It seems ACH is too slow even for some bankers.
Payments in the US lag behind much of the world and many Americans inside and outside of the financial services community would like to move their money more quickly. The Federal Reserve agrees, and convened a roundtable that determined the only way to make payments faster would be to develop a completely new system.
In a roundtable discussion convened on June 3 and 4, 50 participants broadly agreed that the way to faster payments is to ditch the antiquated CH infrastructure and start over fresh.
Easier said than done. This viewpoint is hardly new, and faces considerable challenges from entrenched players, but it is significant that the group recommending ditching ACH was dominated by bankers.
The Federal Reserve payments roundtable took place in June to determine whether or not consumers and businesses would benefit from a faster payments system, analyzing payments initiatives from other countries, and determining the best option to upgrade the U.S. payments system. The summary from the event, published this week, states that the “majority agreed that building new infrastructure is the best approach” and that “attendees” referred to their own experiences building off of older legacy systems and added that a new system would be “cleaner, less problematic, more flexible, and potentially more secure.”
Out of the 50 attendees, 25 were from financial institutions, which was the most represented group. The “technology solutions provider/process” group came in second with 9 members on the roundtable and “payment network operators” had 8 members. There was only 1 regulator.
The roundtable determined that only five potential use cases, or 12% of the total payments market, would benefit from a faster payment system. However, there was some dissent from members. Some thought that POS “shouldn’t be ignored,” while others cited “latent demand,” which is “unforeseen applications…that will materialize once a faster payments solution is in place” as another potential use case. The five use cases cited by the roundtable were the following:
-B2B payments, like just-in-time supplier payments
-B2P payments, like insurance claims, legal settlements, and temporary employee wages
-P2P transfers, like rent repayment to roommates
-P2B payments, like emergency bill payments
Feedback from the public indicated to the roundtable and the Federal Reserve that respondents were looking for “ubiquitous participation, confirmation of good funds, and speedy payment settlement and delivery of information” — problems that the Federal Reserve thinks can only be solved by a new payment system. Businesses were interested in having funds available quickly, while consumers were more eager for faster debiting. But, still, there was a consensus — 69% of consumers and 75% of businesses preferred instant or one-hour payment speeds.
A complete revamp of the U.S. payment system is unlikely however, with the roundtable advocating a new “single item clearing” as opposed to a new system for all payments, which is the “ideal…option.” But with high costs, investments in existing legacy systems, and the length of such a project, building a new system to support all payments is seen as a potential longer-term goal. Other options, like upgrading ACH or ATM/PIN debit systems, were deemed too limiting or fragmented to be realistic. (NACHA, the organization that manages the ACH network, has a stated goal of “same-day settlement of funds” and tends to deride faster payment methods.)
The Federal Reserve held a series of town hall meetings that concluded in June (Simple cofounder Shamir Karkal attended on in San Francisco and wrote a post about it.) It looks like the next step is to “prepare and share a roadmap.” We’ve reached out to the Federal Reserve to ask about progress and will update the post when they respond. Upgrading current payment systems is definitely on the docket for the Federal Reserve, and it seems like the best way to achieve that is by starting from the ground up.