Faster payments are quickly becoming a priority for banks across the country to support a variety of use cases for their customers. Although the drive for faster payments started many years ago with the publication of Strategies for Improving the U.S. Payment System by the Federal Reserve, the Covid-19 pandemic has accelerated many community banks’ plans to implement faster payment solutions. With many businesses and customers now unable or unwilling to process manual payments, such as cash and checks, due to concerns about the virus, a new generation of instant and contactless options can deliver safe, secure, and efficient payments.
Faster payments bring the promise of greater speed and control for consumers and businesses. The faster credit-push model and the use of requests for payments put recipients in much greater control of the funds in their bank account. This benefit cannot be understated because it marks a vast improvement for consumers and businesses that paid by check, only to be left wondering when the check would be cashed.
New faster payment systems are also designed from the ground up to be smarter, with enhanced risk management systems considered and built from the very beginning. Rules and system controls, such as the ability of banks to set transaction limits, will help banks safeguard users and serve as a check against any would-be bad actors.
However, there are many other ways in which faster payments will make a positive impact. There is a growing interest by companies to have the ability to pay people immediately after a job is completed, such as a contractor finishing a project or ride-share driver seeking payment at the end of the day. With faster payments, companies will be able to instantly send payment in those cases, which will improve cash management for companies and satisfy recipient expectations.
The market for faster payments is small but is rapidly growing as more community banks partner with technology providers to access a range of solutions. Faster payment options include, but are not limited to, the following products and systems:
Nacha recently reported a surge in the use of Same Day ACH in 2020—transaction volume and value increased 38.6 percent and 86.1 percent, respectively, to reach new heights of 347.2 million transactions totaling $460.1 billion.
Same Day ACH is the most readily available faster payment solution for community banks because it reaches all financial institutions in the country. Many community banks already offer traditional ACH payment services, such as direct deposit for the payroll of local businesses, so Same Day ACH is an enhancement that is familiar to bank employees and customers.
As more community banks develop and implement comprehensive payment strategies, Same Day ACH is poised to play a vital role in delivering faster, cost-effective payments.
Beyond Same Day ACH, new solutions like The Clearing House’s RTP Network and push-to-card products from the major card network operators also extend faster capabilities to community banks.
Launched in November 2017, the RTP Network now reaches nearly 100 financial institutions and approximately 56 percent of all U.S. DDAs. The RTP Network is the first domestic payment system created since the ACH Network in the 1970s, and it brings many enhancements to improve the payment process for consumers and businesses.
RTP Network features, such as real-time clearing and settlement and Request for Payment, deliver a faster payment experience for community banks and allow business customers to send Request for Payment messages to other businesses or consumers. The use of Request for Payment in B2B scenarios can allow, for example, a company to pay on the spot after the delivery of a shipment. Other companies, like utilities, imagine using the Request for Payment to send monthly bills to customers.
The card networks, notably Mastercard and Visa, are also enabling new capabilities through their Mastercard Send and Visa Direct programs. These solutions utilize the card network infrastructure to allow credit payments to be “pushed” to debit cards.
In a recent report published by the U.S. Faster Payments Council, Mastercard Send said it allows for “secure, near real-time transfers to and from billions of card, bank and digital accounts.” Visa disclosed in its 2020 Annual Report that Visa Direct “enabled faster payouts to over 2.35 million U.S. small businesses and sellers.” Visa also reported that Visa Direct expanded to 3.5 billion transactions globally.
The campaign for ubiquitous faster payments, however, is not finished. ICBA strongly urges the Federal Reserve to assist in achieving ubiquitous, nationwide access to safe and efficient faster payments for all financial institutions and their customers by serving two roles:
Financial institutions will soon gain access to a new option: FedNow, a new instant payment service developed by the Federal Reserve. In February 2021, the Federal Reserve committed to bringing this new service online in 2023.
With FedNow, all community banks will gain access to a new payment system with instant clearing and settlement and requests for payment. These new features will offer community banks and their customers safe, secure, and efficient real-time payments for a variety of use cases. Moreover, FedNow will serve as a platform for innovation for years to come.
ICBA supports the Federal Reserve System in its dual role as payment systems regulator and provider/operator of services. It also:
The push for faster payments is about much more than simply enabling consumers and businesses to enjoy instant funds transfers—it is also an effort to provide richer payment-related data in real time.
Payment-related data, such as details about invoices, can furnish businesses with greater insights that contextualize payments. The adoption of ISO 20022 will help more businesses develop straight-through processing and realize time and cost savings with their payment processing.
Development of a Real Time Gross Settlement System
The addition of a Real Time Gross Settlement (RTGS) system by the Federal Reserve for the settlement of faster payments complements present-day clearing and settlement systems by providing immediate funds settlement transaction-by-transaction on a 24x7x365 basis. Such a platform serves as a foundation for innovation, not just for payments today but as payments evolve in the future.
By developing and operating an RTGS service, the Federal Reserve: 1) provides financial institutions an infrastructure option for clearing and settling faster payments; 2) ensures access for all financial institutions; 3) provides a settlement option that is not affiliated with or owned by the nation’s largest banks; 4) serves as a backbone to ensure settlement continuity in the event of disruption in the private sector; 5) provides a settlement option with transparent rules; and 6) encourages competition and innovation.
Ubiquitous adoption among financial institutions should be the primary measure of success for achieving payments modernization in the U.S. The establishment of FedNow provides choice for every community bank that desires to implement a real time settlement solution. Achieving industry-wide ubiquity will require all community banks to evaluate and implement a real-time settlement solution.
Both the public and private sector providers should aim for interoperability at the earliest possible date, but the Federal Reserve should not delay developing and launching FedNow as the path to interoperability is discussed and charted.
Impact of Existing Legal Framework
The attributes of real-time payments potentially impact consumer protection and risk mitigation strategies. Many of the protections included in the existing legal and regulatory framework need to be revisited to accommodate new payments settlement networks such as FedNow, RTP, or card-based solutions.
Liquidity Management Tools
The Federal Reserve should continue its efforts to provide tools which assist community banks in managing liquidity on a 24x7x365 basis for real-time interbank settlement of faster payments, such as correspondent and agent transfers or automatic transfer of balances (or “sweeps”) based on pre-established thresholds and limits. These tools should also include extension of National Settlement Service (NSS) cutoff times to include holidays and weekends, transfers between financial institutions and Federal Reserve accounts, and access to the Federal Reserve discount window.
These tools should be available for the FedNow service and also for any bank-centric private sector real-time payments settlement service. Correspondent banks and bankers’ banks play a valuable role in liquidity management by serving as funding agents. Therefore, ICBA encourages continued collaboration between the Federal Reserve, private-sector providers, and correspondent/bankers’ banks to ensure that all community banks will be able to participate in these new payment systems.
U.S. Faster Payments Council
ICBA and its members actively support the U.S. Faster Payments Council (FPC). As a founding member of the FPC, ICBA actively contributes by holding a leadership role on the board of directors and through robust participation in workgroups. The FPC was established by the Faster Payments Task Force, which believed that an industry-led framework for cross-solution collaboration and decision making was needed to support achievement of a faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient payments system. Community bank participation in the FPC provides a voice in industry collaboration, a voting responsibility for FPC initiatives and leadership, and an opportunity to influence the development of faster payments.