In typical American fashion, several different versions of faster payments technologies are emerging in the U.S. But instantaneous settlement is now a real possibility for many Americans.
- The U.S.’ workhorse batch payments system, Automated Clearing House (ACH), introduced same-day settlement in three phases, the last of which went live in March 2018. However, same-day ACH settlement can still encounter delays, as payments can take several hours to settle.
- The first phase of the Real Time Processing (RTP) system from The Clearing House went live in November 2017, giving about half of U.S. businesses and households access to real-time payments technology.
- More recently, the Federal Reserve joined the faster payments innovation effort, proposing a new real-time payments facility of its own.
- Meanwhile, mobile payment apps such as Zelle, Venmo, Square Cash and Apple Pay enable individual Americans to pay bills or transfer money to family and friends instantaneously.
Real-Time Payments Tech Innovation Via Mobile P2P Apps
Mobile peer-to-peer (P2P) payments are becoming increasingly popular, particularly with younger people. Among those born after 1995—the so-called “Generation Z”—an estimated 69 percent use mobile banking apps, compared to only 17 percent of Baby Boomers (born between 1945 and 1965).
As a result, the mobile P2P payments space is becoming very competitive. Venmo, Paypal’s mobile app, is the early market leader in the U.S., but research house eMarketer expects Zelle to catch up in 2019.2 Apple Pay and Square Cash are also competing in the innovative P2P payment technology space.
Venmo users link their bank accounts or debit/credit cards to the app, then use the app to make payments (there is a fee for using a credit card). All they need is the recipient’s mobile number or email address. Funds arrive instantaneously, but the recipient must request withdrawal to their own bank account or card. This typically completes on the next business day.3
Square Cash works similarly, but the recipient doesn’t need to have the Square Cash app in order to receive the money. Instead, the recipient is prompted to enter bank or card details to receive the money. Unlike Venmo, Square Cash users can opt for received money to be automatically placed in their linked bank accounts. Withdrawals—including to linked bank accounts—typically take 1-3 business days, though they can be completed instantly for a fee.4
Zelle is a mobile payments app jointly offered by five large American banks. Customers of the Zelle banks can send money instantaneously to each other at zero cost. The money is withdrawn directly from the customer’s bank account in the same way as an online payment. Customers can also use Zelle to send money to non-customers, though payments don’t settle instantaneously.5
Venmo, Square Cash, and Zelle can’t currently be used to make dollar payments outside the U.S. In contrast, Apple Pay is an international mobile payments app. Like the others, users link credit and/or debit cards to the app then use them to make payments, but Apple Pay can be used to make those payments anywhere the card is accepted.6
Innovative RTP Technology Is Enabling Faster Payments from Banks
It might be easy to conclude that the fast growth of mobile P2P payments means that making payments via banks will soon become obsolete. However, banks themselves are now introducing innovative payments technology, particularly for online banking. The Clearing House’s RTP is one example.
RTP is not a mobile payments facility. Rather, it is an enhancement to the interbank payments network to enable real-time settlement of small transactions made through banks. Federally insured depositary institutions (i.e., regulated banks) that participate in RTP can offer faster payments to their customers, both businesses and households. Customers initiate payments through banks in the usual ways, but can route them via RTP if the amount is below $25,000.7 Larger amounts must still go via ACH or Fedwire.
Although payments routed via RTP generally settle instantaneously, the system is not immune to delays. This is because at certain times, RTP can run short of dollars. RTP’s participating banks lodge funds with RTP in advance of payments. These funds are held in RTP’s own settlement bank. RTP sets a minimum amount that each participating bank must maintain at all times. If unexpected payments result in a bank’s RTP balance dropping below the minimum, the bank must top it up by transferring funds to RTP’s bank using Fedwire.8 As Fedwire is only open during working days, faster payments on weekends and holidays can be delayed if RTP balances drop below the minimum.
Federal Reserve Proposal Could End Delays for RTP Payments
The Fed has also proposed two alternative real-time architectures for interbank payments, described as follows in an October 2018 notice seeking public comment:
- "The development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year (24x7x365); and
- The creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks.”9
The first alternative would either upgrade Fedwire to operate 24x7x365 or replace it with a new real-time gross settlement system. Whichever approach is taken, the new system would be a direct competitor to The Clearing House’s RTP. Like RTP, the proposed Fed technology would facilitate instantaneous interbank payments for bank customers. Banks might prefer this system if it meant that faster payments could be made directly from their existing dollar reserve accounts at the Fed rather than from a separate pre-funded account.
However, in its response to the Fed’s proposal, the American Bankers’ Association (ABA) expressed some concern that the Fed’s real-time system might be rolled out after businesses had already adopted RTP, potentially causing some disruption and additional cost for businesses.10
The ABA also noted the importance of interoperability. Real-time payments systems from different providers need to be compatible with each other so that businesses can easily route payments across different systems to better meet customer needs, according to the ABA.11
The Fed’s second alternative, a liquidity management system for banks, would help support other real-time payments systems rather than establish a new system operated by the Fed. Real-time payments systems like RTP rely on having constant access to dollars. The ABA says that a new Fed facility to enable banks to transfer dollars to other banks at any time of the day or night, including on holidays and weekends, would prevent RTP payment delays due to lack of dollar liquidity. Thus, even if the Fed didn’t have a 24x7x365 real-time payments facility of its own, a Fed liquidity management facility available to other payments providers could help ensure that “real-time” payments always settle in real time.
