With its inception in 1974, the ACH Network was one of the safest, most efficient payment systems on the planet. When it comes to features, functionality and speed, though, it’s far outdated compared to real-time systems in use around the world today.
At least 35 nations currently use real-time payment systems, some of which have been in place for nearly half a century. Although there’s a general recognition that our country’s system is out-of-date, the big banks have opposed a real-time payments network, mostly because they reap benefits – such as float – by maintaining ACH use.
Reliable But Limited
Right now, most U.S. payment transactions work through a familiar process: batching the ACH data, transferring from one bank – or originating (ODFI) from a merchant – to the Federal Reserve and, then, on to the receiving bank (RDFI). The ACH draft is then categorized and ranked, with some transactions processing faster than others. For example, drafts that are ‘On-Us’ – meaning the account is drawn on one financial institution and is received by the same financial institution – can be faster. Traditional ACH transactions, however, generally take 48 to 72 hours.
While relatively slow, the process has its merits. For one, it gives a bank the ability to use the monies and guard against overdraft situations and fraudulent funding activities. Unfortunately, it also comes with a number of downsides that have prompted the Federal Reserve Banks and the Federal Reserve Board from moving forward with a plan to update to a real-time payment system.
Part of the impetus behind the Fed’s movement stems from a study the Fed commissioned from McKinsey. The conclusion was that a real-time payments network would result in savings of $10-$40 billion, thanks to improved efficiency in accounts receivable and accounts payable.
Combined with other data that demonstrates the massive benefits of a more modern payment network, this study has shifted the discussion regarding real-time payments. Key industry players have gone from asking “Why are we changing something that’s not broken?” to “How do we do it faster? Who is going to build it? How it will be governed and managed?”
Consumer and Market Pressure
In the face of modern technologies, the industry isn’t doing a very good job of living up to consumer demand. Today’s customers want and expect real-time experiences and instant gratification. While a number of technological advances satisfy this hunger, the movement of money in the U.S. has never kept up with the pace of change. Either too slow or too costly, payments are a late-comer to the real-time revolution in the U.S.
As demand increases, financial institutions are under pressure to satisfy all of the real-time payment needs of their customers, including large enterprises, small businesses and individual consumers. However, due to the speed and global nature of real-time movement, financial institutions face increased risk – the new technologies attract more demanding customers, and a truly global market and rising cross-border payment volumes increase the danger of new disruptions and threats.
To ease the transition, the Federal Reserve developed a roadmap to improve the U.S. payments system. Likewise, some third-party programs, such as FIS’ PayNet, are already making real-time payments a reality by connecting all payment stakeholders in an impartial, open network.
It’s good to know the ball is finally rolling, especially since the increasing impact of global competition is threatening the traditional market leadership of major U.S. financial institutions.