Last week the Federal Reserve announced plans to move forward on a massive overhaul of the U.S. payments system to achieve faster payments than is currently offered by ACH, and how a new system should be implemented is already a topic for debate.
The Fed has given a nod to the U.K.’s Faster Payments as a successful initiative that it might try to replicate. But replacing the current payments system with a whole new one, like the U.K. is doing, might not be necessary, says Sandra Horn, a principal product manager at ACI Worldwide.
“It’s difficult to achieve the reach of the ACH engine, and we already have made progress in certain pockets with faster payments. There are several consortiums of banks that have agreed to offer same day settlement… so to suggest that the change should be like the U.K.’s initiative, I’m not necessarily convinced that’s the way to go,” Horn explains.
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However, there are plenty of lessons to be gleaned from other overseas examples of new payments systems being implemented, Horn says. “You can look to the way that government played a role in the development of SEPA. There has to be government influence to pushing this along. You can also look at what payments standards have been successful in other countries,” she shares.
Rather than copying what other countries have done, Horn advises that the Fed and stakeholders examine the unique pain points for end users in the U.S. system, and then pull solutions and ideas from those foreign initiatives to address those pain points.
An overhaul of the ACH system is also going to present different challenges than other similar initiatives, adds Mark Ranta, a senior product marketing manager at ACI. “The size of the U.S. market is gigantic. Replacing the ACH system will be way harder than the U.K. had it,” he points out.
And it also remains to be seen if banks will buy in to overhauling the payments infrastructure, Ranta says. “There’s still the whole question of who will pick up the tab. The banks definitely don’t want to do that,” he observes.
Whether banks see the demand from their customers for faster payments remains to be seen, he adds. U.S. consumers and businesses have grown used to the current payments environment and there aren’t enough users signing up for faster payments options like PayPal and Google Wallet to make banks feel threatened, Ranta explains. On the other hand, if banks don’t back a faster payments infrastructure then they could leave the door open for PayPal and other players to disintermediate their customers down the road.
In addition, banks already offer a faster payments option - wire transfers, which they can charge big fees for. Banks will probably be interested in protecting that revenue, Ranta notes.
Despite the challenges, the benefits of a faster payments system are undeniable. “We’ve done estimates of the gains to be made from real-time payments. In terms of the value of float and the value of prefunding, there are at least tens, if not hundreds, of billions of dollars out there trapped right now because of the lack of visibility in the current settlement process,” Sandra Horn says.
And a faster payments system could also spur even more innovation in the payments market, Ranta suggests. “So much of the innovation we’re seeing right now in payments is because we don’t have a faster payments system. This would allow the innovators to play in a real-time environment… where they would have access to real-time account data, and be able to get a 360-degree view of the customer in real-time.”