Key insights
- American businesses and consumers have long been stymied by an aging, slow and inefficient payment infrastructure
- New payment rails built by the Federal Reserve may finally transform the nearly $73 trillion in annual ACH transfers — and the 11 billion checks Americans write each year — into instant, data-rich transactions
- Combined with a wave of fintech innovation, these changes will bring massive efficiencies, especially in sectors like healthcare, education and housing, that have suffered from disproportionately high inflation and been a drag on the economy
- This new era of automated, real-time payments will also transform how workers get paid and how we think about money as society
Picture this: An employee gets off work at 7 p.m. While walking to her car, she logs into her team member app and requests a payment for that shift. By 7:05, the money hits her bank account and is available to use for groceries, rent or a car payment. No waiting two weeks to receive a direct deposit (or worse, a check in the mail), wondering if there will be enough to make it through. And if she’s one of the 12 million Americans who used to rely on payday loans, she won’t face exorbitant fees — typically $15 for every $100 loaded, or an outrageous APR of 400% — that act as a tax on those who can least afford them.
The employer benefits, too. With money instantly leaving the company’s bank account, its ledgers update in real time, eliminating the customary accounting process often known as “month-close,” an ordeal so time-consuming and painful that companies don’t do it more than once a month. The need for audits shrinks; financial analytics can be done down to the penny; and no one needs to wait to see what the company’s finances look like. Everything is real-time and transparent to everyone involved.
Welcome to the future of payments, where every transaction begins and ends with software, and the movement of money is easy, instantaneous, seamless and embedded into a variety of products and services. These new levels of automation are coming over the next few years and represent a new, modern operating system for money movement — one that has the potential to create improvements in people’s lives and greater financial efficiency and accuracy for businesses.
America’s slow and antiquated payment rails
Such changes are overdue in the United States, where most banks and medium and large-sized businesses rely heavily on payments infrastructure developed in the ’70s. The Automated Clearing House network, or ACH, conducted 29 billion transactions valued at $72.6 trillion in 2021, according to Nacha, the association that governs the ACH network. Although this rail is the most commonly used system for electronic payments between businesses, transfers take anywhere from one to four days, an eternity in the age of instant streaming and one-click shopping. Payments are submitted in batches rather than continuously. And ACH only settles during the weekday—and never late at night.
We’ve been inching toward a better solution in fits and starts. The RTP (Real-Time Payments) network, launched in 2017 by a consortium of the nation’s biggest banks, transfers funds between two bank accounts instantaneously and works 24/7/365. But its adoption, especially among the country’s smaller financial institutions, has lagged. And yes, thanks to digital payment innovators like Venmo, PayPal, Zelle and Cash App, sending money is far more convenient for consumers. But it’s still a patchwork system that makes figuring out how to send money to an individual or a small business a guessing game. It’s no wonder that checks, although less popular than they used to be, remain a common way for individuals, businesses and government agencies to make payments. In 2021, we collectively wrote 11 billion checks in the US.
Lagging behind other countries
Compare this slow, fractured approach to other countries farther ahead in the digital payments game. Every Canadian, for instance, has access to near-instant payments through Interac’s e-Transfer. All you need is an email and Canadian bank account. In Brazil, Pix works similarly, with people also using it to pay for goods and services. India has achieved particularly rapid success with its instant payment innovation UPI (Unified Payments Interface). This mobile scan-and-pay system connects hundreds of millions of people, including those without bank accounts, and has revolutionized Indian commerce. Virtually every business, from street vendors to high-end mall retailers, sports QR codes that anyone with a unique biometric identification number (which is nearly every adult) can scan to make or receive payments.
In the US, our antiquated payments infrastructure creates particular challenges for large and midsize businesses. Financial accounting teams, for instance, endure the kind of drudgery and inefficiency that doesn’t plague other areas of the business. When digital marketing teams want to track the results of an email campaign, they can quickly access a variety of analytics applications for detailed real-time data. Similarly, merchandising teams can easily see what items are selling where and to which customers. Finance teams, on the other hand, often have no insight into which invoices have been paid, or what investments or purchases have been made, in part because their systems are not directly linked to their company’s bank accounts.
“The coming era of automated, real-time payments will not only change how we think about money as a society, it will have far-reaching implications on user experiences, business models and businesses themselves.”
In a Harris Poll survey that Modern Treasury commissioned in 2022, 80% of US companies with 500 to 5,000 employees said their finance teams do at least half of their payment operations manually. This means painstakingly matching spreadsheets to bank statements, logging into bank portals to make individual payments, or approving payments through email — work made even more challenging by the fact that nearly half of respondents said they use five or more internal systems to manage their payment operations. Nearly all respondents (96%) reported that their current systems for making payments create negative impacts for their companies, including increased financial risk (39%) and wasted employee time (41%).
Software is eating payments… finally
Efforts are underway to help make business payment systems far more efficient by building digital pipelines between a company’s banks and its financial and payments systems. Companies like Modern Treasury build software platforms that help organizations create a single source of truth for all money movement, no matter its source.
These efforts got a major boost in July when the Federal Reserve launched FedNow, a low-cost interbank settlement system to move money between banks in seconds rather than days. Representing the most significant upgrade to the country’s payments technology in decades, FedNow also allows the flow of richer data about transactions. This enables software like ours to help companies parse and automatically reconcile large volumes of transaction data so they don’t have to manually link invoices and purchase orders to the movement of money. Such reconciliation can now be instant, with software revising ledgers every single time money moves. The benefits are significant: Companies can not only free finance teams from tedium and redirect them toward higher-value activities, they can have greater trust and confidence in the numbers they use to make decisions, and greater clarity when reporting assets and expenses to management and investors.
“By the end of this decade, if not sooner, we simply won’t recognize the systems we have today.”
Along with immediate payments, FedNow’s “request for payments” feature has the potential to transform how consumers think about payments. Today, people receive invoices from a wide range of providers — landlords, mortgage companies, utility companies — in the mail or via email. They then log onto their bank or to the provider’s platform and schedule a payment, which will arrive in anywhere from 3–5 business days. FedNow allows these businesses to initiate an electronic request for payment that sends an immediate notification to a customer’s phone. The customer taps for approval and the transaction is settled within seconds. This seamless and instant transaction eliminates the inefficient and, frankly, outdated process of businesses waiting for checks to clear and consumers worrying about whether their checks will get there in time. This new way of doing payments could also be used by businesses to charge one another for goods and services, leading to dramatically improved visibility into cash flows and better cash management.
Far reaching implications
The coming era of automated, real-time payments will not only change how we think about money as a society, it will have far-reaching implications on user experiences, business models and businesses themselves. Many sectors will see benefits. Imagine payment operations in the healthcare industry that are standardized and automated. In 2019, McKinsey estimated that the movement of payments, claims and billing in the US healthcare system cost a whopping $200 billion annually. Streamlining even a portion of this with innovative software solutions could represent a savings of tens of billions of dollars. Other industries that have been reliant on ACH, wire transfers and checks, such as education and housing, are also among those with the highest administrative costs. They, too, could also use payments modernization as a foundation for growth and greater cost efficiency.
And automated, real-time accounting will also make it much harder for large companies to accidentally pay out millions of dollars or simply lose money internally because no one is able to track it. For small businesses, instant payment requests may become a boon, since they will get paid for what they sell more quickly and at a lower cost than with credit cards.
Payment systems haven’t been this exciting or transformational for a very long time. The US went four decades without the introduction of a new payment rail. By the end of this decade, if not sooner, we simply won’t recognize the systems we have today. Much like we marvel at the shopping experience before Amazon or TV watching before streaming, we’re likely to look back at the present moment and wonder why moving money was so hard. Why did it take days for a payment made on a bank’s app to go through? Why did companies have to hire large teams of workers to manually reconcile payments with invoices and bills? And perhaps another question will seem even more baffling to our future selves: Why did we ever have to wait two weeks to get paid?
