If every financial institution in the U.S. were to commit to handling payments in real-time, what would the technology backbone to such a payment network look like?
No hard-and-fast answer to this question exists today. For one thing, so many industry players object to the notion of faster payments across the board that it may never happen. But there are existing technology platforms that provide clues.
The Federal Reserve kicked off a nationwide debate when it released a paper in September that challenged the status quo of the U.S. payment system. Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, chair of the Financial Services Policy Committee and one of this year's Most Influential Women in Payments, led the effort and the team that issued the paper.
"In a world where several other countries are moving to ubiquitous near-real-time retail payment systems, the U.S. payment system does not have this capability," the paper points out.
The U.K., Switzerland, South Africa and Mexico are all examples of countries that have immediate payment systems.
"Tell me the U.S. isn't able to innovate at the same level," wrote Bruce J. Summers, who has consulted with the financial markets group of the Federal Reserve Bank of Chicago, and Kirsten Wells, a vice president at the Chicago Fed, in a separate paper. They noted that such innovation would take either an act of Congress or a collective effort among the Federal Reserve Board and banks, as called for in the Federal Reserve Act.
The failure of the U.S. payments system to keep pace with the growing digital economy has sent users flocking to digital alternatives such as PayPal and Amazon, Summers observes. And that risks Balkanization of payments rather than the national reach the Federal Reserve System was designed for.
Summers proposes a new model for the U.S. payment system: providing a narrow banking license for digital payment providers, to let them hold deposits for payment services. Two other payment experts say they have heard this discussed but wonder if the regulators would find a way to permit a light-burden banking license that would still satisfy their concerns about risk.
Curiously enough, one leader in providing real-time payments is a credit union organization, CO-OP Financial Services, which is based in Rancho Cucamonga, Calif. For years it has allowed members of participating credit unions to use shared branches and ATMs anywhere in the country as their own by linking them all through a single network. Covering about 1,900 credit unions with 46 million accounts, it provides real-time good funds payments. Now CO-OP has signed up with FIS PayNet so its members can exchange payments with banks on the FIS network. FIS expects to have 50 million credit union and bank accounts linked to PayNet by the year's end.
"People are expecting immediacy in many areas of their lives, including the ability to send and receive money," says Caroline Willard, executive vice president of markets and strategy at CO-OP. Banks are making a big mistake in failing to provide real-time payments, adds Willard, who noted that she recently made a payment into her landscaper's credit union account using only his cell phone number.
"The legacy with big banks is that their branch networks are big, their ATM networks are big, and they don't feel the pressure to innovate that credit unions do," she says.
Edward Woods, at payments consulting firm Mindful Insights in Portland, Ore., says ACH isn't going away, but real-time payments will go through networks like PayNet using the nation's debit card rails for a lot less than the credit card companies charge.
"FIS PayNet is a great example of a network emerging to address that need," says Woods. All networks have at least two sides, with a host of characters all around, but it boils down to those who make transactions and those who receive transactions.
The "what's new" part, in Woods' view, is that PayNet has created a sustainable and transparent operating model for a real-time, card-less network — charging originators for transactions they create and paying the financial institutions fulfilling the requests, e.g., verifying funds availability or posting a good-funds credit. It's a win-win, Woods says.
Merchants, billers, or financial institutions themselves, via bill pay or P2P functions offered to customers, get access to real-time transactions without the need of a card, and the bank fulfilling the request gets paid.
PayNet provides a "thoughtful and balanced economic model for participants," Woods says. It also provides the advantage of being card-less and moving with the speed of EFT.
Until a few years ago, only ACH and ATM networks could debit or credit demand deposit accounts. With FIS PayNet, financial institutions can move money in or out of a DDA with an electronic message.