American banking has fundamentally changed. Across the country, banks and credit unions are investing more in technology than in real estate. This development continues to provide benefits to customers, including lower fees and instant account access.
However, despite once being a leader on payment modernization, America now lags behind the rest of the world when it comes to the way we conduct real-time payments. The United Kingdom adopted real-time payments over a decade ago, and countries like Poland, South Africa, and Mexico have already made far more progress than the United States. In fact, a payment deposited between two European countries will most likely clear before a payment from one U.S. state to another.
As a small-town banker, I heard constantly from business owners whose employees, families, and contractors depended on receiving payments quickly. Unfortunately, the Federal Reserve’s potential entry into payment systems is causing uncertainty and further delaying the modernization of U.S. systems. The Fed’s ongoing deliberation has effectively tied the hands of many small financial institutions as they wait to see what the Fed will do.
This delay has already impeded private-sector investment into payment systems and has significantly slowed the U.S.’s move to real-time payments. Despite having a stated goal of near-universal reach for real-time payments by the end of 2020, the Fed is holding the private sector back from attaining this objective. Rather than continuing to deliberate on whether or not to enter the market, the Fed should let the private sector take the lead on real-time payments.
Further, even if the Fed were to enter the real-time payments market, it would likely take years to develop a system. Such a significant investment of time would only further stall progress elsewhere and delay U.S. adoption of modern payment system technology. Further, it is unlikely that the Fed’s system would be able to work seamlessly with the existing real-time payment network. This inability to interoperate would fragment the market and impede the U.S.’s ability to keep up with the rest of the world.
Beyond these time and technical concerns, it’s also important to note that our country’s outdated payment system contributes to income inequality. Though not well-known, our slow systems disproportionately impact low-income consumers who are more likely to face bank fees. In fact, fees associated with bank overdrafts, check cashing and payday loans total $34 billion per year. Until our system is modernized, these Americans will continue to be negatively impacted by our outdated system.
As the U.S. plays catch up with the rest of the world, the Fed should take this opportunity to step aside and let the private sector continue to drive innovation on payment systems. By removing the uncertainty that comes with a potential Fed entry into real-time payments, the Fed would put the U.S. on a path toward modernization and empower consumers to keep more of their own hard-earned money. The necessary technology already exists and the Fed should let the private sector continue to deliver on this important system.
Steve Wichmann recently retired as the executive vice president of Heritage Trust Federal Credit Union in Summerville, S.C.