The Great Experiment

Imagine initiating a payment on your phone and seeing it settle into your payee’s account as fast—or just about as fast—as if you had handed him the same sum in cash. The dream of instant payments has been around probably for as long as electronic rails have existed for money transfer. But it was always that—a dream. Credit card and debit card payments have come close in recent years, and even automated clearing house transfers have speeded up to same-day settlement, but there’s always been a lag, no matter how small.

Well, if nature abhors a vacuum, the payments business has come to abhor a lag. And so Visa and Mastercard have worked on speeding up their networks, and The Clearing House Payments Co. LLC, a New York City-based company owned by many of the nation’s biggest banks, launched a genuine real-time network as long ago as 2017.

Now comes the Federal Reserve. Yes, the Fed. It’s on the cusp of delivering on an instant-payment system it first outlined in 2019—to the surprise of the payments industry—and has been diligently building and testing ever since. Late this summer, Vice Chairman Lael Brainard announced FedNow will start delivering transactions commercially between May and July. The announcement further narrowed the window for launch from the goal it started with, 2022 or 2023, to 2023, to now next spring.

While many observers are wondering who can compete with the Fed, the private sector is busy doing just that (see our cover story, which starts on page 22). The aforementioned TCH is one formidable private provider, with the advantage of actual volume on its rails and five full years of experience. And companies ranging from the big card networks to technology companies like ACI Worldwide are bidding to get their slice of the expected volume (see page 10).

Real-time settlement isn’t always optimal, of course. There will remain situations in which it is to the payor’s advantage to have a bit of lag time—for example, when the payor needs a couple of days to get the money into his account. But the latent demand is palpable enough to induce what is probably the most ambitious investment in network building since the dawn of the bank card systems.

The question is how the capability for routine real-time transfers will reshape the payments industry. Commercial transfers are one thing, but payments on the retail level are quite another. As stores start collecting instant payments from customers, how will that immediate liquidity reshape commerce in the United States?

We don’t pretend to know. But we’re interested to see how this great experiment will play out.

—John Stewart, Editor john@digitaltransactions.net