KEY POINTS

  • Sluggish settlement of payments in the US is pushing NACHA, the national electronic payments trade group, and the Federal Reserve to reform the system. US payments made via ACH can take three to five days to settle. This is inconvenient for consumers and can impact the way businesses run and trade is conducted, particularly as electronic payments are increasingly digitized. The Fed's Faster Payments Task Force and NACHA are looking to implement a same-day settlement program in the US by 2017. 
  • The number of transactions affected by faster payments will increase over time. Ninety-nine percent of ACH payments are eligible for same-day settlement, but the platform is most important for P2P, C2B, B2C, and B2B payments. These areas, which comprised $29 billion, or 12% of US payments volume, in 2014, will grow rapidly over the next several years, magnifying Faster Payments' impact in key areas of focus for payments providers. 
  • Faster payments implementation will be a mixed bag for banks. It could help make bank platforms more competitive to their alternative peers by fostering a more engaged client base. However, the burden of implementation will likely result in additional costs, which may outweigh the benefits.
  • The parties that provide alternative services, like P2P app vendors, mobile bill pay companies, or B2B processors/service providers, will be the true beneficiaries of the system. That's because the added convenience Faster Payments offers consumers could help increase engagement and volume without growing transaction costs, which are typically much higher for real-time offerings. 

Introduction

Payments made via banks in the US, as opposed to those made by credit or debit card, are completed in two primary ways:

  • Wire transfers allow for the transfer of funds between financial institutions in real time. These transactions are expensive, and occur on an individual basis.
  • Automated Clearing House (ACH) transactions use the same mechanisms as wires, but process transactions in large batches once a day or every other day.

ACH payments, which accounted for 18% of total noncash US payments volume in 2012, take a long time to settle — though NACHA’s website states that the majority of US ACH payments settle the next day or within two business days, they can take up to five days because of the batching process that differentiates them from wire transfers. 

This may mean minor [...]