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Will We Ever See a Faster Payment System in the U.S.?


Will We Ever See a Faster Payment System in the U.S.?

That’s a question that has been asked for some time. Now though, there seems to be a push toward moving forward.

Earlier this year the Fed announced it will form a task force to take on the issue and plans by 2016, to come up with a strategy for accelerating payments. As reported in American Banker, some of the options it outlined in its report included evolving the existing PIN debit infrastructure to enable real-time payments; using common protocols and standards to facilitate the clearing of transactions over the internet; building a new payments infrastructure that would build on existing technology and only have limited uses; or building a new payments infrastructure that would process a wider range of transactions.

The NACHA, the Fed, banks and other players have been talking about this for 20 years, says Karla Friede, CEO of Nvoicepay, a provider of B2B payment services. "This latest round of talks aims to bring reform to the system in the foreseeable future, at long last."

She said this will be a good thing. "There is no technical reason why payments shouldn’t be faster. Some of the smartest people I know in payments believe we will get there in two years because of the movement of major banks to collaborate and finally make it happen."

What’s the hold up?

In the 2013 AFP Electronic Payments Survey of more than 450 financial professionals, 82% said they experience difficult convincing customers to pay electronically, 74% had difficulty convincing suppliers to accept e-payments, and 71% found a shortage of IT resources for implementation.

Going electronic can be difficult to implement, as there are sometimes unintended complications for either the company seeking payment, (the seller), or the company that is paying for goods or services (the buyer). The key is to align the buying and selling systems, says Nicole Dwyer, vice president of product strategy at Billtrust.

Adoption has been slow in business-to-business payments because it involves the one thing that companies are most scared about with – their money. "And what’s good for one company isn’t always good for the other. There are some complexities that may account for reasons that e-payments have not fully caught on," she says.

Adoption has been slow in business-to-business payments because it involves the one thing that companies are most scared about with – their money.

From the seller’s perspective, adding e-payments as one of the many formats by which a company is paid can mean added challenges to how the seller tracks and manages those payments. While an ACH, P-Card or Wire payment can create a high level of efficiency for the buyer, the seller is caught reconciling decoupled remittance data, which sometimes means that processing the e-payment can cost more than the processing of a paper check. In order to keep better track of remittance data, sellers often set up their own electronic invoice presentment and payment (EIPP) portals to send out their invoices and track payments, she explains.

As for the buyer, they sometimes find themselves having to use too many different EIPP portals. While it’s in the seller’s best interest to use an EIPP portal, buyers can quickly find themselves overwhelmed by the process. For a buyer that only has to make payment to one vender, an EIPP portal is not a problem. "But now think about if you’re a multinational corporation with thousands of vendors, and each one has created its own payment portal – navigating and uploading payments to all of those EIPP sites becomes way more complex and time intensive, which can also result in added costs for the buyers," says Dwyer.

One of the biggest problems though, says Alex Gerard, founder of CardMix.com, is the slow response and lack of commitment from big banks. "Just look at Peer-to-Peer (P2P) payments. The industry was buzzing about this feature for a long time, but we do not see a viable solution from big banks yet."

He points out that many people don’t know about the ClearXChange P2P network that was founded by five major U.S. banks. "That network allows you to send money quickly and commission free, but since 2011, not so many people know about it. Banks are slowly incorporating this feature into their internet banking, and every bank is promoting the feature by its own name as a white-label solution. As a result, most of the clients are still using PayPal, despite high commissions, and even Facebook’s money send option looks more promising than the solution from banks," says Gerard.

Banks operating on outdated technology won’t see the risks until it’s too late, warns Mary Ann Miller of NICE Actimize, which specializes in safety, security and operations. "Because ACH is the window to a customer’s prime checking account, transactions have to be scoped for potential fraud in real time, at the customer level," she says.

Then too, ACH often are large batches of transactions, so scoring needs to occur quickly in large real time processes to stop individual transactions in a batch. "Fraudsters will amend payments right before payment cut off times. Risk teams will need to be ready for ebbs and flows in monitoring and alert management."

But for all the challenges, a speedier payment system could come to fruition sooner, rather than later. Says John O’Donnell, chief knowledge officer for Online Trading Academy, "The government will be for it because they want more control and awareness of our financial lives and records for tax and other reasons. It will definitely come if two things don’t deter it: global hackers who game the system and could bring the economy to a screeching halt or the American public does not bring political pressure to stop it."

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Comments
Anonymous
Anonymous   |     |   Comment #1
Interesting article.  Many of us would probably like to see a fast, reliable, secure, and commonly interconnected money transfer system available sooner rather than later.

Regarding the present ACH system, several on-line sources describe how this system works, but questions sometimes remain unanswered.  E.g.:

- If ACH is an electronic computer-controlled system, why is it so slow?  I.e. why does a transaction that could conceivably require only a few seconds (or a few minutes, or an hour at most) instead require one or more days to complete?

-  If the reason for slowness is that the transactions are batched, why are they batching them?

-  The "A" in ACH stands for "Automated".  But are humans involved in the ACH process?  If so, what are these people actually doing, and why are they involved in something that could be handled completely automatically by machines?

-  If the ACH system is computer controlled, and computers can function 24/7, why are weekends and holidays treated any differently than weekdays?  I.e. why aren't all days "business days", since buying and selling occurs in our culture 24/7 in our times?

- During the time money has departed from the source of an ACH transaction, and before it arrives at the destination, who is holding the funds, and what are they typically doing with them?  This time interval is often days.

- Who pays for the cost of managing and operating the ACH system, and how is this cost recovered?  E.g. is it similar to our Interstate highway system, paid for via our taxes?  Or are the institutions that are involved in the ACH transfers paying the costs, and then passing those costs on to their customers via other mechanisms.  Would it make sense to fund a more modern ACH (or other payment system) as we do with road, water, and sewer systems?  Or should we fund it like with do with telephone, Internet, and electrical delivery systems?

- Why is there a large variation in the amount of time it takes to do an ACH transfer?  As a few examples of this variation, the following are some typically observed times to complete an inbound ACH transfer initiated from the indicated financial institution, and being transferred from a Chase Bank checking account.  Time is in units of business days, not including weekends and holidays.

American Express Bank:  0 days (i.e. funds appear in the AmEx account instantly.)
Sallie Mae Bank:  1 day
Vanguard Group Mutual funds:  1 day
Ally Bank:  2 days
Star One Credit Union:  5 days
 
Thanks for publishing this blog article.  Hoping to see more constructive progress on this topic soon.
Anonymous
Anonymous   |     |   Comment #2
Bank transactions are "batched", meaning all deposits and transfers made during the day are held until after hours.
ACH transactions have three parts, bank1 to fed, fed account1 to fed account2, and fed to bank2.  Each bank batches, therefore 2-3 days.
Anonymous
Anonymous   |     |   Comment #3
All ACHs take same time (0 days, it is instant, like check 21), only difference is when the bank or CU decides to credit it to you. Many times they create float of few days and sweep the money into other banks that pay interest.
Anonymous
Anonymous   |     |   Comment #6
Neither ACH or check image are instant. 
Anonymous
Anonymous   |     |   Comment #12
#6, That's what the banks and CU wants you to think, otherwise, how many of them can create the float and charged fees for the service.
Anonymous
Anonymous   |     |   Comment #18
Interest rates are 0%.  There are no float earnings.

ACH and check image are not instant.
Anonymous
Anonymous   |     |   Comment #5
The Federal Reserve is closed on weekends/holidays.  Thus, the Fed's settlement service is not available to be utilized, and funds cannot be transferred among financial institutions for payment system settlements.
Anonymous
Anonymous   |     |   Comment #9
Does the Fed shut down its computer systems on weekends and holidays?  If yes, why not instead leave them running and process ACH transactions 24/7?  If the Fed is not shutting down its IT depts on weekends and holidays, why aren't their computers processing ACH transactions 24/7?  If batching of ACH requests is the bottleneck, why not decrease the quantum of time for batch processing, e.g. process a batch every hour, or every 10 minutes, or even smaller time scales?  The original blog article was about the prospects for improving the speed and security of our national money transferring infrastructure.  It would seem that tweaking the existing ACH system might be an easy first step toward making the transfer system more responsive and in tune with modern needs to move money more quickly.  Also, new regulations are apparently needed to ensure all FIs deliver ACH transfers within the same (short) time period.  FIs should be motivated to support faster 24/7 ACH transfers because they would help clear the burden of storing/managing pending transfer requests that accumulate in the FIs' computers over the batching period.
pearlbrown
pearlbrown   |     |   Comment #15
Thanks for posting the link.  I note that   "Additionally, the rule establishes the methodology for a Same Day Entry fee as a mechanism for RDFIs to recover some of their costs for enabling and supporting mandatory receipt of same-day ACH transactions." 
Anonymous
Anonymous   |     |   Comment #16
Pearl, are you from Sugarland, TX ?
Anonymous
Anonymous   |     |   Comment #19
So noted.  And....?
Anonymous
Anonymous   |     |   Comment #20
You are pearlb43  on Ebay  selling coupons???
Anonymous
Anonymous   |     |   Comment #14
You are wrong, the treasury window is open 24/7 and that is what the banks use to float their money over the weekends or the holidays.
Anonymous
Anonymous   |     |   Comment #7
ACH is highly automated within financial institutions.  Almost all ACH transactions settle between financial institutions in one business day (though as another post says, because the Fed is closed on weekends, ACH cannot settle on weekends).  ACH is not funded by taxes - FIs pay fees for services from the ACH system operators.  FIs decide whether and how to price ACH services for account holders. 
Anonymous
Anonymous   |     |   Comment #11
You can add Alliant CU 1 day
Anonymous
Anonymous   |     |   Comment #4
Alliant Credit Union ACH outgoing transfer requests submitted prior to 12:00 noon CT arrive at the destination financial institution early the next morning.  Ditto if the money is incoming to Alliant.  This is less than 24 hour completion time, and the service is free.  I can live with that very comfortably.  I don't need instantaneous.  Even wired funds do not arrive instantaneously, and wiring funds costs money.

Similarly, Alliant bill pay requests submitted today arrive and are credited the very next day.  This also is pretty good for a free service.
Anonymous
Anonymous   |     |   Comment #8
A related ACH problem is the unauthorized use of same...e.g. on the PenFed website there is a "way" to complain about same.  But what is the basis for a valid compliant!  And, who "decides," the bank that allowed your funds to be transferred and the thus your bank will be out of money if it thinks it has the right to right things!  Any Tom, Dick, and Harry can initiate same once your check is used.  Just like an ATM/debit transaction when you do not use ATM/debit cards...i.e. the reason to use a credit card! 
Anonymous
Anonymous   |     |   Comment #13
Many honest and small banks, CU and brokerages credit your ACH immediately and it shows as available funds. Search for them, they do exist.
Anonymous
Anonymous   |     |   Comment #21
It'd sound of which tweaking the current ACH system could be a fairly easy 1st phase to making the particular transfer technique much more receptive and also throughout melody using modern-day must go cash faster.Another easy way to transfer money by Electronic Voucher system at anywhere.
http://moneytransferapplication.com/electronic-voucher-system/