn more interest on their deposits – a benefit, assuming interest rates recover. Those are just two examples that show how additional speed could lead to new and innovative changes to how we transfer value.
This doesn’t mean there is no downside to faster payments. Upgrading the U.S. banking system’s capabilities will be both difficult and potentially expensive. A major source of difficulty is that unlike many other countries with real-time payment systems, the U.S. is incredibly diffuse, with thousands of institutions (the top five institutions in the UK have over 97 percent of deposits, while in the U.S. only about 55 percent of deposits are in the top five). The need to coordinate thousands of stakeholders is one reason why the Federal Reserve has convened a broad-based task force. Additionally, the development of a real-time system is unlikely to be cheap. While the cost will depend on its exact nature, initial estimates have it coming in at break-even to unprofitable, at least at first. Of course the development costs will be frontloaded, and innovative uses may increase volume and profitability, so in the medium to long term the upgrade will likely be profitable.
The question of whether to make the U.S. payments system operate in real time, and how to do it, is an important one. This is why the Federal Reserve and payments stakeholders are working so diligently. The Milken Institute is honored to be included in the process and looks forward to helping make the payments system more capable and inclusive.