On May 19, 2015, NACHA announced that its membership of 12,000 institutions had approved Same Day ACH, opening up a future in which the U.S can finally see faster payments. This momentous decision overhauls the current ACH network which typically sees day-after settlements in even the best case scenario. This move is a notable milestone in the US payments industry. Why?
The U.S. is a notable laggard when it comes to the gold standard – real-time payments. In an environment where many global financial institutions have undergone the transformation process to speed up payments, the U.S. has fallen behind its international counterparts in reaching the same standard. Although “real-time payments” has been the veritable unicorn the US has been chasing for sometime now – is it really even all that important? Is it worth the tremendous infrastructure investment that will be required from institutions nationwide?
The short (and perhaps undesirable answer) here is: yes. The need for US financial institutions to finally embrace real-time payments is palpable – consumers are increasingly expecting near-instantaneous response in every service they use. According to Fed research, 69% of consumer payers and 75% of business payees preferred instant or one-hour payment speed. More surprisingly, 75% of businesses and 33% of consumers expressed willingness to pay a fee for payments that have faster availability to the payee. The need is so great that businesses are willing to give up more fee in exchange for time savings. When faced with this clear demand, shouldn’t banks be responding in-kind?
As Silicon Valley start-ups throw down the gauntlet of innovation in front of traditional brick-and-mortar institutions, banks need to view real-time payments not as an infrastructural or administrative hassle, but as a must-have to survive in a new era of banking. The shift towards millennials is also prompting banks to revisit how best to service this new digitally-savvy demographic.
Mobile and social payments for example are already threatening bank business lines. As Bob Steen, CEO of Bridge Community Bank, commented to American Banker, "I think it's already happening that people are migrating to options outside the banking system" in search of faster payments. It's pretty hard to argue that PayPal hasn't had a significant impact, on at least online sales and other transfers between people. And frankly they may be the easiest way to move money internationally there is, and the most cost-effective."
As banks embrace omnichannel strategies and look to satisfy the needs of their younger, tech-savvy customers, real-time payments is fundamentally important to the ability for true innovation and digitization to succeed. Surprisingly, we live in a world where the physical supply chain may actually be outpacing the financial supply chain, in spite of electronic payments. Amazon Prime recently announced “Amazon Prime Now” – where customers can receive deliveries same day and potentially within the hour in key cities across the US. Sadly, it’s more likely that your grocer can deliver a dozen eggs to you within 60 minutes than it is that the grocer will get your payment for those very eggs. As mobile payments exponentially increase and consumers take to new methods – such as the Apple Watch – to interact with merchants, real-time payments are a necessity to ensure that the underlying payments infrastructure of the US catches up to the desire and need of customers and merchants today.
While moving to faster payments is worthy of applause, it’s time for US financial institutions to look forward and embrace real-time payments. As more and more institutions look to digital transformation to overhaul their services and processes, inside and out, payments is a fundamental area that needs to evolve. At Polaris, we’ve worked with major institutions in key countries to help move their payments infrastructures into the 21st century. We encourage all US institutions to work together to do the same. It’s time for the US to not only keep up – but move ahead.
About the Author
George Ravich is Executive Vice President and Chief Marketing Officer of Polaris. He has been in the FinTech business for over 15 years, and was previously CMO at Fundtech and head of marketing for the consulting division of CSC. He can be reached at firstname.lastname@example.org