The American payments industry is slowly, painstakingly inching its way toward faster payments. Not real-time payments, necessarily, mind you – but faster payments.
The lack of urgency behind these actions is striking. It stems from a fundamental misunderstanding of why upgrading the U.S. payment infrastructure is worth the investment in the first place.
This misunderstanding is understandable. Our payments system may be clunky and slow, but it works pretty well, really. It is ubiquitous. It provides a range of different options. According to the Federal Reserve’s 2013 Payments Study, it moves a jaw-dropping $175 trillion dollars a year through the economy in over 120 billion transactions with inspiring accuracy.
So, while lots of people may grumble a bit about the disconnect between real-time, 24/7, 365 access to almost everything else versus waiting days for a check to clear, and while it may be mildly embarrassing that the U.S. payments system is falling behind that of Europe (or maybe even Kenya?), the fact is that for the majority of consumers, delays in sending and receiving electronic funds are an odd, occasionally annoying quirk, not a meaningful disruption to their day-to-day life. And, that’s a big part of why payments system modernization is moving slowly. It is tough to make the business case to justify the investment required.
But, for the millions of people who manage their finances real-time down to the dollar, payment delays are more than annoying – they do harm to their financial health. Here’s the fact pattern to keep in mind: a small contractor gets a new job (Let’s call him Joe.). Joe has to buy thousands of dollars of supplies and hire a crew quickly. If Joe’s Remodeling, Inc. were a larger business, he could use a line of credit or accumulated reserves to manage his cash flow. Joe could get started on the work, while waiting to be paid. But Joe is an enterprising guy with knowledge, a strong work ethic and a truck, not a large company. So, he drives over to his client to pick up the deposit he is being paid on the work and cashes the check at a check casher so he can get started immediately. As a sole proprietor, every day matters, because Joe can’t start the next job until he finishes this one and his income depends on staying busy. He does not earn a salary to tide him over across the ups and downs in his productivity.
Financial health is when people have ways of managing their day-to-day finances that help them to be more resilient and take advantage of opportunity. For Joe, faster payments offer a meaningful way to improve his financial health. Real-time payments would help him to budget better and avoid check cashing and overdraft fees. Perhaps most importantly, they would enable him to shift his attention to more important financial (and non-financial) questions than “has that check cleared yet?” Instead of driving around cashing checks, he could invest that time in his business or his family.
So, the conundrum for American payments providers is that those who could pay the most will probably not be willing to pay. But, they probably will expect this level of service for free. Meanwhile, those who would benefit the most and who would pay fees for faster service move a smaller total amount of money through the system. Not only does it not seem quite fair for them to bear the cost of the upgrades required, but they may not generate enough revenue for providers to recoup their costs through fees.
Caught between these realities, those working toward payments infrastructure improvement run the risk of not thinking big enough – of looking for the small, incremental changes that can be paid for with customer fees. And, that may then create a new, even bigger problem for providers: the slowness of American payments creates too big of a competitive opportunity to ignore. New services are already beginning to fill that gap; payments incumbents will eventually be disrupted if they don’t match the immediacy offered by services in the rest of the consumer economy.
It’s tough to be the bearer of bad news, but the fact is that the payments industry is like the New York Times building its first website. It must have been painful to invest in the cannibalization of its core flagship product. But, it was an unavoidable defensive move.
The good news is that the financial services industry can learn from the disruption that has already occurred in so many other industries. Instead of focusing on how much fee revenue can be tacked on to service improvements that many customers will take for granted, providers should think about how their services can grow and change with the new functionality to come. As they do so, the CFPB’s Vision of Consumer Protection in New Faster Payments Systems establishes baseline standards for what these new services should provide: they should be “safe, transparent, accessible and efficient.”
But, that is only a beginning. Faster payments should also become a platform on which financial health building applications – better products, more targeted customer service and deeper advice – can be built. If the financial industry embraces this opportunity, it will reap the benefits of true brand engagement in the form of greater customer loyalty and share of wallet. It will also genuinely contribute to the financial wellbeing of millions of Americans. Once we see that an investment in faster payments is about a lot more than convenience – it’s about financial health – we see that upgrading the U.S. payments infrastructure deserves a lot more urgency.
Rachel Schneider is senior vice president of CFSI and Aliza Gutman is director of CFSI.