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Could Banks Hold Back Faster Payments in the U.S.?

The Fed is pushing to implement a faster payments system in the U.S., but getting banks to buy into it will likely be a big challenge.

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.

[For More on Real-Time Payments, Check Out How Accuity Is Helping Increase STP Rates for International Payments]

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.”

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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eshellabarger597
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eshellabarger597,
User Rank: Apprentice
2/12/2014 | 6:27:03 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
Why not ride the rails of ACH. It's cheap, it's secure, it's cheap, it's reliable, it's cheap, it's slowly going international, it will be faster when same-day ACH, and then, really?, real time ACH? It could work.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
2/18/2014 | 8:06:41 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
It could hypothetically and we've seen some banks achieve faster payments riding the ACH rails. I think the Fed has kind of gotten caught up in the examples of the countries that have gone a rip-and-replace route like the U.K. They see the success that the U.K. is having and see a lot of potential there as a result of what they're seeing. But they're still in the exploratory phase of figuring things out, and it's too early to tell how they're going to go about it.
KBurger
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KBurger,
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2/12/2014 | 8:32:05 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
This debate reminds me of the efforts in the capital markets industry 10-15 years ago to mandate T+3 and then T+0 -- reduce to 3 days and then eventually zero days the time it takes to process certain kinds of transactions. I don't remember all the details except that as I recall the deadlines kept getting pushed back because of technical challenges, industry complaints, etc etc. And then it sort of became a non-issue, I think, because technology advanced to a point where trading was happening almost real-time. So I guess an argument could be made that eventually the industry could achieve Faster Payments without regulatory mandates ... but given the disruption going on in the payments space, that doesn't seem like a wise strategy to me.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
2/18/2014 | 8:09:00 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
PayPal already offers real-time payments, but until you see a lot of people moving more transactions to PayPal from their banks, the banks won't be incentivized to change. Of course, by the time that people start moving those transactions to PayPal it might be too late for the banks to get things done.
GHERGENROEDER211
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GHERGENROEDER211,
User Rank: Apprentice
2/12/2014 | 9:04:12 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
The U.S. has been a laggard when it comes to payments innovation, especially P2P market acceptance. The UK, Singapore, Australia and Brazil are far ahead of the U.S. in development and implementation. At the core of the lack of innovation are the banks themselves. Some want to protect what they have already invested in. Others lack the political will to do what's right for end users. There are better ways to serve consumers today, especially with the tremendous advances in technology. I've been involved in the payments business for 40 years. Yesterday's payment schemes are obsolete. There are solutions today that can handle real time payments via the ACH. Settlement can be same day too. The industry can build on a great payments platform without tearing down the house. If the banks do not step up to the plate, there are disrupters eagerly awaiting to satisfy consumer needs. Next generation payments will be driven by consumers. This is a great opportunity to reinvent payments. To all the banks I challenge you to not think about all the obstacles and your self-interests, but to focus on a modern payments system for Americans.
KBurger
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KBurger,
User Rank: Author
2/13/2014 | 2:51:30 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
Great insights here, and I agree -- way too much effort "protecting turf" and not enought about moving the U.S. financial system into the lead in terms of new capabilities. We see this with things like mobile wallets, too. Banks (especially in U.S.) risk winning some battles but losing the war in terms of the payments business.
Gareth Lodge
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Gareth Lodge,
User Rank: Apprentice
2/20/2014 | 9:53:24 AM
re: Could Banks Hold Back Faster Payments in the U.S.?
To clarify, the UK didn't truly rip and replace. Whilst undoubtedly new work was required (I worked on the programme), equally it leverages both the existing ATM network and the ACH infrastructure.
The US faces a bigger challenge because of size obviously, but equally the ACH network*s* are starting far further back in terms of features and functionality. The analogy is perhaps the dilemma the fixed-line telco industry faces. It faces increasing competition - mobile, cable companies, etc, yet is seen as utility and unsexy. It has the choice of tweaking the copper it has laid decades ago to eek out more bandwidth, or it can start laying fibre at huge cost, and look to the future. Over a 10-20 year period, cost aside, the answer is obvious. But signing off the bill today, and figuring who pays is very different.
So the current ACH system maybe old but is fit for purpose; equally, on a global basis, it's score card is probably D-, and sliding backwards on an almost daily basis. Many of the complaints we hear about ACH in the US are actually unique to the US because of the system. Perhaps a rip & replace would not only achieve real-time, but also fix the broader issues too.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
2/21/2014 | 7:13:19 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
Great insights here. There are many issues and players involved here, and each seem to be moving in different directions. Whatever "solution" is selected, it is going to take a lot of work (and some arm twisting) to get everyone on board.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
2/21/2014 | 8:29:37 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
Yeah I think the point about wire fees in the article is especially relevant. Banks are really going to want to protect that fee income, and unless they feel pressure from customers to speed up payments, there really isn't an incentive for them to try and participate in this. A lot of arm twisting is the only way to get this done.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
2/21/2014 | 8:27:12 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
I was under the impression that the UK was doing a sort of staged rip and replace, and they were taking out the ACH. Thank you for correcting me on that. You make a great point about the current U.S. system sliding backwards by the day. The Fed says it will take at least 10 years to replace the current system, so you wonder what kind of state we'll be in by the time they actually finish the project. Likely the speed of innovation could pass by whatever is implemented by the Fed in that 10 years.
EdP107
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EdP107,
User Rank: Apprentice
2/22/2014 | 8:39:35 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
As a financial crimes investigator, I have no problem with speeding up transactions as long as you can speed up the verification of funds side as well. Currently I get several calls from bank investigators each week regarding forged checks. Everyone assumes that if a check is paid out that it has "cleared". This is why overpayment scams and secret shopper scams are so successful. The bad guys count on the check being paid out and the victim sending the money on before the bank is told that the check or account was no good. Then the bank victimizes the scam victim by freezing their account when all the bank had to do was wait for the funds to truly clear.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
2/25/2014 | 2:29:54 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
How true. Everyone wants speed, but with speed there is a bigger opportunity for fraud and scams. I don't see the quest for faster payments going away, though. Instead, I think banks will need to do a better (faster) job on the clearing side. It can be done and the technology is available, but banks have to be willing to make the investment.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
2/25/2014 | 6:18:09 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
Security is one of the areas that the Fed is looking at in examining faster payments. Definitely will need to have fraud monitoring systems in place that are capable of handling the volume and velocity of transactions.
Byurcan
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Byurcan,
User Rank: Author
2/25/2014 | 7:07:56 PM
re: Could Banks Hold Back Faster Payments in the U.S.?
Definitely, also as mobile payments technology to become more popular, it also can help detect fraud quicker, i.e. a bank sending someone a SMS message about a possible a fraudulent transaction, as oppsed to a phone call, or , forbid, a letter.
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