Like 9/11, the coronavirus can spur needed payment automation
The coronavirus health crisis has put stress on almost every aspect of life for people all over the world. The immediate impact of shelter-in-place orders throughout the country is already fundamentally shaking the foundations of the U.S. economy, but the long-term impact will be even harder to gauge.
All that many of us know for sure is that business, government, and society will be fundamentally changed—maybe even transformed for the better.
So let’s take stock of the U.S. financial and payments infrastructure and what could be made easier in this moment— ways to create better connectivity and ease of distribution of critically needed funds for individuals and small businesses, for instance. Americans have always had a way of learning from crises, and fixing the problems exposed by difficult moments.
You may remember that the attacks on September 11, 2001 exposed a fundamental weakness in American check clearing. Just 19 years ago, final clearing of checks was still done physically, and paper checks had to be returned to the account holder’s bank at the end of the process. The Federal Reserve and the banking industry operated a fleet of more than 100 private jets to transport checks around the country.
After the attacks, all air travel in the country was shut down for a week, which caused a severe backup in the clearing process that required emergency intervention from the Fed to keep payments flowing. The story is beautifully written in the Federal Reserve Bank of Chicago’s 2001 annual report.
Ultimately, all of this would lead to the U.S. legislature passing the Check 21 act in 2003, which gave the same legal standing to a scanned image of a check as the piece of paper itself. It was a critical development for digital initiatives in payments, speeding up not only processing between banks, but creating remote deposit options for banking consumers.
It took the 9/11 crisis to get the legislation moving. 2020 should be that moment for the U.S. payments infrastructure. Not simply for the most obvious benefits – faster clearing times are always helpful in disaster relief efforts, of course – but to improve the critical defects that this situation has exposed in the aging financial infrastructure.
For citizens without direct deposit already on file with the IRS, the country’s only option to get payments out is to mail paper checks, which the organization warns could take up to five months. The situation may be a little better for businesses, as banks will disburse funds to loan recipients they vet.
But the timing on all fronts fundamentally fails to meet the goals of the relief measures. And the entire process could have been easier with digital real-time payments and secure account identification technologies.
The real-time payments system in development at the Federal Reserve is a start. Yet that does not provide a secure payments directory mechanism to get payments to consumers and businesses, even when recipients are vetted by banks.
Some proposed solutions could even get that money to the unbanked, something that a paper check doesn’t easily manage, through enabling cash deposits or transfers via kiosk or retail locations. Beyond the speed of transactions, it’s ultimately cash itself that’s showing its age, here. It’s difficult to move paper money on a large scale when a lot of Americans still find it the safest and most universally accepted payment method.
There is a need and opportunity here to rebuild the aging, legacy infrastructure in payments, at the IRS, and within the banking system. It is not a technology problem. It is an opportunity brought more fully to our attention by a virus. Businesses and consumers alike stand to benefit, and it’s hard to point to a more direct or universal use case than a quicker turnaround time on getting critical funds into the American economy.