US bankers are mulling over the business case for faster payments and there is still debate about how – if the US does speed up its transactions – they should do it.
Payments network the Clearing House has plans for a “multi-year effort” to build a faster payments system, news of which has been met with scepticism. Given the fragmented nature of the US banking industry and the fact that the Federal Reserve has no mandate to force banks to move to real-time payments, some wonder whether the Clearing House’s project will actually get off the ground.
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Payments innovation in the US has been typically led by market forces, rather than the firm hand of a regulator. In his Celent report on real-time payments, Gareth Lodge notes that one of the myths about real-time payment is that it only comes about with a push from the regulator. Other myths about real-time payments are that they are new and there are only a handful of such systems in the world.
Perhaps another myth is the assumption that faster payments are a good thing. One argument is that real-time payments reduce risk: more frequent settlement means banks know what their positions are, and at any point – in a crisis, for example – they know exactly where they stand.
However, the flipside is that faster payments actually increase risk. If a payment takes three days to clear, for example, there are three days to detect if it is fraudulent. And in the event of a crisis, if customers are able to withdraw their deposits in real-time, a run on a bank could drain a bank of its funds within a matter of minutes.
Since about 15,000 financial institutions in the US will have to address these challenges, it is hardly surprising that the Clearing House’s system will be a 'multi-year effort'. Any bank system that touches the real-time payments will also have to be in real-time. If the US is to move to real-time payments, its banks must be certain they can cope with the additional pressures of operating in a real-time environment.
