June 23, 2015
Everyone deserves a faster way to send money to friends, family and others. To settle US domestic payments more quickly, a lot of proposals and initiatives have been floated so far. There are a bunch of solutions that startups and FinTech firms have brought to the market over the last 5 years. Let's start with the initiatives taken to make the slow ACH system "faster" (if it sounds to you like building faster horses than cars, you are not alone).
NACHA, the electronic payments association, has finally proposed a solution to provide a new, efficient and ubiquitous capability to expedite the processing of ACH transactions. With the new rule, same-day processing of virtually any ACH payment can be enabled. But it will take some time for the rule to become fully effective. Same Day ACH would become effective over three phases during September 2016. The amended rule will provide ACH originators that desire same-day processing the option to send Same Day ACH transactions to accounts at any receiving financial institution (RDFI). While faster ACH is good, it is not really real-time. So what are the other options?
Faster payment options are already available in the US in various formats (closed systems, exchanges and/or other concepts):
The advent of alternative payment solutions to make payment settlements quickly and efficiently is making the world move faster. ACH is providing same-day solutions which is not a real-time solution.
At this point of time in the US, some companies are already making a move in real-time settlement solutions. They provide a low-cost, efficient payments network so that millions of Americans can move funds in real time. Below are the names of some of the companies that are using cutting-edge technology to provide payment platforms to make the movement of funds faster.
Remote Deposit Capture (RDC) Plus: Remote deposit capture refers to the ability to deposit a check into a bank account from a remote location without having to physically deliver it to the bank. It is one of the most important achievements by United States Federal Reserve in this field. Some banks (Regions, Moven, etc.) have gone ahead and offered immediate funds availability as well. And that is a game changer.
Lot of banks in the US currently offer RDC services in one form or the other. By the end of 2013, there were more than 1,300 banks offering RDC services while the number at the end of 2014 reached 2,900. It is estimated that by the end of this year, more than 5,000 of the 7,000 financial institutions in the US will have an RDC solution in place. But only a handful actually offer immediate funds availability. Those who do are able to offer a faster payment option to their customers. E.g., Regions Financial Corporation and Moven.
ClearXchange: clearXchange is the largest P2P payments network in the US created by and for financial institutions. Earlier this month they launched a real-time payments service that includes not only its original P2P payments product but also business-to-consumer payments. The country’s leading banks rely on clearXchange’s financial technology to allow consumers and businesses to send and receive money using just an email or mobile number. More than 100 million people already have access to the clearXchange network directly through their current bank. FirstBank has also added clearXchange’s P2P payments system as the newest tool in its robust mobile banking application. The only issue is that it is not adopted by all the banks so far. Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co., Capital One Financial Corp., are the founding banks of the system and a new addition is U.S. Bancorp, plus non-owner participants such as First Bank Holding Co.
Venmo: P2P mobile payment app Venmo was launched in 2011. After its release, within a few months, payment processing company Braintree purchased it for $26.2 million. In 2013, PayPal acquired Braintree and as a result, acquired Venmo as well.
Venmo ties a customer’s account to his/her phone number. Venmo to Venmo account transfer alert happens immediately. Most cashouts will happen within the day. In Q1 of 2014, the Venmo app reached $314 million in payments which was the same volume as Starbucks’ mobile payment app in that time period.
Source: BI Intelligence
According to Forbes, Venmo is predicted to reach $90 billion in payments by the end of 2017.
PayPal: PayPal is a faster, safer way to send money, make an online payment, receive money or set up a merchant account. Paypal to Paypal transfers happen immediately. The company operates worldwide (except a few countries) and has 100 million active users globally.
Dwolla: Dwolla digital payment network securely connects with US banks and credit unions to enable safe, fast and account-to-account transfers. The company provides real-time payment solutions within its closed system. So if two people have Dwolla accounts they can move money between each other in real time.
Dwolla is also an extremely low-cost payment processor – in some cases, there are no costs for the merchant. There is a 25-cent flat fee for all transactions and no fee for any transaction under $10. When you begin to compare this fee structure to others like PayPal ($.30 + 2.9% vs. $.25 + 0.0%), the differences can be substantial.
Update: While there are other solutions as well in the US that allow for faster payments, we picked the above five in our list.