Coronavirus, RTP, and the Social Implications of Payments

COVID-19 and the subsequent shutdown have highlighted the drastic inequalities within our society. Underserved communities are not only the most at risk of contracting the disease, but also of becoming economically impaired from this shutdown. These communities need money fast.

Unfortunately, the U.S. payments system is not set up for speed. Real-time payments (RTP), where a payment is processed almost instantly, has been available in other countries for over a decade and is gaining traction throughout the world. In Europe, the U.K. first put together a faster payments task force back in 2004.¹ Europe’s motivation to remain competitive on a global scale led to the early adoption of RTP. In India, a Unified Payments Interface (UPI) which was just developed in 2016 had already grown to 955M monthly transactions by late 2019.² The Indian government’s encouragement of UPI has helped move workers into the formal economy and spread financial inclusion. By contrast, the Fed created a faster payments task force in 2015, but still does not have the infrastructure ready.³ The social implications are now painfully obvious.

RTP and the U.S.

Real-Time Payments

By dollar value, nearly all U.S. payments are completed over either the Automated Clearing House (ACH), wire, or credit/debit. RTP is the logical next step in U.S. payments innovation. RTP handles the clearing and settling of individual payments nearly instantaneously, as opposed to ACH which batches payments together and can take days for the cash to settle. RTP can simplify a business’s operations by enabling the immediate acceptance and conceptualization of payments.

Since its creation, one of the Fed’s functions has been to operate key interbank payment, clearing, and settlement systems.⁴ The Fed is uniquely capable of managing the interconnectedness of the banking system as banks have minimum reserve requirements — they are required to deposit a minimum threshold of cash for safe keeping in accounts held by the Fed. The Fed’s infrastructure for RTP, FedNow, is anticipated to be introduced in 2023 (though many within the payments community expect delays).

A solution for payments in real-time is not new to the U.S. The Clearing House (TCH), a private company formed by a consortium of the largest U.S. banks, created its own RTP infrastructure in 2017.⁵ TCH is powered by VocaLink, a software company that has provided the backbone for faster payments in the U.K. for a decade.⁶ However adoption of TCH has been slow, only reaching about 50% of demand deposits midway through 2019.⁷ While there is no clear reason the U.S. has fallen behind, a few theories are:

• While U.S. banks and card networks remain profitable, there is no motivation for new payment infrastructure. Moreover, a complete overhaul of the payments infrastructure would be a costly endeavor.
• The fragmentation of the U.S. banking system is unique. The sheer number of banks makes cooperation daunting and more complex than other nations.
• The actors in the U.S. payments infrastructure have heightened lobbying power to keep the status quo.
• In a markets based economy, the Fed is hesitant to further compete with private sector solutions.
• Commercial banks are hoping to transact on FedNow over TCH as they believe a national payments infrastructure should be run by the Fed as opposed to large banks.
• U.S. culture and habits have made it difficult to accept any change away from card networks.

Social Implications

Payments innovations and government policy play an important role in the inclusion of underserved communities. A solution like RTP could push adoption of mobile banking and greatly benefit lower income consumers.

First, immediate access to funds could benefit those using check-cashing services or payday loans. The time gap between cashing a check and receiving the cash is very disruptive to a consumer living paycheck to paycheck. RTP would eliminate some of these concerns while simultaneously decreasing the overdraft fees that can burden these consumers.⁸

Additionally, underbanked consumers are also more likely to use mobile banking services. The ability to access digital payment channels would be an important shift for those who rely heavily on cash payments. These payments would be simpler, more reliable, and safer than holding cash.

As such, RTP can be a tool used to fight income inequality within the U.S.

Payments and COVID-19

COVID-19 has highlighted the social implications of a faster payments network. Congress recently passed the CARES Act, a landmark $2.2tn stimulus package, which includes sending cash directly to millions of Americans. While on paper the direct payments of $1,200 are a great initial prescription for this unprecedented fiscal crisis, in reality the execution of such a scheme has been challenging.

Direct deposits, the way the government wishes to send money, is inaccessible to lower income and underbanked consumers who do not have an account on file with the IRS. As such, tens of millions of Americans are waiting for paper checks and will not receive their benefits until at least early May, weeks after other Americans have received their payments.⁹

In an attempt to simplify execution, an initial bill presented by the House proposed the creation of a digital dollar where the Fed would act as a commercial bank holding digital wallets for all Americans.¹⁰ This would have been a major strategic shift for the Fed, as thus far it only maintains accounts for private banks. In the end, the creation of this digital dollar failed, as the technological challenges, regulatory hurdles, and negative implications for the banking sector were too cumbersome. However, this discussion of democratizing banking access through the creation of a Fed-managed digital dollar is here to stay and, in the long run, Fed managed digital wallets may play an important role in our payments ecosystem. Governments around the world are continuing to explore this concept. Most recently, in February 2020 Sweden announced a year-long pilot of an e-Krona.¹¹

With instant payments and a central bank digital currency off the table in the short term, innovative FinTechs are mobilizing. Jack Dorsey, CEO of Square, took to Twitter to say, “Square and many of our peers can get this done. US government: let us help.”¹² Chime, a digital-only bank, is piloting a program of sending $1,200 to individuals who already direct deposit into its bank.¹³ GiveDirectly, a nonprofit with expertise in sending cash electronically, is working with donors and the government to find a fast solution to sending cash directly to vulnerable Americans. Visa and Mastercard are lobbying to use their peer-to-peer (P2P) real-time payments solutions, VisaDirect and Mastercard Send, to deposit cash instantly into bank accounts of millions of consumers.¹⁴ The response of the FinTech community, and businesses as a whole, in working with the government is encouraging.

However, when it comes to COVID-19, it will take weeks for lower-income Americans to see their stimulus payments, most likely in the form of checks. This delay will negatively affect the citizens who need this payment the most. The outdated and fractured system in the U.S. has never been more in the spotlight and, unfortunately, more costly to everyday citizens. RTP infrastructure will help in the future, but it is too late to help us fight the economic ramifications of COVID-19.

I would love to hear from you if you have questions, feedback, or simply want to discuss! Please message me on LinkedIn and don’t hesitate to get in touch.

[1]: “Payment Systems Task Force Members and Terms of Reference Announced.” Office of Fair Trading, 31 Jan. 2007, web.archive.org/web/20081019110152/www.oft.gov.uk/news/press/2004/43-04.

[2]: “Real-Time Payments Systems and Third-Party Access.” A Perspective from Google Payments, Google, Nov. 2019, static.googleusercontent.com/media/pay.google.com/en//about/business/static/data/GPay_RTP_2019.pdf.

[3]: “U.S. Path to Faster Payments.” Faster Payments Task Force, fasterpaymentstaskforce.org/.

[4]: Cooper, Cheryl R, et al. U.S. Payments System Policy Issues: Faster Payments and Innovation. Congressional Research Service, 2019, U.S. Payments System Policy Issues: Faster Payments and Innovation, fas.org/sgp/crs/misc/R45927.pdf.

[5]: “The Clearing House Payments Authority (TCHPA) Sign In.” The RTP Network: For All Financial Institutions, The Clearing House, www.theclearinghouse.org/payment-systems/rtp/institution.

[6]: Groenfeldt, Tom. “The Clearing House Gets Going With Real-Time Payments.” Forbes, Forbes Magazine, 22 Jan. 2019, www.forbes.com/sites/tomgroenfeldt/2019/01/22/the-clearing-house-gets-going-with-real-time-payments/#77334e216650.

[7]: “Clearing House CEO Emphasizes Equal RTP Access, Pricing for All Banks.” ABA Banking Journal, 22 May 2019, bankingjournal.aba.com/2019/05/clearing-house-ceo-emphasizes-equal-rtp-access-pricing-for-all-banks/.

[8]: Cooper, Cheryl R, et al. U.S. Payments System Policy Issues: Faster Payments and Innovation. Congressional Research Service, 2019, U.S. Payments System Policy Issues: Faster Payments and Innovation, fas.org/sgp/crs/misc/R45927.pdf.

[9]: Keshner, Andrew. “When Are Stimulus Checks Being Sent out? Here’s How to Make Sure You Get Yours.” MarketWatch, MarketWatch, 14 Apr. 2020, www.marketwatch.com/story/when-are-stimulus-checks-being-sent-out-how-to-keep-tabs-on-yours-2020-04-10.

[10]: Bambrough, Billy. “Shock U.S. Digital Dollar Proposals Set Bitcoin And Crypto Prices Alight.” Forbes, Forbes Magazine, 24 Mar. 2020, www.forbes.com/sites/billybambrough/2020/03/24/shock-us-digital-dollar-proposals-set-bitcoin-and-crypto-prices-alight/#62bf1d6e318e.

[11]: The Riksbank to Test Technical Solution for the e-Krona. Sveriges Riksbank, 20 Feb. 2020, www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/notices/2020/the-riksbank-to-test-technical-solution-for-the-e-krona/.

[12]: Dorsey, Jack (@jack). “People need help immediately. The technology exists to get money to most people today (even to those without bank accounts). Square and many of our peers can get it done. US government: let us help.” 26, March 2020. 3:20pm. Twitter.

[13]: Hugh, Son. “Chime Pilots Way to Get $1,200 Stimulus Checks to Users Instantly after Talks with Mark Cuban.” CNBC, 3 Apr. 2020, www.cnbc.com/2020/04/02/chime-bank-pilots-way-to-get-1200-stimulus-checks-to-users-instantly.html.

[14]: Surane, Jenny, and Robert Schmidt. “There’s a Battle Brewing for Taxpayers’ $1,200 Government Relief Check for Coronavirus.” Accounting Today, 1 Apr. 2020, www.accountingtoday.com/articles/theres-a-battle-brewing-for-taxpayers-1-200-government-relief-check-for-coronavirus.