In short:
- New solutions aim to quicken payment processing in the U.S.: In 2016, Nacha debuted away for banks to settle ACH transactions the same day they are received. The ClearingHouse followed by launching a new real-time payments network.
- Companies including Visa and Mastercard have also launched products to enable fasterpayments, cementing these processing speeds as the new normal.
- Faster payments offer consumers and business a host of benefits, including certainty ofpayment, improved cashflow and simpler management of finances.
Faster payments are nothing new on a global scale. A few countries have had faster paymentssystems for decades, and today about 40 nations have systems in place tomove money in real time. While the U.S. was late to the party, the sophistication of itsreal-time payments system is catching up to that of other countries.
Beginning in 2016, several major U.S. financial associations completed new initiatives tohelp money move faster. The advantage of being a latecomer is that the U.S. could learn fromthe experience of other countries, including economic powers like the United Kingdom, Chinaand Japan.
So which faster payments systems are available in the U.S. today, and how do they work?
Nacha takes a step in the right direction
Nacha is a not-for-profit that runs the ACH Network, a widely popular system for moving moneybetween bank accounts electronically. In September 2016, the organization launched Same Day ACH(opens in new tab) credit transactions.Same Day ACH allows consumers and businesses to receive money the same day it’s sent,instead of in 2-4 days as with traditional ACH. Nacha accomplished this by adding newprocessing windows at 10:30 a.m. EST (for the 1 p.m. settlement window) and 2:45 p.m. EST(for the 5 p.m. settlement window). A year later, it added Same Day ACH debits.
Nacha’s Same Day ACH allows consumers andbusinesses to receive money the same day it’s sent, instead of in 2-4 days.
Like traditional ACH, Same Day ACH uses batch processing. The bank or credit union thatinitiates the transaction pays the receiving financial institution 5.2 cents for eachtransaction. That’s quite a bit more than regular ACH, which charges the originatingandreceiving bank each less than four-tenths of a penny per transaction (or even less, thanksto volume discounts).
Nevertheless, it’s got supporters.
“Same Day ACH remains the only faster payments solution that is ubiquitous among allbanksand credit unions in the U.S.,” said Scott M. Lang, chief of staff at Nacha.“Adoption ofSame Day ACH has been strong since Nacha rolled it out in 2016. With 178 milliontransactions last year, Same Day ACH has seen its volume grow by 137% since 2017.”
Nacha plans to continue improving the service by adding a third processing window with a 4:45p.m. EST deadline in March 2021. (This was pushed back(opensin newtab) from September 2020). Thatlater window will be especially helpful for financial institutions in the Pacific andMountain time zones. Additionally, the maximum transactionsize(opens in new tab) for Same Day ACH willjump from$25,000 to $100,000 in March 2020.
The Clearing House goes real-time
Soon after Same Day ACH launched, The Clearing House’s long-awaited real-time payments(RTP)network went live in November 2017(opens innew tab). Unlike Same Day ACH, RTPruns on an entirely new set of payment rails.
“If you wanted to go to a truly instant payment system that built in some of thefunctionality that we knew would help to make it viable and valuable in the U.S., we reallyneeded to start with a new platform,” said Steve Ledford, senior vice president ofproductsand strategy at The Clearing House. “Then one of the advantages when you do startbuilding anew platform, you can build it based on all of the advances in technology, advances in waysof thinking about how you handle information.”
The Clearing House’s RTP is a “credit push” network that settles paymentsin an average ofjust 2-3 seconds.
The Clearing House’s RTP network(opens in newtab)settles payments in an average of just 2-3 seconds.
This is how it works:
- A consumer authenticates themselves through their bank app/website and initiates apayment. (Imagine a patient paying a hospital for a recent surgery, for instance.)
- The payer’s bank creates a message and sends it to the RTP network, which TheClearingHouse validates and forwards to the receiving financial institutions (in this case, thehospital’s bank).
- The receiving institution either accepts or rejects the message. (It could be rejecteddue to a wrong account number, a closed account or an account not in the receivinginstitution’s system.)
- If the receiving institution (i.e., the hospital’s bank) accepts the message, itimmediately sends a message back to the sending institution (or patient’s bank),sayingthe payment has been accepted.
As that process happens, in the background, The Clearing House settles the transaction inreal time, using a joint account at the Federal Reserve in New York that participating banksmust prefund and keep above a certain minimum. Each real-time credit transfer costs thesending institution 4.5 cents, and there are no volume discounts or monthly minimums.
Although the sender must be the one to initiate the transaction in RTP, the receivinginstitution can issue a request for payment to try to start of the process. This costs 1cent. For example, a power company could send a customer a request for payment that includesa link to a bill (costing the company 1 cent). The customer’s bank will then presentthismessage to the customer, who can complete the payment or ignore it. (Request for payment isdifferent than a debit, since the power company is not automatically pulling the money outof the customer’s account.)
“One of the big features of the overall network is regardless of how a payment isstarted,the payer is always in control,” Ledford said. “It’s up to them when theywant to pay or ifthey want to pay.”
That control reduces fraud and errors, Ledford notes, because a request for payment isattached to a specific invoice and receiving bank account and handled through a securechannel.
Same Day ACH vs. the RTP Network
More than half of U.S bank accounts can access the real-time network, the bulk of thosewithin the large banks that run The Clearing House(opensin new tab). Same-Day ACH,meanwhile, is available to just about every U.S. bank account because it uses the samenetwork as traditional ACH. technology. It’s not necessarily a direct“competitor” to theRTP network, but rather a half-step between regular ACH and RTP.
Around half of U.S bank accounts can access the RTPnetwork. Same Day ACH, meanwhile, is available to almost all of them.(Note that the services aren’t necessarily direct “competitors.”)
The Clearing House’s goal is for every U.S. account to be able toaccess theRTP network by the end of 2020. However, joining the network is at the discretion of eachbank or credit union.
“Some of the investment decisions, which [financial institutions are] making in theirlocalmarket, getting all of those aligned and understanding when you want to take that step tomove to faster payments, the timing of how that all works, is a big challenge,” TrevorLaFleche, senior director of product management for enterprise payments solutions at Fiserv,said.
There are three primary options for a bank or credit union to connect to the RTP network,each of them designed for financial institutions of different sizes and requiring varyinglevels of financial and human resources.
Although the costs are similar for Same Day ACH and the RTP network, remember the RTP networkdiffers from Same Day ACH in that receivers cannot initiate transactions.
It’s worth noting that some may choose an entirely different solution: the Fed recentlyannounced it’s developing its ownreal-time payments service(opens in new tab),though itwon’t be available for another 4-5 years.(More on that in our next article.)
Nacha and The Clearing House may handle the majority of U.S. transactions, but there are anumber of alternatives in the faster payments space.
- Visa Direct
Visa Direct can handle business-to-business (B2B), business-to-consumer (B2C) andperson-to-person (P2P) payments. “Instant pay” features for Venmo, PayPal, LyftandPostmates all use Visa Direct.
Like the RTP network, Visa Direct is a credit push system, though it moves money on the debitcard rails. Transferred funds are available within 30 minutes after a transaction iscompleted – even on nights and weekends – and sometimes much sooner.
Users can set up an account with their existing Visa debit card because the company wanted tomake sure this product was easy to use, according to Matt Friend, Visa’s vicepresident ofglobal faster payments strategy.
“We really didn’t have to create anything new – Visa Direct leverages thatnational andglobal infrastructure that’s already in place that everybody has access to, and justturnedaround the flow of the transaction from pulling money to pushing money in order to cover allthese new use cases and capabilities,” Friend said.
One key differentiator with Visa Direct compared to the RTP Network and Same Day ACH is itsupports cross-border payments.
- Mastercard Send
Mastercard Send is a similar platform that can handle transactions involving businesses andconsumers, though unlike Visa Direct, the card network says(opensin new tab) it can push money to“virtually all U.S. consumer debit cards … regardless of brand.”
- Zelle
A third option is Zelle, a P2P payments network created by eight large U.S. banks. Zelleallows users to move money directly from their bank account to someone else’s in amatter ofminutes, as long as the recipient has a Zelle account. All it needs to execute thattransaction is the recipient’s email address or cell phone number.
Although payments post in real time with these solutions, settlement is same day or next dayfor most of them, not immediate like with the RTP network.
How real-time payments benefit everyone
There’s a reason why faster payments have been such a focus in the financial world intherecent past. When money moves between people and businesses more quickly, it offers themextensive benefits like:
- Certainty of payment
Take, for instance,U.S.distributors that buy from Chinese manufacturers(opens innewtab). The distributors typically pay forgoods when they come off a container ship at an American port. But that payment fromdistributors to manufacturers traditionally takes two or three days to show up in themanufacturer’s account and could fail due to insufficient funds or incorrect accountcredentials. Those pitfalls disappear when that transaction happens in real time.
“Being able to settle things in real time allows you to put finance at the point of thetransaction and match what’s happening in the real world with what’s happeningwith thefinance,” LaFleche said. “And that’s a huge benefit to companies, justbeing able to havethat certainty.”
“Being able to settle things in real time allows you to put finance at the point ofthetransaction and match what’s happening in the real world with what’shappening with thefinance.”
When a consumer pays a business, the biller can watch the payment go through while thecustomer is on the phone. There is no doubt about whether the funds are in thecustomer’saccount, and that customer doesn’t need to call the electric company, for example, tomakesure his payment posted and he won’t receive a late fee.
- Improved cashflow
Cashflow issues are the biggest challenge small business owners face, according to a recent Lendio study(opens in new tab). Fasterpayments resolve many of the issues related to cash on hand because money can reach abusiness’ bank account almost instantaneously.
It means business owners no longer have to nervously wait for money to show up as they try topay employees or invest in new supplies and equipment. Long-term, that added freedom canhave a momentous impact on the growth and ultimate success of a company.
“If you think about it, if you have more control over your cashflow, it’s likegiving youmore available working capital,” Ledford said.
- Ease of managing finances
Both consumers and businesses can benefit from knowing their true account balance at anytime. No longer is someone looking at their bank account balance and mentally subtractingauto-payments for a savings account, student loan and car payment that already startedprocessing to find out how much money she actually has available. That reducesoverdrafts and makes managing finances more straightforward.
For people struggling to make ends meet, faster payments can reduce the need for payday loanswith sky-high interest rates. If they work a second job as a Lyft or Postmates driver, forexample, they can get that income right away to fund daily expenses.
- Sometimes faster is just … better.
There are countless other situations in which speed is of the essence. For example, imagine afamily’s home in South Florida is severely flooded after a hurricane and the familyfiles aninsurance claim. Instead of waiting days or weeks for the insurance payout to arrive in themail – which may prove difficult when many roads are underwater – the insuranceprovider canimmediately put the money in the family’s account once it verifies the claim. That canhelpthe family gets back on its feet and start repairing its house more quickly.
Another scenario: If someone needs an emergency surgery and a family member offers to help,the person getting the surgery could use the family member’s loan right away insteadofputting it on a credit card or taking out a loan with much higher interest.
The bottom line
Faster payments are no longer an abstract idea in the U.S. – they have arrived, andmanyconsumers and businesses can start capitalizing on the advantages they provide right now.However, this is hardly a finished project, and the faster payments landscape is bound toevolve in the coming years.
The far-reaching benefits of faster payments offer proof that this is not a small stepforward but a landmark leap ahead.
So what’s next for this fast-moving initiative in the financial world? Find out inpartthree, the final story in this series. We’ll examine the future of the paymentsspace,including the Fed planning its own faster payments system and the role of fintechs andfinancial institutions in that future.
