By Patti Murphy
When I was a young reporter, the prime rate was hovering well above 10 percent, and banks and other businesses made money playing payments float. A banker at the time explained the essence of cash management: corporations want to collect payments at the speed of light and disburse funds by dog sled. Today the prime rate is hovering just above 4 percent, operational float has been effectively squeezed out of most payment mechanisms, and nearly everyone with skin in the game is talking about sending and receiving payments faster.
In July 2017, a Federal Reserve-commissioned task force issued a call to action that, if heeded, would make faster payments available to every consumer and business in America by 2020.
Faster payments is a relative term. When the automated clearing house (ACH) system took off in the 1980s, ACH payments cleared far faster than checks (two to three days versus a week or more). Over time, process improvements and "electronification" have made inter-bank check clearing a one- to two-day routine. The ACH now supports same-day settlement. And then there are mobile payment applications which can make payments seem near instantaneous to consumers.
So upon receiving the Fed's report, two questions quickly came to mind:
Faster payments don't necessarily have to be in real time. Same-day ACH, for example, has been a big hit, according to NACHA ‒ The Electronic Payments Association, even though final settlement occurs hours after payment initiation.
Meanwhile, ample evidence shows the answer to the second question is a resounding no. It took seven years to implement the United Kingdom's Faster Payment Service – a system the Fed has pointed to as something to emulate, and by most accounts, it only handles a fraction of that nation's payments.
Seven years is fast compared to the pace of change in the United States. The ACH, for example, was created in the 1970s as a faster, better alternative to checks. But ACH transaction volumes only surpassed check volume a few years ago; the biggest shift has been among consumers shunning checks for debit cards. Nearly half of all business-to-business payments in the United States are still made by check, according to the Fed.
A more recent example is the move to EMV (Europay, Mastercard and Visa) technology for credit and debit card acceptance. Despite several years' prep time and the threat of ruinous financial liability if EMV devices are not deployed and customer card data becomes hacked, millions of U.S. merchants still authorize cards using mag stripe readers.
The Fed established a public-private sector task force in 2015 to help lay the groundwork for initiatives that would speed up payments with an eye toward real-time (or near real-time) payment options for consumers and businesses. Hundreds of payments experts, banks and solution providers have been involved; some participating organizations have been actively working on projects that move payments in near real time.
In June, for example, a big-bank owned network named Zelle began making available a person-to-person payment app participating financial institutions can offer mobile banking customers. Payment initiation requires just an email address or mobile phone number. To date, over 30 financial institutions have signed on to offer Zelle. Early Warning Services LLC, the bank-owned consortium that runs the network, said it also has strategic agreements with leading payment processors that can make Zelle available through community banks and credit unions.
Early Warning estimates the network will make near real-time payments (minutes from initiation to available funds) available to more than 86 million U.S. mobile banking consumers. (Think of it as a bank-owned version of PayPal or Venmo.) It's a good start, but it doesn't really meet the Fed task force's vision.
"The Faster Payments Task Force calls upon all stakeholders to seize this historic opportunity to realize the vision for a payment system in the United States that is faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient by 2020," the Faster Payments Task Force Final Report Part Two: A Call to Action, stated. "Achieving the vision will be enabled by ubiquitous receipt – where all payment service providers are capable of receiving faster payments and making those funds available to customers in real time."
Zelle is not an outlier. Banks and financial technology companies are working on several initiatives to speed consumer and business payments. The report references and describes 16 proposals evaluated by the task force. But multiple solutions are not the answer. "[S]ervice providers and end users will see little or no value if required to invest in or use multiple solutions to reach a large number of end users," the report noted, adding that while no one can say precisely how many solutions are enough, "it is desirable to broaden the reach of all solutions by enabling faster payment transactions to cross between them."
The report offers several recommendations for achieving this goal. For example, the task force wants the Fed to develop an always-on settlement service. That's a far cry from current practice which more closely resembles old-fashioned "banker's hours" than a 24/7/365 operation.
Historically, as a regulator and as gatekeeper to the nation's payment system, the Fed has taken a poky approach to change. A recent set of rule changes addressing electronic checks and shortening check return mandates (in response to near universal electronic clearing) languished at the Fed for three years. Those changes take effect in July 2018.
The Fed's national net settlement service – which provides final settlement of ACH, wire transfer and other bank-to-bank transactions – operates from 7:30 a.m. to 5:30 p.m. ET, Mondays through Fridays, except holidays. The need for an always-on national service that can accept electronic files to effect final settlement on financial institutions' Fed accounts is not new. It has been discussed for years, including among members of the Fed's Faster Payments Task Force. How long will it take for the Fed to change its hours? No one can say, but I can't imagine it happening in three years, given the required changes in technology, staffing and operating rules.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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