Waiting 10 years for instant payments feels like the ultimate irony, the underwhelming punchline of a failed joke. But for the 329.5 million people living in the US, it is a reality.
Businesses and consumers alike find themselves refreshing online balances for up to five days to see if an invoice or salary has finally cleared. Meanwhile, purchases are taken instantly, leaving people routinely out of pocket. For the 61% of Americans who live paycheque to paycheque, the glacial processing must be agonising. And for many other countries – like Japan, whose real-time payments system is now 41 years old – it is baffling.
The US Federal Reserve is publishing press releases about the long-awaited 'modern' solution, now scheduled for mid-2023, but why has it all taken so long? And are people really excited for FedNow – or are they just fed up now?
Fear of systemic risk
According to Steve Boms, executive director of the Financial Data and Technology Association for North America, there are several reasons behind the lag. “The first is a fear of systemic risk,” he reveals. “Every kind of new innovation since 2008 has always been viewed through the lens of: ‘Does this create more risk in the financial system?’ and: ‘Will this lead to the next crisis?’.”
The rise of fraud has left many payments facilitators and regulators (of which the Fed is both) on high alert. In 2021, unassuming US account holders were scammed out of $5.8bn – a jaw-dropping 70% increase on the year before. Adding to this figure is something the Fed is anxious to avoid. “[…] With faster payments, there’s going to be faster fraud,” emphasises Nasreen Quibria, senior advisor at automated clearing house payment system overseer Nacha, and former consultant to the Federal Reserve Bank in Boston.
“We’re going to see an acceleration of this type of fraud unless it is addressed very soon, and it would be worthwhile that it happened before the launch of FedNow,” she adds. For Ms Quibria, the current “alphabet soup” of regulations does little to protect against the incoming tsunami of fraud linked to instant payments. While regulators grapple, decisions take years.
Finding ‘ubiquity’ is a challenge
it’s challenging to get all the participants to work together and move in the same direction
Of course, another reason for the hold-up is simply the enormity of the task. You can only climb a mountain step by step – or in FedNow’s case, bank by bank. “We have [around] 25 or 30 very large financial institutions, but collectively, they only have around 60% of customer deposits,” comments Mr Boms. “And then you have the long-tail of about 9800 other financial institutions who collectively control the other 40%.”
With such a diverse range of structures, attitudes and technology requirements, finding a one-size-fits-all solution across 50 states has been near impossible.
“We’ve never been able to reach ubiquity,” agrees Ms Quibria. “It’s a very large country – very fragmented[…]. It’s challenging to get all the participants to work together and move in the same direction.”
You don’t know what you don’t know
The concept of a “fragmented” US has become increasingly familiar, especially within society. Economic inequality has snowballed over recent years, with the average high earner now bringing in nearly 14 times more than a low-earner. Interestingly, some critics have laid the blame on slow payments.
Desperate people who have been nominally paid but cannot access their salary often resort to payday loans, hence the name. This has created a vicious cycle of poverty. Eye-watering rates and extortionate fees leave the 80% of low earners living paycheque to paycheque with even less.
Those who avoid loan sharks are still in dangerous waters, as overdraft fees rack up too. The average American is penalised $250 a year – usually for small individual amounts of around $24. For the lowest-income families – who can only afford to spend around $80 on food each week – these unfair charges must be devastating. There is a strong argument to suggest that the poorest are picking up the tab for FedNow’s sluggishness.
However, the people who suffer the most may never realise it. An astonishing 64% of Americans have never left the US, and therefore have not experienced real-time payments elsewhere. “You don’t know what you don’t know, right?,” suggests Mr Boms. “How do you get frustrated about something when you don’t necessarily know there’s an alternative?”
Therefore the pressure on the Fed to move faster is fairly low-key. The initiative is largely driven by fintechs rather than banks – who profit from overdraft fees (Wells Fargo, for example, raked in $1.4bn in 2021) – or the ordinary people who do not know any different.
Nine months to go
So, is the average American on the sidewalk frustrated about the dwindling speed of FedNow? Probably not. Instead they are likely kicking themselves about incurring another overdraft fee and counting the days until their paycheque clears.
