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Real-time payments: a near-future reality?

October 20, 2014
Consumers, small and medium businesses, and corporations are becoming more and more impatient thanks to the digital and mobile revolutions. Despite this, our nation’s payment systems are either very slow, or costly: paying via check takes one to three days but is “cheap”, while making a wire transfer is practically instantaneous but is expensive. Why is it that we write checks to pay for our rent when, for over 20 years, we’ve been sending e-mails that reach their destination instantaneously?

By Paul Maia, MBA W’15

Have we stayed behind on this specific topic because our payment systems or not relevant? Certainly not, this is an extremely important topic. Within the USA, on average, 330 million non-cash consumer payments with a total value of $220 billion are processed on a daily basis. That’s $80 trillion that are transacted over our payments systems throughout a whole year, or 5x of our nominal GDP!

Created by Paul Maia - public domain at http://www.philadelphiafed.org/consumer-credit-and-payments/statistics/

As a user of payments systems, you might have never thought about this. I don’t blame you, what happens between when you swipe your credit card at a cash register and when the merchant receives his money is invisible and complex. Payments processors even call it “the plumbing”. However, it typically takes 1-3 days for your money to reach the merchant after he submits the authorization that you signed. This delay is also true for transactions between customers and their suppliers, for salary payments, for money transfers, etc.

Because of this delay, merchants, suppliers and other users are exposed to unnecessary credit and fraud risk, and have a much harder time managing their cash flows and working capital, among other costs. For example, users are exposed to credit and fraud risk because this makes it easier for customers to purposefully or accidentally default on their commitment to pay for something between the moment a transaction begins and the moment the transaction is actually accomplished. Additionally, working capital is harder to manage because of the uncertainty of when a user will receive funds from a transaction. Imagine having to take a loan to replenish your inventory because a payment is delayed.

To make matters worse, at a systemic level, these risks are aggravated. For example, during a financial crisis, if multiple insolvencies are occurring simultaneously, many of the transactions that are pending may suddenly become insolvent. Remember, with a three-day processing time, at any moment, on average, there is $0.6 trillion dollars being processed throughout the whole country! If transactions were close to instantaneous, there would be almost no payments pending and the systemic credit risk associated with payments would be practically cancelled. The result of this is a mix of increased prices experienced by end-consumers, lower margins for our companies, and higher costs when exporting from or importing to our nation.

Motivated by similar reasons, multiple countries and international bodies have decided to implement lower cost real-time or near-real-time systems throughout the world. These systems process payments in just a few minutes. Among many other examples, the UK successfully launched its Faster Payments Service, which is fully dedicated to small value payments, and Sweden’s main banking association has continuously improved its Bankgirot payments system. The latter supports different speeds for processing transactions, mobile and e-money transaction processing, automatic e-invoice processing, etc. It’s even fully integrated with the online income tax system. As a plus, the UK’s system was implemented by the private sector with minimal government intervention, and Bankgirot is fully driven by the private sector. Other countries that have opted to implement such a system include Switzerland, Japan, the Eurozone, Brazil, Mexico, South Africa, India, etc.

Within our nation, some private sector initiatives to increase our payment speed are already being developed by the private sector, such as PayPal and Venmo’s P2P transaction systems. However, such systems only ensure real-time payments when transacting funds between two user accounts of the same system. This is clearly insufficient to resolve this problem and does not put us on par with other developed countries where real-time payments are possible between any two bank accounts.

Many questions remain though. What would be the actual economic benefit of implementing a real-time system in the USA for smaller transactions? What would be the total cost of implementing this (including both developing the platform and updating all payment interfaces to use the new platform)? If this is a worthwhile endeavor, who should drive it? Should it be public-private effort kick-started by the Federal Reserve or the government? How can the administration help the various stakeholders discuss this topic, make a decision, and implement it?

Multiple agencies are collaborating to find answers to these questions. As an example, the Federal Reserve has already launched a process to explore potential options and is engaging with both national and foreign stakeholders that can help shed light on what direction we should take on this matter. You can read about this on innumerous Papers and reports launched by the Federal Reserve Banks.

These are tough questions about a critical topic for our economy. It’ll take the collaboration of multiple agencies to find the direction that best fits our nation’s needs.

 

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

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RESOURCE SPOTLIGHT:

  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>