By Ian McCue, commerce & retail reporter at Grow Wire
⏰ 10-minute read
- New solutions aim to quicken payment processing in the U.S.: In 2016, Nacha debuted a way for banks to settle ACH transactions the same day they are received. The Clearing House followed by launching a new real-time payments network.
- Companies including Visa and Mastercard have also launched products to enable faster payments, cementing these processing speeds as the new normal.
- Faster payments offer consumers and business a host of benefits, including certainty of payment, improved cashflow and simpler management of finances.
This is the second story in a three-part series on faster payments.
Read part I, “The Road to Faster Payments."
Read part III, “The Future of Real-Time Payments.”
Faster payments are nothing new on a global scale. A few countries have had faster payments systems for decades, and today about 40 nations have systems in place to move money in real time. While the U.S. was late to the party, the sophistication of its real-time payments system is catching up to that of other countries.
Beginning in 2016, several major U.S. financial associations completed new initiatives to help money move faster. The advantage of being a latecomer is that the U.S. could learn from the experience of other countries, including economic powers like the United Kingdom, China and Japan.
So which faster payments systems are available in the U.S. today, and how do they work?
Nacha takes a step in the right direction
is a not-for-profit that runs the ACH Network, a widely popular system for moving money between bank accounts electronically. In September 2016, the organization launched Same Day ACH credit transactions. Same Day ACH allows consumers and businesses to receive money the same day it’s sent, instead of in 2-4 days as with traditional ACH. Nacha accomplished this by adding new processing windows at 10:30 a.m. EST (for the 1 p.m. settlement window) and 2:45 p.m. EST (for the 5 p.m. settlement window). A year later, it added Same Day ACH debits.
Nacha's Same Day ACH allows consumers and businesses to receive money the same day it’s sent, instead of in 2-4 days.
Like traditional ACH, Same Day ACH uses batch processing. The bank or credit union that initiates the transaction pays the receiving financial institution 5.2 cents for each transaction. That’s quite a bit more than regular ACH, which charges the originating and receiving bank each less than four-tenths of a penny
per transaction (or even less, thanks to volume discounts).
Nevertheless, it’s got supporters.
“Same Day ACH remains the only faster payments solution that is ubiquitous among all banks and credit unions in the U.S.,” said Scott M. Lang, chief of staff at Nacha. “Adoption of Same Day ACH has been strong since Nacha rolled it out in 2016. With 178 million transactions last year, Same Day ACH has seen its volume grow by 137% since 2017.”
Nacha plans to continue improving the service by adding a third processing window with a 4:45 p.m. EST deadline in March 2021. (This was pushed back from September 2020). That later window will be especially helpful for financial institutions in the Pacific and Mountain time zones. Additionally, the maximum transaction size for Same Day ACH will jump from $25,000 to $100,000 in March 2020.
The Clearing House goes real-time
Soon after Same Day ACH launched, The Clearing House’s long-awaited real-time payments (RTP) network went live in November 2017. Unlike Same Day ACH, RTP runs on an entirely new set of payment rails.
“If you wanted to go to a truly instant payment system that built in some of the functionality that we knew would help to make it viable and valuable in the U.S., we really needed to start with a new platform,” said Steve Ledford, senior vice president of products and strategy at The Clearing House. “Then one of the advantages when you do start building a new platform, you can build it based on all of the advances in technology, advances in ways of thinking about how you handle information.”
The Clearing House’s RTP is a “credit push” network that settles payments in an average of just 2-3 seconds.
The Clearing House’s RTP network settles payments in an average of just 2-3 seconds.
This is how it works:
- A consumer authenticates themselves through their bank app/website and initiates a payment. (Imagine a patient paying a hospital for a recent surgery, for instance.)
- The payer’s bank creates a message and sends it to the RTP network, which The Clearing House validates and forwards to the receiving financial institutions (in this case, the hospital’s bank).
- The receiving institution either accepts or rejects the message. (It could be rejected due to a wrong account number, a closed account or an account not in the receiving institution’s system.)
- If the receiving institution (i.e., the hospital’s bank) accepts the message, it immediately sends a message back to the sending institution (or patient’s bank), saying the payment has been accepted.
As that process happens, in the background, The Clearing House settles the transaction in real time, using a joint account at the Federal Reserve in New York that participating banks must prefund and keep above a certain minimum. Each real-time credit transfer costs the sending institution 4.5 cents, and there are no volume discounts or monthly minimums.
Although the sender must be the one to initiate the transaction in RTP, the receiving institution can issue a request for payment to try to start of the process. This costs 1 cent. For example, a power company could send a customer a request for payment that includes a link to a bill (costing the company 1 cent). The customer’s bank will then present this message to the customer, who can complete the payment or ignore it. (Request for payment is different than a debit, since the power company is not automatically pulling the money out of the customer’s account.)
“One of the big features of the overall network is regardless of how a payment is started, the payer is always in control,” Ledford said. “It’s up to them when they want to pay or if they want to pay.”
That control reduces fraud and errors, Ledford notes, because a request for payment is attached to a specific invoice and receiving bank account and handled through a secure channel.
Same Day ACH vs. the RTP Network
More than half of U.S bank accounts can access the real-time network, the bulk of those within the large banks that run The Clearing House. Same-Day ACH, meanwhile, is available to just about every U.S. bank account because it uses the same network as traditional ACH. technology. It’s not necessarily a direct “competitor” to the RTP network, but rather a half-step between regular ACH and RTP.
Around half of U.S bank accounts can access the RTP network. Same Day ACH, meanwhile, is available to almost all of them. (Note that the services aren't necessarily direct “competitors.")
The Clearing House’s goal is for every U.S. account to be able to access the RTP network by the end of 2020. However, joining the network is at the discretion of each bank or credit union.
“Some of the investment decisions, which [financial institutions are] making in their local market, getting all of those aligned and understanding when you want to take that step to move to faster payments, the timing of how that all works, is a big challenge,” Trevor LaFleche, senior director of product management for enterprise payments solutions at Fiserv, said.
There are three primary options for a bank or credit union to connect to the RTP network, each of them designed for financial institutions of different sizes and requiring varying levels of financial and human resources.
Although the costs are similar for Same Day ACH and the RTP network, remember the RTP network differs from Same Day ACH in that receivers cannot initiate transactions.
It’s worth noting that some may choose an entirely different solution: the Fed recently announced it’s developing its own real-time payments service, though it won’t be available for another 4-5 years. (More on that in our next article.)
Nacha and The Clearing House may handle the majority of U.S. transactions, but there are a number of alternatives in the faster payments space.
Visa Direct can handle business-to-business (B2B), business-to-consumer (B2C) and person-to-person (P2P) payments. “Instant pay” features for Venmo, PayPal, Lyft and Postmates all use Visa Direct.
Like the RTP network, Visa Direct is a credit push system, though it moves money on the debit card rails. Transferred funds are available within 30 minutes after a transaction is completed – even on nights and weekends – and sometimes much sooner.
Users can set up an account with their existing Visa debit card because the company wanted to make sure this product was easy to use, according to Matt Friend, Visa’s vice president of global faster payments strategy.
“We really didn’t have to create anything new – Visa Direct leverages that national and global infrastructure that’s already in place that everybody has access to, and just turned around the flow of the transaction from pulling money to pushing money in order to cover all these new use cases and capabilities,” Friend said.
One key differentiator with Visa Direct compared to the RTP Network and Same Day ACH is it supports cross-border payments.
Mastercard Send is a similar platform that can handle transactions involving businesses and consumers, though unlike Visa Direct, the card network says it can push money to “virtually all U.S. consumer debit cards … regardless of brand.”
A third option is Zelle, a P2P payments network created by eight large U.S. banks. Zelle allows users to move money directly from their bank account to someone else’s in a matter of minutes, as long as the recipient has a Zelle account. All it needs to execute that transaction is the recipient’s email address or cell phone number.
Although payments post in real time with these solutions, settlement is same day or next day for most of them, not immediate like with the RTP network.
How real-time payments benefit everyone
There’s a reason why faster payments have been such a focus in the financial world in the recent past. When money moves between people and businesses more quickly, it offers them extensive benefits like:
Take, for instance, U.S. distributors that buy from Chinese manufacturers. The distributors typically pay for goods when they come off a container ship at an American port. But that payment from distributors to manufacturers traditionally takes two or three days to show up in the manufacturer’s account and could fail due to insufficient funds or incorrect account credentials. Those pitfalls disappear when that transaction happens in real time.
“Being able to settle things in real time allows you to put finance at the point of the transaction and match what’s happening in the real world with what’s happening with the finance,” LaFleche said. “And that’s a huge benefit to companies, just being able to have that certainty.”
“Being able to settle things in real time allows you to put finance at the point of the transaction and match what’s happening in the real world with what’s happening with the finance."
When a consumer pays a business, the biller can watch the payment go through while the customer is on the phone. There is no doubt about whether the funds are in the customer’s account, and that customer doesn’t need to call the electric company, for example, to make sure his payment posted and he won’t receive a late fee.
Cashflow issues are the biggest challenge small business owners face, according to a recent Lendio study. Faster payments resolve many of the issues related to cash on hand because money can reach a business’ bank account almost instantaneously.
It means business owners no longer have to nervously wait for money to show up as they try to pay employees or invest in new supplies and equipment. Long-term, that added freedom can have a momentous impact on the growth and ultimate success of a company.
“If you think about it, if you have more control over your cashflow, it’s like giving you more available working capital,” Ledford said.
- Ease of managing finances
Both consumers and businesses can benefit from knowing their true account balance at any time. No longer is someone looking at their bank account balance and mentally subtracting auto-payments for a savings account, student loan and car payment that already started processing to find out how much money she actually has available. That reduces overdrafts and makes managing finances more straightforward.
For people struggling to make ends meet, faster payments can reduce the need for payday loans with sky-high interest rates. If they work a second job as a Lyft or Postmates driver, for example, they can get that income right away to fund daily expenses.
- Sometimes faster is just … better.
There are countless other situations in which speed is of the essence. For example, imagine a family’s home in South Florida is severely flooded after a hurricane and the family files an insurance claim. Instead of waiting days or weeks for the insurance payout to arrive in the mail – which may prove difficult when many roads are underwater – the insurance provider can immediately put the money in the family’s account once it verifies the claim. That can help the family gets back on its feet and start repairing its house more quickly.
Another scenario: If someone needs an emergency surgery and a family member offers to help, the person getting the surgery could use the family member’s loan right away instead of putting it on a credit card or taking out a loan with much higher interest.
🌱 The bottom line
Faster payments are no longer an abstract idea in the U.S. – they have arrived, and many consumers and businesses can start capitalizing on the advantages they provide right now. However, this is hardly a finished project, and the faster payments landscape is bound to evolve in the coming years.
The far-reaching benefits of faster payments offer proof that this is not a small step forward but a landmark leap ahead.
So what’s next for this fast-moving initiative in the financial world? Find out in part three, the final story in this series. We’ll examine the future of the payments space, including the Fed planning its own faster payments system and the role of fintechs and financial institutions in that future.