How Fast Do Payments Have To Be?

When it comes to real time or same day, there are advocates in each camp. But which option is better? The answer is far more nuanced than the question.

For a number of years now, the payments industry has talked about so-called faster payments. But what does this term really mean? Five years ago, The Clearing House Payments Co. LLC, a company owned by many of the nation’s biggest banks, launched its Real Time Payments service, which moves money, as the name implies, virtually instantly.

A year before that, the national automated clearing house system introduced a service that moved credits so they could settle the same day if they met a certain daily deadline. In 2017, Nacha, the system’s governing body, added same-day debits. Last year, the number of credits and debits combined more than doubled the 2019 total and was up 74% over 2020 (chart, page 22).

“We had phenomenal growth last year. We haven’t seen that real-time has caused a shift in traffic,” says Jason Carone, a senior vice president with responsibility for the Electronic Payments Network, TCH’s ACH business. Adds Bob Steen, chairman of Mt. Vernon, Iowa-based Bridge Community Bank: “Same-day has outperformed in volume beyond anyone’s expectations.”

At the same time, popular consumer payments services, such as the Zelle and Venmo peer-to-peer networks, are thriving on their ability to tap real-time capability.

So just how fast is fast, and do payments have to be made in real time? With some six years of experience with both faster ACH and The Clearing House’s RTP network (not to mention foreign real-time services), the payments industry is still sorting this out.

The answer, though, takes on increasing urgency as the Federal Reserve prepares to launch its FedNow real-time payment system next year, a move that will kick up competition in faster payments to an even higher level.

‘Immediate Impact’

Nacha has worked over the past few years to enhance the same-day service in ways that accommodate a greater range of payments and keep settlement windows open later, making the service available for transfers that take place late in the banking day.

The dollar limit, which started out at $25,000, went to $100,000 later, and in March was raised to $1 million. That has opened the service to a much wider array of transactions, including business-to-business payments and credit card settlements for large merchants, Nacha says. “It had a pretty immediate impact,” says Michael Herd, senior vice president for ACH network administration.

Now, payments executives can see the same-day service “is worth my while—there is not a lot of my transactions that aren’t eligible,” Herd adds. An example: insurance payouts. “The prior limit left [insurers] with too much of their client base not eligible,” he says, “but a significant enough part of the client base is now covered.”

That pleases community bankers. “There’s no question real time is going to be beneficial,” says Michael Bilski, chief executive at North American Banking Co., which has five offices in Minnesota. “But for the majority of payments, if settlement happens within 24 hours, that’s good for
most people.”

But at the margins of the payments business, same-day settlement may not be good enough for some people and some businesses in circumstances where funds are needed within seconds. “There’s still a need for finality of payment,” says TCH’s Carone. “I really need to know that money’s in my account. I can’t wait til the end of the day. A wire or real time will do that.”

He cites an example of a warehouse where a truck is ready to pull away from the dock and the delivery must be paid for immediately. Another scenario he mentions is the ride-share driver, who can be compensated “multiple times per day” through a real-time network. “That driver needs to put gas in his tank,” Carone adds.

‘Considerable Value’

But speed isn’t the only critical factor. Real-time payments offer another advantage in the volume of information they can carry about the transaction, experts say.

“The business has the ability to recognize the transaction more quickly, with a lot less manual effort. That creates considerable value the business would be willing to pay a little more for,” notes Sarah Grotta, director of the debit and alternative products advisory service at Mercator Advisory Group, a Marlborough, Mass.-based consultancy.

Wholesale pricing for same-day ACH and real time is roughly similar at around a nickel per transaction, Grotta says, though much depends on financial institutions’ markups. “That can vary quite a lot,” she says. “It all depends on how banks decide to price. In general, [they] are pricing ACH lower.”

In the end, it may not be a question of how much real-time transfers eat into the market share claimed by same-day ACH. Rather, the actual outcome may turn out to be both faster-payment rails taking a bite out of a much older cousin. Grotta cites an example. “Payroll is a big use case for real-time payments as well as for same-day ACH,” she notes. “They’re both encroaching on wire transfer.”