By Advito and Gregorie Toussaint, Principal at Edgar, Dunn & Company
Finally the Federal Reserve wants to catch up to the digital age. Earlier this month, The Fed floated a proposal to facilitate a new real-time payment system. Instant or real-time payments are real-time transfers of funds from one bank account to another bank account. This new payment system would operate around-the-clock speeding up the processing of trillions of dollars for consumers and businesses. And how will they do it? Well they want your input.
Currently, The Fed’s system runs on a schedule that doesn’t reflect today’s fast, convenient and accessible digital economy. For example, have you ever gotten paid on the weekend or a holiday? Nope. Sorry the banks are closed. This new proposal would allow for a real-time settlement system where banks process transactions as soon as a customer sends money. It would be operated by Federal Reserve Banks in cities across the country and could be used by more than 11,000 U.S. financial institutions.
So what does this mean? Well, improved cash flow for sure. But it also will reduce risk, decrease fees as well as better inefficiencies and experience in the payment process.
Right now the U.S. lags behind other countries in modernizing faster payments. Even though we live in a 24/7 digital economy with tech-savvy consumer-facing technology, there is a serious innovation gap between making a payment and settling. So which countries have implemented or are currently implementing instant / real-time payments? Many more than you may imagine. Edgar, Dunn & Company (EDC), strategy consultancy specialized in payments, has identified close to 20 countries with instant / real-time payment capabilities, ranging from Japan, South Korea, Brazil, India, Singapore to Sweden. And many more are underway with 15 countries and the European Union-led scheme SCTinst (SEPA Instant Credit Transfer) under implementation, highlighting a global trend towards real-time payments.
The benefits will be significant for both consumers and businesses as funds will be transferred instantly without any delay, contributing to the development of businesses and economies around the world. It is expected that many use cases will be built like P2P money transfers, B2B just in-time payments, immediate payroll or consumer to business payments. The impact of real-time payments will depend on the development of payments infrastructure and local / cultural payments habits. South Korea and Brazil have an average value of instant payment transactions close to $3,000, indicating a high usage of B2B transactions while Sweden with less than $100 reveals a predominant usage for P2P payments. In the UK, Faster Payments created in 2008 is used by both consumers and businesses and has significantly contributed to the decrease of cheque usage.
EDC expects that instant / real-time payments will have a significant impact in the travel industry. It will allow the immediate funds transfer between corporates, travel agents and travel suppliers to confirm bookings with potentially lower payment fees. It is not expected to replace card payments but to complement card payments as evidenced by Faster Payments in the UK. However, a range of services related to instant payments will need to be developed so that it can be widely used in the travel industry. This will include the possibility to handle exceptions such as refunds or cancellations as well as an a-la-carte approach regarding value-add services such as travel assistance and insurance.
Instant payment is getting there. But still a lot to do before becoming widely used.
If you want to learn more about The Fed’s proposal- read the 47-page notice published in the Federal Register, the official record of the federal government.