The Real Reason We Don’t Have Real-Time Payments in the US


Alex is not impressed. Photo: Shutterstock

The UK has real-time payments. Mexico does, too.

So why isn’t the American economy underpinned by a real-time payment system yet? The answer is pretty simple.

Getting big financial institutions to agree on anything is not just hard, it might even be impossible—especially when they don’t want that thing you’re trying to agree on.

That’s been the state of payments here in the US.

If the Federal Reserve is notorious for being vague and ambiguous—former Fed Chairman Alan Greenspan was particularly famous for his use of “Fedspeak”—the central bank has been unequivocally clear about what America needs: a universal real-time payment network.

The Fed outlined its position in a public consultation paper last September.

Not only have users been demanding it, slow payments serve as a tax on the US economy.

The problem for the Fed is that they need to approach this with a light touch. They can mediate and nudge, but ultimately the industry itself needs to step up and make things happen.

But that means the industry needs to reach a consensus, which is … complicated, to say the least. In an industry as far-reaching and as fundamental to the economy as payments, there are a wide range of constituents whose incentives don’t always align.

Complicating the situation further—US financial institutions still make the bulk of the profits from payments. Because when you don’t have real-time payments as a default offering, you get to charge people for the luxury.


Show me the money. Chart: McKinsey

Objectively, no one wants to kill their golden goose. For banks, this is the equivalent of their “Kodak moment.”

“The payments business is pretty lucrative for financial institutions so speed can be an issue,” one Fed insider explained to me. “If I am able to offer that speed to a consumer or business or corporation, what are they willing to pay for that? Is there a way for financial institutions to turn that into a revenue opportunity?”

So when the Fed asked for feedback on their faster payments initiative from industry participants, it superficially appears as if everyone supports a better, more efficient system. In truth, however, what it amounts to is really just a bunch of signalling and non-committal cheerleading.

Consider the JPMorgan Chase’s response. They absolutely support technological innovation. At the same time, they’re going to hold out until there’s further clarity on the business side of things.

JPMC is supportive of further innovation around near-real-time payments and wants to see the industry proceed with new solutions that make sense, recognizing that the industry is already at work on several such initiatives. The Federal Reserve can lead the industry dialogue on near-real-time payments innovation which have value to all stakeholders and meet the Federal Reserve’s safety and soundness requirements.

The industry has long talked about a “FedEx” model, where end users pay different prices for different levels of speed, certainty and information around payments. We believe this is fundamental to the successful implementation of a real-time payments initiative, and that the use cases need to fit into this model, where users will actually be willing to pay for the increased speed they are receiving.

All of which amounts to little more than a bunch of hand waving. It’s a delicate dance that ensures that nothing ever gets done.

Economist Susan Athey put it to me plainly when we discussed the Fed’s dilemma back in 2014:

It seems clear that innovation is needed, right? So it must be right around the corner? Likely, the relevant government regulators are just being slow. Right? Wrong. Rather, some key industry players don’t want to change, and even among those that do, it will take many years to reach consensus for how to change

[Professor Athey is a Ripple board member.]

There’s been a lot of buzz around building consortiums around various use cases for distributed financial technology in the last six months—which frankly, is great. The industry is making great progress and cooperation among major stakeholders will be key for developing useful standards and commercializing new technologies.

But at the same time, it might be worth managing our expectations. Because if you think about it, the Fed is the Original Gangster in that regard, bringing together the industry’s big players to have a constructive conversation around how we can improve our payments system—the Fed’s Faster Payments Task Force. [Ripple’s Ryan Zagone is an elected member of the steering committee.]

Progress has been steady on that front over the last few years, but, understandably, it’s also been excruciatingly slow—as is typically the case when looking at progress driven by broad industry consensus.