Imagine if ATMs let you pay your bills day or night, as easily as taking out cash. Really pay bills, meaning the money gets to the company in minutes instead of days, saving you a late fee.
Or picture banks staying open on the weekend. Really open, so you could make a deposit Saturday that shows up in your account before Monday or Tuesday.
The Federal Reserve is holding a nationwide brainstorming session for banks, merchants and financial middlemen around the country. They are thinking of ways to complete payments in “near real-time,” to keep up with a world that expects results at the tap of a smartphone key.
“This is not an area where the Fed has all the answers,” said Helen Holcomb, first vice president of the Federal Reserve Bank of Dallas. “In fact, we’re not sure we have the majority of the answers.”
Holcomb spoke before a roomful of bankers, payments professionals and other interested parties, me included. It was the last meeting of six scheduled around the country to air ideas such as paying bills via ATM and stretching bankers’ hours to 24-7.
Behind the initiative is an awkward fact. The U.S., with its supposedly dynamic financial system, still takes days to complete noncash payments. In other parts of the world, such as Britain and Australia, technology not only authorizes electronic transactions in minutes, but settles them quickly as well. In other words, as anyone who uses online bill payment knows, U.S. banks are nimble at taking money out of your account, but not so swift at getting it to the recipient.
“If you go to the financial institution website to pay the utility bill, the thought is, I’ve clicked on ‘pay’ so my utility should have that money instantaneously,” said Dennis Simmons, president of the Southwestern Automated Clearing House Association in Dallas. “But it can take two to five days.”
Even when those payments are electronic, they are processed in batches instead of going straight through, causing delays. Nonbank networks such as PayPal and newer, mobile alternatives are finding faster ways to handle the front end of payments — between you and a merchant or another person. But both parties need to be signed up with the system for it to work, limiting their usefulness. And these transactions cost more to handle than traditional bank payments.
Then again, there are costs linked to slow payments too, and we’re all paying them. For example, retailers are busiest on weekends, but they can’t use the revenue in their cash registers until Monday at the earliest. That means short-term borrowing to tide them over, with the cost of financing baked into prices on the shelves.
Speaking of slow payments, what about checks? Although they’re on the decline, “billions of checks are still written today, for all types of payments,” according to the Fed’s Payment System Improvement – Public Consultation Paper dated Sept. 10. Paper checks may have to be hauled around the country for days, from homes to businesses to banks.
But the check is still a handy item, Fed officials at the Dallas conference pointed out. The recipient doesn’t have to be on the same network as you, and you don’t have to know their account number, or their bank, or anything about them, really, except the name to write on the “pay to” line. Checks are cheap to process, and while they start as paper, 90 percent of them now travel much of their interbank route as electronic images — only to sit around after they arrive, awaiting batch processing.
Payments that are as easy as checks to use, that travel securely and also lightning-fast, are the goal of the Fed’s payment improvement initiative. The ATM bill-pay idea, in use in Britain and elsewhere, is just one potential solution. “If you think about the ATM world, if you put your card in and your PIN, anywhere in the world, you get money out,” said Simmons. “They have solved for interoperability.” So your bank could talk to your electric company’s bank in real time via the ATM networks, speeding up that utility payment.
The Fed’s listening tour wound up in Dallas this week, but the central bank will continue chewing on ideas as it considers written comments being submitted by industry players.A whitepaper sometime after mid-2014 will condense the ideas into a road map for the future. Then the hard work of implementing changes will begin, said Sean Rodriguez, the Fed official who emceed the meeting in Dallas. “At some point we have to stop the talking,” he said, “and start the walking.”