The Federal Reserve in the US is keen on an overhaul of the US payments system to allow for faster payments than those currently offered by ACH (Automated Clearing House). Interbank payments need to be faster and the Fed has outlined a number of goals in a road map to facilitate this. The current payment system operates on East Coast banking hours (8.30am -5pm) Mon to Friday, taking several days to reach a beneficiary.
The Federal Reserve together with NACHA (The Electronic Payments Association) currently operate the ACH network as well as processing wire-transfers and check-imaging payments. The ACH network moves approximately $39 trillion in almost 22 billion electronic payments annually. Now NACHA is proposing to switch to ‘same day ACH’ which will allow transactions to clear on the day they are initiated.
The Fed’s current drive to speed up clearing echoes developments in other countries, such as the UK’s Faster Payments Service. However many commentators argue that an opt-in solution like Faster Payments is unlikely to succeed given the size of the US market. It is also unclear who will pay for faster clearing, with the banks seemingly unwilling to coordinate efforts or pick up the tab. Others believe that the US government needs to introduce faster clearing through regulation, citing the role that government regulation played in the development of faster clearing across Europe with SEPA (the Single European Payment Area).
There is sentiment among clearing parties that a faster payment system can only work if it also generates revenue for the banks. It is not yet clear however, how the banks would profit from a new system. Consumers and businesses would all prefer faster payments but most are unwilling to pay for it. Next day processing is generally regarded as being good enough for any routine bill payments and payroll deposits.
Security surrounding faster payments is another key issue for corporations, banks and the technology providers that move money and data for financial institutions. At a minimum, any new development will have to ensure that existing security standards are maintained.
The UK model: The Faster Payments Service
Since its launch in 2008, The Faster Payments Service (FPS) has decreased payment times for funds transfers from days to hours, allowing most retail banks to provide transfers in close-to real time. Faster Payments is now the most popular choice for small domestic payments in the UK (the maximum value limit is currently fixed at £100,000, with many banks fixing a lower limit for transfers by retail customers).
Ordinary retail bank to bank transfers are typically completed using FPS, but UK businesses still use the older BACS system for their direct debit and direct credit payments. The current US system for funds transfers is similar to the UK BACS system where payments can take up to 3 days to clear. BACS was the standard method for domestic bank transfers until the introduction of Faster Payments in 2008.
The Faster Payments service was developed as a result of an industry initiative involving the UK’s Office of Fair Trading; this initiative achieved buy-in and support from industry in the shadow of threatened government regulation.
Should the US adapt the UK approach to improve clearing times?
The Fed’s current calls for faster clearing need to be accompanied by a credible threat of regulation in order to bring about a change akin to the UK Faster Payments development. At the moment it is not clear whether the Fed could successfully drive regulation of the US payment system, consequently there is no clear incentive for industry to cooperate or self-regulate to reduce clearing times. Some commentators recommend simply allowing new payment solutions to develop organically – this has already happened in practice, as card payments typically fill the gap created by inefficient clearing in the US. Initially sceptical about the prospect of faster payments in the US, payments professional Carol Coye Benson is now encouraged by positive steps taken by The Clearing House and the Fed to bring this a step closer to reality. In her informative article Faster Now Faster? she offers her thoughts on what should be included in the design phase of the faster payments process.
The UK experience has shown that faster clearing can spur further innovation in the payments market, allowing innovators to play in a real-time environment with access to real-time account data. UK consumers now have access to convenient payment tools such as Barclays pingit: an app which leverages FPS to allow clients to transfer funds in real-time.
It is unlikely that the move to faster payments would have taken place if the UK government had not threatened the UK banks with regulation; the industry response to this threat has created a more efficient, consumer-focused payments environment. Some would argue that the payments ecosystem in the US (characterised by the widespread use of checks and card payments) represents a home-grown solution that is just as efficient as the UK payment system. We will leave it to the economists to test that theory.
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