It is hard to believe the world’s leading economic driver of capitalism also employs the slowest payments system of any developed nation, but it is true. In its recent summary the Federal Reserve declared the United States’ need to update its payments systems. “If the faster payment solution includes improved information capabilities (e.g. e-invoicing) that enable more efficient AR/AP systems, $10B to $40B in business back-office efficiencies can be captured annually, making the business case positive.”
While industrialized nations, including the United Kingdom, Australia and Singapore, as well as developing states such as China, Nigeria, and Chile, utilize real-time payment systems, the U.S. continues to implement the automated clearing house (ACH), a system built in the 1970s, as the infrastructural backbone of nearly every payment method. It is the job of the National Automated Clearing House (NACHA) to regulate how ACH transactions should be performed and how ACH data should be safeguarded – visit this page to learn more. There are other payment options, including PayPal, Apple Pay, Square, etc. that have added to consumer choice, however they also require businesses to shoulder expenses, such as higher processing fees. The Harvard Business Review notes the “rate of technological innovation, data analysis, and interconnectivity are pioneering new business models, security breakthroughs, and consumer convenience at a dizzying pace. This has made the outdated system, especially its slow speed, painful and frustrating.”
The good news is the government and private sector are moving to improve the payments system dramatically. In fact, in January the Fed laid out a roadmap with four possible options to enable real-time payments.
- Revamp the U.S.’ infrastructure for PIN debit-cards
- Adopt a protocol for clearing Internet transactions
- Build new payments infrastructure on top of the existing system for limited uses
- Create an entirely new payments system designed to phase out checks, wire transfers and ACH altogether
One of the biggest stumbling blocks in creating a real-time, faster payments system is that the U.S. has many more different types of banks than other developed nations do. Each group is motivated by its own interests, particularly when it comes to self-preservation. “Achieving ubiquity is no easy job in a financial system as large and diverse as that of the U.S. – particularly since the interests of big and small banks don’t always align,” American Banker reports. The Fed has convened a task force to decide upon which of the four options is best for the country to pursue by the end of 2016, with most people involved leaning toward scrapping the system and building something new. Implementing a new system will involve a “multi-year process.”
Once the new system is established it will be vital to the economy to get all businesses involved, regardless of size. “What that will do is increase the level of competition which in turn should drive down costs and improve the level of innovation in the payments industry,” explains Tom Hay, head of payments at advisory firm Icon Solutions.
The Harvard Business Review points out that there “will be a massive opportunity for those first movers. In much the same way that broadband Internet changed the way enterprises interact with data, companies will literally flourish or die based on how they can best adapt to this new financial environment. Whether you’re a small business that’s dependent on steady cash flow to make payroll, or a Fortune-100 multinational that processes millions in accounts receivable daily – this will impact you.”