For faster payments, a rapid state of change
Faster Payments. For all the talk leading up to and following the July 2017 final report of the Faster Payments Task Force, how many of us actually make or receive a faster payment on regular basis? The truth is, not that many bank and payments customers seem to execute very many faster payments. So will that change? In time, yes—and here’s what that means.
The faster payments universe encompasses everything from The Clearing House’s real-time system (which processes payments in less than 15 seconds) to Visa’s consumer card-based, worldwide money transfer system—which might take 15 seconds, or up to 30 minutes. Both systems deserve credit for getting down to business hard on the heels of the task force report.
So is 15 seconds fast enough? You might think so. But for most U.S. businesses and banks, the assumption is that “faster” means less time than that for payer and payee banks to send, receive, clear, post, and settle with good funds availability. That’s just three seconds for each functional step, and less total time that it probably took you to read this paragraph.
“Launching faster payments was a watershed moment for the payments industry,” says Byron Marshall, BAI’s director, research. “Now that we’re nearly a year in, I think it’s important to understand where we are, see if it is living up to expectations and understand how things might change. Now that we have built it, have they come, and if not why?”
As for the answer, Marshall says: “Candidly, it seems financial institutions have yet to figure out how to fully unlock the potential of faster payments and create value. The ones that most quickly figure out how to translate the faster payments architecture into a compelling product offer for customers will have a clear competitive advantage in monetizing its capability.”
Meanwhile, at least one faster payments system doesn’t tout speed as it primary virtue. The Better Than Cash Alliance program was initiated by the Bill and Melinda Gates Foundation and is operated by the United Nations. The global effort strives to improve payments services for rural communities, primarily in the Southern Hemisphere—with a primary objective of safer payments by eliminating cash. Payments that can’t be stolen are the best kind, and matter tremendously for the merchant returning to her farm from the marketplace with a crop payment tucked away via mobile phone.
Then there is the issue of accuracy, which in theory could suffer with today’s need for speed. Anyone who has worked in a wire room knows that speed and accuracy can compete for attention and operators sometimes get torn between getting a payment out fast versus getting it out right. Even fully automated systems must balance speed and perfection.
In the wake of the task force, changes and challenges
Since wrapping up last year, the Faster Payments Task Force has made a positive impact through its efforts—but more work remains to done. Task Force sub-groups still meet and have some months to go before they produce definitive recommendations on three nuts-and-bolts issues: directories, rules and standards, and regulatory processes. In most countries, governments mandate every part of the payments process. But the U.S. continues to honor the tradition of giving banks wiggle room as they implement new methods and technologies. The conversion will be marked by rapid adoption by many, and a slower pace for most, before it reaches a critical mass of senders and receivers.
Most big corporations and many small businesses will gain significantly. For large payments, the most obvious benefit is to receivers who can use funds sooner or start earning interest earlier. Senders can hold the funds in interest-earning accounts for longer and still get them to the payee on time. And for small businesses with limited operating cash on hand, the benefits can be even greater. Getting money from customers faster, while avoiding a withdrawal time crunch to pay suppliers, can only help with cash management.
Senders and receivers of international payments also avoid undue cross-currency settlement risk, though this presents a conundrum. On the one hand, troubles due to outbound transactions racing ahead of expected (but delayed) inbound payments would decrease. That noted, a bank failure unrelated to payments might spread quicker under a global faster payments scheme. Circuit breakers have been suggested, but not everyone yet agrees on who should control the switch.
The world’s payers and payees have much to gain from the global implementation of faster payments, especially where safety is concerned. Those part of the Better Than Cash Alliance, as we have seen, represent one constituency; bad actors trying to “break the bank” in less than 15 seconds now have their have their work cut out for them. Financial institutions and payments processors win; consumers get their money in less time than it takes to visit an ATM. What could be better?
Who needs faster payments? Almost every large company. Most mid-size and small firms. Third-world farmers. First-world payees. Virtually everyone, everywhere. Think: a new financial era, just 15 seconds away.
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George Warfel has worked in banking and payments for more than 30 years at SRI International, IBM and PwC. Currently he is general manager, fintech and payments strategy at IBM partner Haddon Hill Group, Inc. in Oakland, California.