While there are always costs and risks involved in implementing new technology, faster payments solutions with broad reach and strong safety standards in place could lead to many benefits for society as a whole. The Federal Reserve commissioned a study in 2014 to identify which types of domestic payments had unmet needs for speed. The study found that at least
29 billion transactions, or 12 percent of all U.S. payments annually, could benefit from faster authorization, clearing, settlement and/or availability of funds.
The specific use cases that could benefit most from faster payments include:
- Person-to-person payments, such as paying a friend or a babysitter;
- Certain types of person-to-business payments, such as emergency bill payments or rent payments;
- Certain types of business-to-person payments, such as wage payments for temporary workers or medical insurance claim payments; and
- Certain types of business-to-business payments, such as just-in-time supplier payments.
A fast, safe, ubiquitous payment system could benefit society in the long run by improving payment system efficiency, providing a safe framework for payments, and promoting global competitiveness and interoperability.
Speed and Availability
As consumers and businesses are able to send and receive payments more quickly, this may allow easier cash flow management and more predictable budgeting, spending, and investing. Fast good funds verification could reduce the chance for end users to make unintentional overdrafts and help them avoid costly short-term financing. If faster payment solutions are designed to process payments on a 24×7 basis, end users may benefit from the additional flexibility to quickly complete transactions and monitor accounts at any time. In addition, if faster payments solutions are able to take the place of checks, small businesses and under banked consumers may be able to receive funds more quickly. Over time, business models and processes could change dramatically based on faster funds availability.
Payment System Efficiency
Society as a whole could benefit from greater payment system efficiency if fast, ubiquitous electronic payments solutions decrease the cost of operating and maintaining the infrastructure needed for paper-based payments. Society as a whole could benefit from greater payment system efficiency if fast, ubiquitous electronic payments solutions decrease the cost of operating and maintaining the infrastructure needed for paper-based payments. Studies from the UK, Singapore, and Mexico show that faster payments adoption has not caused a noticeable reduction in debit card transactions, but has likely reduced the use of less efficient payment methods such as checks and cash.
Several countries have seen a growth in electronic payment volumes and a reduction in bank branch visits after implementing faster payment systems. If the United States follows a similar trajectory, faster payments could facilitate cost savings to society in the long run.
Risk Management, Safety, and Security
Faster payments could help reduce many of the risks in the current system by shortening the delay between payment initiation, clearing and settlement. Timely confirmation of good funds and certainty of payment finality could benefit both financial institutions and their customers.
While faster payments solutions will introduce new risks, such as operational risks associated with more rigorous processing requirements, there are also broad benefits to be gained if new solutions meet high standards of risk management, safety, and security. When building a new payment system and/or integrating faster payments with existing systems, there are opportunities to include stringent risk management, safety, and security standards even though these standards may not be directly linked to payment speed.
If faster payments solutions incorporate advanced security features and technologies into their design, this may lead to greater public confidence in the payment system in the long run.
Global Competitiveness and Interoperability
A potential benefit of faster payments may be greater global competitiveness and the long-run possibility for faster and easier global transactions. For businesses operating in multiple countries, banks making payments across borders, or consumers sending money abroad, faster payments solutions with globally interoperable standards could eventually help to facilitate faster, more transparent and affordable cross-border payments.
Benefits for Providers and End Users of Faster Payments
As with any major shift in technology, payment providers will face both costs and benefits to upgrade their systems to a new faster payments infrastructure. Investment by providers and adoption by end users will depend on the specific benefits they can gain from faster payments. Each stakeholder involved in making and receiving payments will face unique costs and benefits in shifting to a faster payment system.
- Consumers could benefit from particular uses that are not well-served by current payment options—for example, just-in-time bill payments or ubiquitous person-to-person payment methods that do not require both the payer and recipient to set up an account with a particular provider before sending a payment. Faster payments could promote greater financial inclusion if new solutions are able to reach customers of non-bank providers that are not well served by mainstream payment options today. Unbanked and underbanked consumers might particularly benefit from faster, safe payment products with features such as faster access to funds and timely payment notification to facilitate easier cash-flow management.
- Business end users have expressed a strong desire to receive payments more quickly. Faster receipt of funds may help both large and small businesses to manage cash flows in real time and avoid expensive short-term financing. Businesses will also benefit from greater certainty as payments clear and settle more quickly with finality. In addition, faster payments could lead to innovative practices or services that might allow for differentiation among competitors. Smaller businesses that do not currently use electronic payments could also potentially benefit by shifting directly from paper checks to real-time payments.
- Government agencies may also face costs in upgrading their back-end systems and processes to receive and send real-time payments, but large volumes of government payments could be processed more quickly with transparent and timely notifications. In particular, emergency and disaster payments would greatly benefit from immediate processing.
- Financial institutions of any size may face substantial costs in upgrading their systems to safely and securely process, post, clear, and settle transactions more quickly, particularly if the system rules require 24×7 availability. Although there may be risks with early adoption of new payments solutions, there are potential opportunities in providing cutting-edge payment services. Long-term benefits include maintaining a strong customer relationship and remaining highly relevant through the ability to offer innovative new products in the face of increasing competition.
- Non-bank providers include a wide variety of firms involved in some aspect of payment processing—from large financial service providers to small technology firms. Non-bank providers have the ability to develop new and innovative financial products quickly, and faster payments may provide many opportunities to enhance existing products and offer new services. Providers may face significant costs in developing or upgrading payment solutions and diverting scarce resources from other initiatives; however, there are potential payoffs to transitioning to a faster payment environment, such as the ability to develop products and solutions designed for market segments which are currently underserved.