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.

"The piping is already there with EFT," Woods explains. Getting ACH to change to real-time is just too difficult, he adds. "You can speed up ACH processing by increasing the number of processing windows (assuming everyone would play), but you can't make the ACH network real-time given the existing system design and ecosystem, which works in batch mode."

It is easier to come up with something that is net new, he explains, and innovation will probably be pushed by newer players like Facebook, Square, and Twitter, he believes.

"When eBay needed low-cost payment, it bought PayPal, which has gone a long way toward disintermediating the banks," Woods says. "If I need to send $3,000 to my cousin, it shouldn't cost me $20 for a wire."

Peter Gordon, general manager of PayNet at FIS, says the company will have 500 banks on the network by the end of the year, when all its banking core systems will be able to handle real-time transactions. The payments travel over the same wires as debit payments and are good funds.

Smaller banks that have outsourced their transaction processing to FIS, Fiserv or Jack Henry should be able to get their systems to work with PayNet in approximately 50 hours, the company says. While banking experts often point to the thousands of banks in the U.S. as a reason the country can't move as quickly as Canada or the U.K., Gordon said that three processors — FIS, Fiserv and Jack Henry — represent 90 percent of the banks, if only 40 percent of the payments volume.

Global, mobile, social and cloud trends will force the banks to move, Gordon adds. "You can see that from Bitcoin, PayPal and Square." Several of the top 15 banks several will take a leadership position, he believes.

"Banks in that group travel in herds," he points out. The "herd" will take action over the next 18 months, he predicts. Payment networks like PayNet and ClearXchange will become interoperable the way ATMs and bill-pay have. Clearxchange is a payment network created by Wells Fargo, Chase and Bank of America that lets customers send and receive person-to-person payments using an email address or mobile number.

Fiserv's Popmoney is another. Fiserv says 2,000 financial institutions, including 15 of the top 30 banks, community banks and credit unions, use its payments service. TD Bank signed up for the service in March.

The question isn't whether a real-time payment system can be built, Gordon says. "We built it."

The question, of course, is when will all the payments players in the U.S. coalesce around one real-time payments system?

Chris Hadorn, a principal in the financial services practice at KPMG, thinks the U.S. would benefit from setting up a payments council like the one Australia developed to bring together a variety of stakeholders, including corporations and consumers. 

"As the U.S. is retiring older platforms, it would be good to have a common vision of how we move together toward a common goal," he says.

Meeting Resistance

Banks and other entrenched players in the U.S. payments infrastructure envision running the aging ACH batch payment system for years to come. The country's largest banks don't want to make the costly move to real-time payments because they are doing quite well with the status quo and they contend the payment options available to users meet most needs, with wire for high-value payments and ACH, credit and debit cards and services like Western Union and MoneyGram for small payments.

"Do you want to send me money in five minutes? You can, with Western Union. If you need to pay your utility bill on the last day, you can," says a payments director at one of the world's largest banks. "The pain is by and large solved, although it is not necessarily solved using the best and latest technology, or market practices that exist elsewhere in the world."

It's hard for banks to see a payoff from an investment in faster payment networks.

"Which customer segments are willing to pay for using that faster payments system?" he asks.

"ACH in the U.S. is pretty darn effective," says a payments executive at another money center bank.

The big banks are afraid to lose the revenue from ACH and they don't see the potential for profits from new products, says a payments expert at a leading consultancy.

"The American Bankers Association and The Clearing House say nothing should be done unless there is a business case," the banker says. "At the top of their minds is that rather than adding a new payment mechanism it will take away a very profitable instrument, and that doesn't seem to make sense to them."

The rest of the world is going in this direction, he adds, noting that except for the Check 21 Act of 2003, the U.S. payments system hasn't seen foundational change since 1974.

Hadorn agrees that banks have approached faster payments as a problem rather than an opportunity.

"I don't think banks have stepped back and sharpened their pencils to see what a faster platform could do. I don't think there has been enough energy in the U.S. to see where the value could be," he says. "Some would be in product innovation, and banks would need to educate their customers [about new products] and price [them] accordingly."

In the absence of any organization bringing corporations, retailers and consumers into the discussion, or Congressional action, any move to real-time payments will probably be left to technology providers such as FIS and Fiserv, or perhaps nonbank financial firms such as PayPal and Dwolla.

Tom Groenfeldt is a freelance writer based in Sturgeon Bay, Wisc.