Faster, smarter, better. This is the future of payment trends. Processing timelines have been shortening for decades, to the point where faster payments are cleared and settled in seconds. As if that wasn’t enough, we are on the cusp of an era of smarter payments, which include additional data that better supports commercial and retail use cases.
Markets around the world have been rolling out real-time payment systems over the last decade. But is the instant gratification from true real-time payments the only solution for unmet consumer and corporate needs? Would same-day payments meet most, if not all, of the same needs? Expedited online payment methods, payroll applications and many ad-hoc business payments, etc., would benefit greatly from same-day (not real-time) settlement, and allow the network to move payments faster and provide additional functionality.
Driving Instant Gratification through Payments
The last decade has drastically changed the business model and technology behind payments – from new platforms and solutions, to updated regulations on payment effectiveness and security. More significant than those, however, is the level of expectation from merchants, consumers and even regulators.
Under the guidance of the Federal Reserve, the U.S. banking system is cooperating closely to accelerate the speed and efficiency of payment systems. Meanwhile, NACHA (The North American Clearing House Association) has approved rules for same-day ACH, The Clearing House is preparing a pilot program (with FIS) to roll out its Faster Payments solution and we can expect several other initiatives in 2016.
Despite such demands, what constitutes “fast enough” is unclear; some want instant or near-instant transfers, while others want same- or even next-day payment availability.
When is Same Day Online Payment Processing Quick Enough?
It remains to be seen whether there is a true need for real-time payments or if settlement within a few hours would suffice. In fact, same-day payments, routing through established ACH infrastructure, would probably satisfy many, if not most, payment needs.
Same-day payments would satisfy payroll systems needing to pay hourly workers, while providing flexibility for late and emergency payrolls. Same-day also would provide accelerated bill payments, enabling consumers to make bill payments on the due date, and provide faster crediting for late payments. In the business world, same-day payments would enable faster settlement of invoice payments between trading partners, and could include remittance information bundled into the payment transactions. Similarly, when moving money between owned accounts, both consumers and corporations would benefit from faster crediting.
Same Day ACH: Moving at the Speed of Fast
In the United States, same-day ACH payments are well placed to satisfy the majority of payment use cases. NACHA, which serves as the administrator of the U.S. ACH network, has embarked on a program that will enable same-day processing of virtually any ACH payment; currently, most ACH payments are settled on the next business day.
Financial institutions will be able to submit files of same-day ACH payments through two new clearing windows provided by the ACH operators: a morning submission deadline of 10:30 a.m., with settlement occurring at 1:00 p.m., and an afternoon submission deadline of 2:45 p.m., with settlement occurring at 5:00 p.m. Exceptions would include international transactions and high-value transactions above $25,000, which only account for one percent of current ACH network volume. These new capabilities will become effective in three phases, beginning in September.
The Future of Faster Payments Trends in the U.S.
A study conducted by the Fed found that over two-thirds of consumer payers and three-quarters of business payees prefer instant or one-hour payment speed. The key question for all users is what functionality will be required to meet Americans’ needs: validation of good funds, settlement of funds or actual funds availability in a user’s bank account?
The Clearing House network sits front and center in this dialogue. As the foundational infrastructure of electronic payments, the ACH supports over 80 million payments daily. By improving processing timeframes on ACH system, we can better meet the needs of the industry. Today’s work on same-day ACH is an industry effort that will serve as a first step to moving payments along much faster.
The hope is that migration toward immediate payments will create opportunities for additional services above and beyond simple transaction processing. Even smaller banks using vendor solutions will be able to participate in additional revenue-generating activities and differentiate themselves by adding tangible value across each transaction.
We will continue to see an abundance of payment options. Wire transfers, ACH transfers and check payments certainly have inherent inefficiencies, but they will not be decommissioned anytime soon. Not all payments are created equal; some transactions are better suited to a credit card and some to a wire or ACH transfer, while others demand true immediacy. While not a cure-all, moving toward faster payments will help us all better align the various payments use-cases with the most appropriate payment system.
Stay tuned, as the faster payment train has certainly left the station and is coming to the U.S., in one form or another. How fast do your payments need to be?