Online payments appear deceptively instantaneous in the United States. The slick user interfaces for digital payments require just a few taps and credit card numbers populate automatically on checkout pages. But the US does not operate in a world of instant payments. Despite the frictionless appearance, funds do not post and settle in consumer bank accounts in hours, or even days—something that the pervasive use of credit cards in the US masks for the average consumer.
Historically, US consumers used checks to make payments directly from their bank accounts, but check payments do not translate to online payments. Today, US consumers are left with a gap in their payment options: they cannot pay directly from their bank accounts (as allowed by a check), and real-time payments can only be made through expensive third-party credit cards. The lack of a real-time digital payments network holds the US back: It creates delays and risks for consumers and businesses and ties up capital needlessly.
The US has some catching up to do. Many countries in Europe stopped issuing paper checks more than two decades ago, transitioning instead to an electronic payments network. The United Kingdom introduced instant payments in 2008. The Single Euro Payments Area (SEPA) was launched in 2017, allowing instant payments among 36 countries using a unified framework for direct bank payments, including cross-border transfers. Globally, 79 countries have already implemented at least one instant payment network.
This year, the US will take a major step toward faster payments when the Federal Reserve launches its planned FedNow payment network. But even after FedNow launches, the US will still have a ways to go before consumers can access instantaneous digital payments.
Faster payments in the US
The US was originally at the forefront of electronic payments. In the 1970s, it introduced the Automated Clearing House (ACH) for processing electronic payments. This initiative happened because a group of California bankers became concerned about the growing volume of paper checks overwhelming the processing equipment and the technology to clear the checks. ACH became—and still is—the method for issuing payroll, vendor payments, and other direct deposits.
While the ACH network made electronic payments possible within the US, it is far from instantaneous. ACH settlements typically take several business days from the time they’re initiated. ACH transactions are processed in batches, either at the beginning or end of the day, or as several batches throughout the day, necessitated by the extremely robust but 60-year old COBOL mainframe systems on which ACH runs. The ACH network moved $77 trillion in 2022.
In 2016, the ACH Network introduced Same-Day ACH which settled transactions within the same business day. Still, same-day ACH falls short of instant payment processing. Wire transfers are another payment option, with real-time transfer capabilities through the FedWire system. However, wire transfers need to be submitted during FedWire operating hours. Wire transfers typically support critical business transactions involving large sums rather than everyday payments between consumers and companies, and often incur significant fees.
A few consumer-friendly options have emerged, such as the RTP network. Governed by some of the largest banks in the US, the RTP network offers real-time payment processing for financial institutions. Unlike ACH, however, RTP only has the ability to credit payments to an account (“push payments”), whereas ACH also has the ability to debit payments from an account (“pull payments”).Meanwhile, checks are still a regularly used form of payment for consumer and business transactions in the US. In 2003, Congress passed The Check Clearing for the 21st Century Act (Check 21), as a way for banks to accept an electronic substitution (image) of a check instead of the original. The purpose was to “foster innovation in the payments system” according to the Federal Reserve, but is still no more than a patch on an antiquated technology.
FedNow: One step closer to real-time payments
In 2019, the Federal Reserve announced its plans for the FedNow Service, the U.S. attempt to create a European-style network of real-time payments. As a complement to the ACH Network, FedNow (with an initial launch planned for July 2023) will offer instant payments between bank accounts. Transfers will take mere seconds instead of hours or days that ACH and Same-Day ACH offer. And, unlike FedWire, FedNow will be available 24/7. FedNow will be governed by the Federal Reserve instead of a private banking association. Like the RTP network, FedNow will have transaction fees of only a few cents per transaction, which makes it cost-effective. Initially, FedNow will have a cap of $500,000 while the RTP network has a limit of $1 million per transaction. For now, FedNow also only supports domestic “push payments” but not “pull payments,” so it is still missing half of the equation that ACH enables.
The key variable for these real-time payment solutions is “participating financial institutions.” The RTP network has close to 280 participating financial institutions, including some of the largest banks in the country, but with nearly 10,000 banks and credit unions in the US, this offers far from universal coverage. FedNow is only just beginning its rollout and, again, financial institutions have to opt to implement FedNow. Consumers will not be able to access FedNow directly, and can only access it if their bank opts in. Eventually, FedNow is expected to have interoperability with ACH, which could broaden its reach and perhaps get the US closer to instant payments.
Financial institutions, even if they opt in to FedNow, will still have to figure out how to make it available to their customers. FedNow only operates as a payment rails system; access for consumers needs to be provided by the financial institution through their online banking or a third-party app. Adoption among the general population may be slow and limited as a result. Also, the lack of support for “pull payments” means that instant payments directly from a consumer’s bank account—as well as other solutions requiring “pull” capability—are still not possible. For these reasons, FedNow will also not work as payment rails for the P2P space. Finally, there are legitimate concerns that FedNow does not adequately protect against fraud, as it does not provide a solid method for recalling erroneous or fraudulent payments that is available when making payments by wire.
FedNow will likely change the face of bank to bank payments in the US, particularly with respect to business-initiated payments. But the FedNow system as currently imagined falls short of being a fully-integrated real-time payments network supporting a broad range of instant consumer, business and international payments use cases (both “push” and “pull”) that Europe has proven is possible.
The US may still be waiting for its true solution to real-time payments.
Piret Loone is a contributor to the GeoEconomics Center and the General Counsel and Interim Chief Compliance Officer at Link Financial Technologies.
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