IndustriesBanking & Insurance

Musings on Prospects for Real-Time Payments in the US

As I sit in my office in Massachusetts after shoveling out from the 8th snowstorm in six weeks (but who is counting?), I have begun to wonder whether now is the time to simply declare that all banking going forward shall be digital. Just as our Commonwealth’s new Governor banned all street traffic except for emergency vehicles for several days in late January, perhaps the Federal Reserve Bank should declare a permanent ban on all financial transactions involving paper except for emergencies. No paper checks, no paper deposits, no paper loan documents, no signature cards, etc.

OK, maybe this is a little bit extreme but being stuck at home for days at a time over a six week period can result in some out of the box thinking. As we enter the middle of the 2nd decade of the 21st century, what is clear is that in many ways, we are still living with 20th century infrastructure. Whether it is roads and bridges, public transportation, or archaic banking practices and systems, we need to stop taking a band-aid approach to our problems and recognize that world around us has changed.

A perfect example of this is the slow but hopeful progress being made toward the development of a modern retail payment system in the United States. With the Federal Reserve System and at least part of the banking industry in the form of The Clearing House announcing support for a real-time electronic payment system, we have an opportunity to finally break the bonds of the past and join many other countries that have already made this investment. It’s time to stop talking and start acting.

What is holding us back? Some banks are stuck on how to make the business case: they are in denial about the future of payments given the investment by non-bank providers and evolving consumer preferences. The cost of replacing batch-oriented systems that were developed decades ago and are still being used by almost all banks to process payments is a hurdle. Some industry participants are hung up on how to support the small percentage of the population that doesn’t have the access or interest in real-time payments, a percentage that shrinks every day. Trade associations and payment system operators have a perceived vested interest in the status quo. Merchants and large corporations are already overwhelmed with the multitude of new payment systems being introduced by banks and technology companies.

Consumer and business adoption of technology is radically changing expectations about the fundamental role of banks in society. Payment processing is at the heart of the traditional role of banks: being a trusted intermediary of financial value. But payment processing in 2015 and in the future is also at the heart of the new role of banks: being a secure and convenient intermediary of financial value and data. If banks don’t hurry to embrace this new role, they will eventually be relegated to the role of the payments provider of last resort.

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