The U.S. economy remains sluggish, and the cost of funds is set to rise. What can help? Perhaps faster payments, suggests Gene Neyer, senior vice president of global payments with Fundtech.
Faster payments have become routine in 35 countries across the globe, according to a new study from Celent, and a variety of different approaches are being used.
Singapore and Australia are viewing faster payments as a public commodity much like the internet or highways. Networks are more valuable the more ubiquitous they are, as was seen with telephones and email. Singapore and Australia are thus investing public funds as well as private ones int building a network for the benefit of their countries.
Other countries, such as Sweden and Mexico, took a less drastic approach and their systems take a more piecemeal approach to faster payments.
The latter model is more likely to work in the American context, where the Federal Reserve seems reluctant to be perceived as coercing banks into faster payments, as happened in the U.K. (The CFPB would likely not be so hesitant.) Instead, the Fed has a ten-year roadmap and continues to hold town hall-style discussions to investigate the implications of what launching a faster payments system in the U.S. could look like. (A roadmap is due this fall.)
Real time payment systems exist in the U.S., it should be mentioned, but lack ubiquity.
Neyer told Bank Innovation that the ten-year timeframe would be met — the only question was how far ahead of that distant deadline this could be done. He referred to the continuing “soft recession” the U.S. is experiencing, and how money movement plays into it.
“The velocity of change is low,” Neyer said. “We’re seeing no inflation, because money is turning around slowly.” Faster payments — getting money to where it is needed more quickly, will help the economy recover, Neyer said. Faster payments are simply more efficient, and help both businesses and consumers better manage their financial decisions.
Neyer continued, “The marginal cost of making payments is low. Much of the cost [today] involves risk management, exception handling, and research.” Faster payments are actually cheaper, but this is not to say they are risk-free — controls must be put in place to ensure, for example, that all of a bank’s funds are not wired out overnight. The controls are greater at nights and over weekends — it’s during the weekday those funds have flow.
Some countries utilize a cross-subsidy t help pay for faster payments, where business payments subsidize consumer payments. In Sweden, payments cost in the neighborhood of $0.20 to $0.30 cents, while a banker in a small New York-area bank told Bank Innovation recently that it cost his bank $0.92 to move money. The $1 charge for customers to send a payment (taking 2-3 days) was simply to recoup costs, in other words.
A faster payment network will cost money to build and manage, but will bring the actual cost of payments down, and that, Neyer suggested, should be expected to work to everyone’s benefit.