Could a United Kingdom model speed America payments?
By Daniel Littman
The U.S. payments system has made substantial progress in becoming faster, better and cheaper in the last two decades. The number of checks paid has fallen by more than half, from nearly 50 billion a year in the mid-1990s to an estimated 20 billion today. The number of electronic payments has been rising to take the place of checks and to accommodate growth in overall payments activity. And the cost of clearing and processing the remaining checks has fallen due to both the Check 21 Act spurring check-image clearing and the reduction of monthly paper statements.
There is always room for improvement, however. Two areas where the payments system still has some work to do are the persistence of paper payments, particularly checks, and the speed of payments, particularly checks and ACH, which clear and settle on the business day after they are initiated.
Speed of payment is not a “good” unto itself. Speeding up payments increases both the transparency and certainty of transactions for the initiator and for the receiver. Speeding up payments can improve the efficiency of the transaction as well, and it can reduce the incidence of fraud and exceptions. Speeding up payments can also facilitate new ways of making payments, for example capitalizing on the ubiquity of smartphones.
In the United Kingdom, an initiative to increase the speed of “retail” payments was put in place in 2008. It is called the Faster Payments Service, or FPS. FPS has grown rapidly, and now represents about 5 percent of consumer and business payments in the country. It has cannibalized other payment types that were slower or paper-intensive, or both, including transactions on the United Kingdom’s ACH system (BACS), checks and even cash.
An interesting feature of FPS is its “credit push” approach to transactions. When a consumer initiates a payment transaction online, the instruction goes first to the consumer’s own bank and bank account. If sufficient funds are available, then the consumer’s bank sends a credit through the FPS infrastructure to the receiver’s bank. Thus, FPS avoids the several messages exchanged back and forth to clear the transaction, which occurs with a point-of-sale debit card, credit card or scanned check transaction here in the United States. Most FPS transactions are completed in a few seconds.
FPS began as an online-only payment mechanism. Since 2008, British financial institutions have added phone-initiated and file-initiated transaction features. In 2014, FPS will make new features available to participating banks, including mobile applications that enable bill payments and payments at the point of sale. FPS will also introduce a method for payment initiators to send funds to receivers when they do not know the bank and account number of the receiver. The receiver’s mobile phone number will serve as a substitute.
FPS may be a model for the United States to emulate. The British and U.S. banking and payments systems differ in important respects, so FPS could not be carbon-copied. However, a U.S. variety of FPS, if successful, could accelerate the decline of checks and reduce the number of transactions that take a day or more to clear and settle. A credit-first model might also help jump-start mobile payments in the United States, by simplifying the end-to-end process.
The Federal Reserve will be exploring the opportunities and challenges associated with a U.S.-variety of FPS with the financial services industry over the next year. The Federal Reserve’s district banks would welcome comments on this idea by Dec. 13. Interested parties can read more about this initiative at www.fedpaymentsimprovement.org.
Daniel Littman (firstname.lastname@example.org) is senior payments research consultant and economist with the Federal Reserve Bank of Cleveland.