What is the Future of Faster payments in the United States?

Adam Rust

Next week, the first meeting of the US Faster Payments Council  will convene in Chicago. It will represent the end of a long journey. For the last five years, the Federal Reserve convened a diverse set of stakeholders to create a governance body for the new payments regime.

The FPC originated out of market demand for faster payments. The Federal Reserve’s 2015 report, Strategies for Improving the U.S. Payments System, galvanized the industry, ultimately leading to the development of the 330+-member Faster Payments Task Force ("FPTF"). Through that activity, consumer organizations, business end-users, financial institutions, payment network operators, technology providers, and others came together to chart the course for faster payments, and as a result, the Faster Payments Council was born.

What is the Future of Faster payments in the United States?

- Faster payments become a ubiquitous aspect of our payments system when it becomes apparent that it can solve known pain points.

- Faster payments become a ubiquitous aspect of our payments system when businesses see an opportunity to add value to their brand through adoption.

- Faster payments become a ubiquitous aspect of our payments system when end-users perceive the benefits, and when they feel comfortable with their security.

The Business Perspective

I regularly hear from employers who say they can motivate their workers to work extra shifts when they can also provide pay at the end of the day or the next day. We know that many people live on the financial edge (Fed study). The solutions exist, but true integration with payroll is something that is mostly only within the capability of larger employers. Rather than leaving the market to a few use-case specific tech providers, it would be better if workers at all businesses could tap faster payment of wages. Employment agencies paying every week pointed to the flexibility of faster payments to turn around payroll sooner.

Employers may see interest among their employees and gig workers to use faster payments as a way of differentiating their company: another way to receive a payment from a customer in a rush to pay, a way to make faster payments to vendors, a way to pay employees and 1099s sooner, a way to reduce the need for working capital. Additionally, it has merit as a way to reduce fraud from checks – mainly a need among smaller businesses.

We know from the experience in the UK that the majority of faster payments occurred after regular business hours. Going back to the UK faster payments experience – a good analog given the nature of our economies - there were 264 million business-to-consumer faster payments in 2012.  There were even more consumer-to-business faster payments. When consumers had the option to use a faster payments service to make a regularly recurring fixed value payment, at least 94 percent tried it at least once in 2012.

The most common faster payments use case was C2B payment of a credit card bill. Within a few years after its introduction to the UK, two-thirds of credit card bill payments were made through a faster payments service.  

A faster payment can overcome known payment points. A few examples:

• Receiving a refund from a merchant to a debit card is often “clunky,” with instances where refunds are made by cash because the refund would otherwise take up to 7 business days to be credited back to a consumer’s debit card.

• Wages. At a conference that I attended in Phoenix last week, a representative of Uber spoke about the uptake of faster payments among drivers in India. The speakers said that drivers often ask to be paid several times a day. They ask for funds when they purchase gas. They ask for funds when they want to break for lunch. They ask for funds when they finish up for the day and prepare to shop for dinner.

• Distribution of commissions, incentives, and rewards.

• Insurance payouts. Be it for large-scale disasters, for smaller dollar renter’s insurance payments, or property and casualty losses. Account holders might need funds that night – the faster payment option allows an insurance company to make that payment with good funds immediately. An end-user, having experienced the immediate receipt of funds, would undoubtedly perceive that outcome as a point of differentiation. .

Small businesses could be left behind. Already, small businesses tend to rely on checks far more than larger corporates do, to their detriment. They pay more to pay, and additionally, they take on more risk of check fraud.

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faster payments challenges opportunities

What are the drivers?

Felt demand is the critical driver of uptake. Specific use cases will provoke the most, but innovations may spur new demand. The Faster Payments Task Force ("FPTF") predicted the most significant market for B2B low-value payments (paying vendors) and P2B remote payments would have the most volume. The need exists in particular B2P examples, but transaction volume is perceived to be lower than with the first two categories I mentioned a moment ago. For consumers, the driver will probably be on the receiving side – when an existing faster payments participant offers to send them money.

For businesses, where the decision is more strategic and forward-thinking, the driver will be like anything else: a return on the investment – either directly or through perceived value of their business in the eyes of their customers and vendors.

I hope that corporate end-users come to see faster payments as a differentiation. In the UK experience, comments identified a variety of benefits:

• Benefits to customers (a receipt of funds sooner (insurance payouts, refunds))

• Benefits to employees: The UK survey, in reviewing the timing of faster payments volume over the course of 5 business days, found that the sort codes associated with businesses sent more payments on Friday than any other day of the week. Most of those payments were probably established to pay wages to workers.

• The flexibility of payment timing

Reduced payments costs

The systemic price of rolling out a faster payments service is relatively modest. So the net present value doesn’t have to be that high to demonstrate a justification for the investment. [But that ignores the cost of using Zelle, speaks to the need for Fed solution]

The Faster Payments Task Force predicted a net gain to the economy of $600 million by 2025. For a business, ordering a faster payment costs less than a check. (27 cents vs. 47 cents)

Getting over end-user inertia:

The value that any participant derives from joining a network is a function of the size of that network. Scale equals value. How do we get there? I think it will be a combination of facts and impressions. The example of the rollout of direct deposit – a value-added service that increased speed and reduced risk – should have been a no-brainer to benefits payments recipients. Instead, Social Security waited for decades to see 100 percent signup and only did so after several efforts at mandating utilization of direct deposit.

It takes a sender and a receiver to make a payment. In my opinion, most new users will sign up when they understand they have funds waiting for them inside a faster payments solution. End-users will sign up when they get a notification that someone has sent them money. Workers will sign up when they understand that they can receive their wages sooner. They sign up because their bank or their technical provider prompts them to try it – maybe with an accompanying reward.  

Still, faster payments have to overcome some of the perceptions existing in the public sphere about safety. The fact that providers instant on irrevocability is short-sighted.

A group like the FPC can lead by creating content about adoption – but messaging will work best when providers educate end-user. I am encouraged by how my bank has suggested a faster payment instead of bill payment, for example.

What would you like to see next?

We know that faster payments can solve for specific payment pain points. We don’t know what else it will do. Henry Ford said, “If I had asked people what they would have wanted, they would have said faster horses.” They didn’t know how much better a car would be, how society would have to change as a reflection of the improved service, and what things would be added to its platform of functions. Note: there is some controversy surrounding the authenticity of his authorship of this quote.

Following the lesson from Henry Ford’s insights, it took a significant investment in infrastructure to make the car as a central aspect of American life. The use of vehicles as a mode of transport depended on the build-out of our national network of highways. At the moment, only private entities have created faster payments solutions, and those systems are not yet interoperable with each other. Zelle serves consumers, whereas the Clearing House’s Real-Time Payments (“RTP”) serves businesses.

We have known challenges, too. I would like to see standards for data privacy, especially when we are working across linked accounts. I would like to see a system where end-users have real power over their data, like the power to have their data deleted when they close an account, to see the data that a service provider holds on their account, the ability to receive a service and still limit the use of their data, and some progress on reasonable enforcement. We should be moving toward a system that establishes a high baseline of data protection rights and moves away from an up or down opt-in system. I would like to see work to improve data privacy on directories. I would like to see better ways to integrate the data needed for payroll payments (taxes) and invoicing into actual payment messages. I hope that small businesses will enjoy the benefits of faster payments.

We need to work on interoperability – the mechanics of it, the standard best practices, including appropriate disclosure regimes. People will see the benefit of fraud information sharing.

I think we’ll see banks creating value-adding services. This week, Digit announced it would use TCH’s RTP service to cover overdrafts on bank accounts linked to its service immediately. We’ll see innovation elsewhere, too. Who would have expected that the car would prompt people to wait in line to receive their food from a window on the outside of the restaurant?

Things to Watch in the Future

In my opinion, the FPC must take a role in establishing rules and standards for faster payments in the United States. As currently structure, the FPC cannot make its own rulesets. If the FPC did have the authority to write rules, supervise providers, and make enforcement actions, then it would take an important step toward interoperability. We need a system that works when a payment goes from one service (Zelle, for example) to another (VISA Direct, for example). In the current ecosystem, operators create their own rules. In some cases, there are ad-hoc one-off agreements between various solutions.

We will see the benefit only after there is a problem. Some lower-bar solution will introduce risk to the system. At that moment, other providers will want to have an enforcement lever. If that lever is the FPC, then the organization becomes a central place for managing the faster payments ecosystem. If not, it will default back to traditional payments regulators.

NACHA has rules for the groups that want to access ACH systems. An FPC analog will create value for the organization.

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Adam Rust has worked to defend consumers against harmful financial practices since 2005. He has written extensively about overdraft fees, payday lending, credit insurance, student loans, prepaid debit cards, high-cost installment loans, and subprime mortgage lending. The New York Times interviewed him when it reported on the CFPB's rulemaking on prepaid debit cards; subsequently, his research paper framed the debate on consumer protections.

He serves on the Board of the US Faster Payments Council. He is Director of Research at Reinvestment Partners in Durham, North Carolina. He is the author of BankTalk. He is the author of "This is My Home: Challenges and Opportunities of Manufactured Housing" and has testified to Congress on how to redress some of the problems with manufactured housing. See more on his LinkedIn profile.