Why it's taking so long for Americans to get payments instantly
wsj.com
wsj.com
The article claims big banks lobbying with their own competitor to FedNow delayed the rollout of real-time payments, according to those industry officials. But another factor I want to point out is that the USA has more small banks (and, I assume, credit unions) than any other country on Earth; affecting the ability for the network effects of a real-time payment system to take hold.
"The U.S. has more than 4,000 small banks. That's more than any other country in the world and more than all of the small banks in the entire European Union combined."
https://www.npr.org/2023/05/04/1173488958/silicon-valley-ban...
I am a member of one of the 20 largest credit unions in the US but they only allow to receive FedNow payments. Not send them. I am assuming it is expensive to setup and many small financial institutions may not be able to support it for years down the line.
This is such a strange question. Having many participants in a market simply means that nobody were able to consistently outcompete the other players.
I's like saying, why have 2 million farms in the U.S., when you could just have a few mega cooperations owning all farm land?
It would make more sense for many of those smaller banks to merge locally and compete with much bigger banks in their geography. But the US is odd. Take, for example, the justice system, where very little town has its own police force. In contrast to other countries where the State police do all forms of policing and everyone gets a better and more uniform quality of service.
I would question the notion that promoting numerous small banks without the advanced features of larger counterparts, and deeming it beneficial for competition, is simply a manifestation of U.S. exceptionalism.
I used to bank with large national banks. Their fees were higher, account balance minimums were higher, loans were harder to get (often with higher rates), and their response to customer service issues were to raise their hands and say “sorry, it’s corporate policy.” Their big benefit was that branches were easier to access and they have ATMs everywhere.
I moved to a local credit union and have no interest in ever switching back. They invest in the community. It’s easier to get a loan. It’s easier to appeal to a human. And they simply work with you more. Nowadays they provide essentially everything larger banks do with better service. The only thing I can think where they lack are international wire transfers, where they need to route through a bigger bank. I think I’ve needed to do that once in the past decade.
Regional banks could possibly fill the role small banks do, but we used to have regional banks and they all consolidated throughout the 90s and 00s, presumably to be more profitable, or they sold off to larger banks. Small banks and credit unions do the job regional banks used to but without the mandate to increase profits year over year.
There are plenty examples of American exceptionalism. Providing more customer choices and better service by having more choices in banking is not a stellar example, IMHO. It may complicate rollout like of things like FedNow, but if that’s the cost of having access to a banking system that enhances their communities, I’ll live with the trade-off. On the other hand, I have friends in other countries that despise their bank but have maybe two other options, with essentially no difference between them, so they’re stuck with it.
A core topic of what I wrote is that I enjoy banking with an entity that doesn’t have aspirations to grow beyond its local environment. I enjoy being a member of a credit union. I decidedly do not want to bank with a large bank. History has shown this utopia you envision is almost certainly never going to happen.
Why should I want to bank with a large bank? I’ve done it, several times, and it offers no advantages over my current bank. The goals of a credit union are far more aligned with my own interests.
Yeah, no. The tiny bank in Arkansas isn't participating in the same market as the tiny bank in Alabama. But the large bank from New York wasn't allowed to compete in Alabama by state regulators.
In fact, I suspect that there are actually huge inefficiencies in these very small regional banks people are paying for one way or another.
It might still be worth it for society, in the end, but I highly doubt that it’s cheaper/more efficient than in other countries.
One example is the fact addressed in the article: It takes way too long to roll out technical innovations that have been commonplace in other countries for decades or even centuries.
I’m not even sure why you’re intent on blaming small banks for the slow rollout. The article notes that the large banks introduced a competing system in 2017 and it took years to deploy. That’s with all of the advantages of large bank efficiencies and none of the pesky government bureaucracy. We always hear stories about the legacy COBOL systems these big banks have and how it hinders innovation.
It seems to me this more a case of no incentive. If this were such a highly sought after feature, customers would flock to the banks providing it, but they’re not. It’s worth considering why so many choose smaller banks. They can certainly choose large banks but aren’t, despite whatever efficiencies large banks can supply.
Barclays was founded in 1690 though
I’d rather have 50 large banks than 5 humongous and 5000 tiny ones from a resilience and efficiency point of view.
Sounds like a business opportunity. Heh, I wonder why the market is so broken that this wasn't fixed yet, there's obviously money in dealing with money.
It's more of a people problem than anything else. Wrapping the future in a palatable package for risk adverse bankers is truly a cursed problem. Everyone needs their medicine coated in some exquisite form of custom sugar or they won't even look at it.
Traction has been acquired though. We've got word of mouth doing the rounds and customers are coming to us out of the cold.
Paperless onboarding is our bread and butter, but we are eventually going to become the single pane of glass for any branch manager or frontline employee.
Back office is our next dragon. We are saving it for last because doing front office well (I.e. paperless signed docs straight to imaging system via api) means back office workload naturally reduces.
The opportunity is bananas. More than we can deal with and you basically have a mini market per core platform. I feel like you need a really special kind of team to do what we do. Our company president is a former banker with a strong vision of what an ideal in-branch customer experience looks like. I can't imagine it working out any other way.
There’s a lot here that sounds interesting but I have no idea what business you’re in
It really is incredible to me the moats that some of these business leaders have been able to construct. At the end of the day, what these companies are selling is regulatory permission to use a very over priced SQL database.
The real-time aspect of FedNow has liquidity implications; the fact that it (optionally?) allows outbound push payments for consumers at a much cheaper rate than wires makes means that automated fraud prevention becomes a priority.
In other words, when you can charge $10-30 for an outgoing (and often incoming!) wire, that pays for the liquidity and manual fraud reviews (during business hours only). At roughly $0, those economics change significantly.
Why should efficient lending decisions somehow be uniquely hard to make in a large corporation with many local branch offices?
We’ve seen massive consolidation in mobile phone networks (where local knowledge should arguably matter just as much for where to build the next tower), supermarkets (I’d assume preferences and spending habits to also vary widely), media, and many other areas of business.
What makes banking so special? And why in the US, but not in most other countries in the world?
And if it’s a question of not having too many “too big to fail” entities: Wouldn’t it then be better to have 20-50 Chases rather than 5 Chases that still concentrate a huge chunk of customers and a long tail of thousands of tiny banks?
Once a bank gets big enough, I think the main issue is risk. The long tail of tiny banks represents a certain customer type that is harder to model in an Excel model and is vetted through personal relationships. Consider one the "big" banks in that long talk - SVB. For a lot of startups getting banking services such ACH, or lending mortgages to founders backed by "paper gains" would be a nightmare for your classically trained big-four bank manager. Conversely, all the work thank bank manager would have to do in winning those deals, likely wouldn't get any benefit from the parent bank except for the bank charter and maybe a small bonus. It's better to be the CEO of a small bank with a highly differentiated order flow, then to fight your exec who lives 1000 miles away that won't let you lend to founder of DropBox because cloud storage isn't a dropdown in their excel spreadsheet.
The trouble is that the decisions can't be entrusted to the branch offices, so you wind up being a little stiff and inflexible and slow.
Banks have the issue with delegating power to give you money. From a distance I'd guess there is a real advantage to businesses of local banks and being able to work on personal relationships.
You never have a relationship with a big company, you are just an entry in a database interacting with an algorithm.
Easy. When you only exist in for example Manhattan, you don't have to deal with divergence laws against Calif, because you just not in Calif.
But when you have branches in NY and in Calif, laws just prohibited you to make different decisions for NY and Calif - all MUST be SAME.
And we still do have too-big-to-fail ones too – and they’re gaining market share.
Only being able to receive and not send is a feature I’d love to have for my bank account. If it’s implemented at the “bank level” even better. One less worry for me.
It hit the market well after people were seeing FedNow on the horizon. Why bother building something expensive that's obviously going to be obsolete in a few years?
If it was meant to compete with PayPal/Cashapp/Venmo, it was 10-15 years too late for that. Anyone who wanted it had it already.
I wonder if the value of Zelle is that it's still a private club. The customer safety and confidence stories have been terrible-- rejecting accountability, ignoring fraud and misuse. The banks are incentivized to say "our network, our rules."
FedNow, as a government entity, will eventually respond to controversial political forces like "people expect to be made whole in the event of fraud" or "payment platforms should provide a means of leverage in customer disputes".
GDP of USA and Italy: 26.95 and 2.19 trillion dollars. [2]
GDP/banks (if it makes any sense but bear with me) : 26.95/9000 = 0.0029 and 2.19/439 = 0.0049
So yes, money per bank is less in the USA but only by a factor of 2. It's in the same order of magnitude. It's also a much larger and sparse country (at least in some areas) so I would expect more fragmentation and redundancies in those markets where you need to be physically close to customers. Banking is among them IMHO
[1] https://www.bancaditalia.it/pubblicazioni/banche-istfin/2023...
[2] https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
Congress grilled bank executives about it last year and even most of the representatives failed to grasp that it was digital cash. If someone gets defrauded, it's just as if they handed $20 to a scammer. It's going to be hard to reverse that.
Comparing it to cash is dumb.
Imagine you’ve sold a car, the buyer drives off and later reverses the payment.
For very large transactions we have escrow—but isn’t quick by design.
A new potential court-ordered opposite transaction is not what people think of when they hear reversible.
It's that table stakes have changed. Mainstream customers-- and the regulators who represent them-- expect reversibility as a built-in feature. The technology exists for it. Saying "we're building digital cash in 2023" is like saying "we're going to sell a 4K OLED television with seperate VHF and UHF knobs, because it was fine for Grandpa's 17" CRT."
Various players may desperately want a non-reversible transaction to save a few cents per transaction, or to immunize themselves against bad-faith chargebacks, but it's pretty much ignoring everything we've learned about fraud and user experience in the last 50 years of electronic payments.
At best, there might be a market for a seperate, parallel universe of nonreversible transfers, but it would likely be something tightly regulated and B2B, rather than something that you can misdirect ordinary customers into choosing (like, say, Zelle or PayPal's friends-and-family mode)
I doubt this. Austria alone has 334 independent Raiffeisenbanks(!) (usually Ltd. or Cooperatives) and this is only considering one of our three banking sectors. In total we easily have over 500 independent banks in Austria alone and I know our Swiss colleagues have much more than this. And we're just two tiny countries.
Instant payments in the EEA have worked without an issue for a long time now, by the way.
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
― Upton Sinclair
This is also why fintech/insuretech/etc startups tend to fail so spectacularly...because in almost every case they severely underestimate the difficulty and don't understand the enormous scale and expense of the past several decades of that were carried out by established and already very profitable companies.
It's incredibly hard to justify getting rid of something that already provably works (what every single person that thinks we should flip a switch and get instant payments is advocating). There is a tendency to portray financial IT services as being risk-averse...there is maybe some truth to that but I'd characterize it more like a situation where those on the outside are simply not aware of the enormous amount of risk already being taken just to make minor improvements to existing systems with 50+ years of business rules encoded into them.
For all of those reasons, FedNow looks to me like it's actually been a fantastic success so far. I'm not sure what the WSJ was expecting to see. They aren't (to my knowledge) hundreds of billions over budget and a half decade past due...that is about as good as one could have hoped for.
Then is it surprising that other nations have had near instant payments for a good while?
The US digitalized it's financial industries the earliest and so it has the most pre-existing infrastructure to maintain and past decisions to deal with the consequences of. The finance industry was quite literally the first major industry to computerize in the US, most other countries got started decades later due to a lot of factors but mostly either poverty, being behind the iron curtain, or lack of access to reliable computers.
It's always more difficult when you have millions of active users and SLAs to abide by, and regulators and auditors that are aware of every possible thing that can go wrong and that they should be asking questions about.
You are completely ignoring many countries here that have had instant, free transfers since the 90s.
It never ceases to amaze the lengths Americans will go to explaining why they are behind the rest of the world in some way or other while trying as hard as possible not to say "because profit".
A phone number based transfer service can be implemented as a directory service on top of that much more easily.
And to give another counterexample: The US has had cell phone networks much longer than many other countries, yet the 5G deployment here is pretty competitive internationally.
The second mover advantage is real, but I don’t think it can explain the holdup here.
US has a simpler task by any conceivable yard stick, but there is absolutely no political will to get it done.
I don’t think the US _did_ digitise its financial industry first, did it? That’d be the UK, with Girobank, and BACS; the US ACH system showed up a few years later. Spoiler: the UK has instant payments (FPS is about 15 years old). Eurocheque, a sort of spiritual predecessor to SEPA, showed up the same year as Nacha (though most European countries had their own national systems until the early noughties, when they were largely replaced by SEPA).
Granted tech leaping explains why many third world countries are ahead, however the US was no where near the first to digitize its banking infrastructure. I've heard stories from former (now-retired) colleagues who went to visit banks in the US to showcase Skandinaviska Bankens digital ledger. This was around 1968, and the US bank executives were allededgly blown away.
The EU banking landscape is far more heterogeneous – 24 languages and 27 different nationalities, each with their own jurisdiction. All in all against all odds and still Instant SEPA is in place (not to mention the national mobile account-to-account solutions).
Technical debt does not explain the absense of instant payments in the US. I'm convinced that the real reason lies in the imbalance between political and corporate will. Or put differently: an effect of what happens when corporate will dictates (finances) political will.
There was no return for the last decade because we had zero interest rates the whole time.
Australia implemented Osko from scratch in 4 years and it took maybe 2 more before every main bank was using it. There's no need to wait for everyone.
They did https://en.wikipedia.org/wiki/Zelle
> The initial release of the FedNow Service provides baseline functionality supporting market needs for a range of use cases, including those growing in demand such as account-to-account (A2A) transfers and bill pay.
https://www.frbservices.org/financial-services/fednow/about....
I've never seen Zelle suggested for bill pay. I've tried to use Zelle for account-to-account transfers, but it was obvious this wasn't the intention; I think I had one bank account tied to my email and another to a bank account tried to my phone number so I could send money to myself (the intention seems to be a person only sends/receives from one bank account) and the limits are very, very low. When I was trying this, the cap seemed to be secret and vary institution to institution.
[1] https://www.zellepay.com/faq/there-limit-how-much-money-i-ca...
Separate from this, wire transfers are near-instant during business hours. Most banks surcharge these for standard customers, but all the big banks have wire fee waivers on certain account tiers.
There's also the "accidental" transfer method of over-refunding a debit card, which used to be a sketchy fintech trick but is now straight up supported by Visa.
Sometimes they offer bill pay services which don't guarantee prompt delivery (in fact, often imply that they might fall back to sending a physical check through literal postal mail), but in practice frequently enough do go through instantly by whatever means the bank happened to find convenient.
There's a cost to being the first to invent infrastructure. Others can stand on your shoulders and build improvements, while you're stuck with "version 1.0".
Other nations might have instant payments for a good while, but the US had viable banking and a postal service for more than 200 years. The cost of being first is sometimes being last to upgrade. :/ see also: China and trains.
edit: come at me!
The postal services of many European countries also predate the USA.
Australia in the late 90s had instant intra bank ACH transfers. Even inter bank was within 15 minutes. And not exactly a regulation free market.
It's after the first 4 that you go from trillions to billions in assets. They should have some reasonable pull. 10 should be still a low enough number to make an agreement and effectively make the rest follow or lose out.
US Banks are forced to do new things all the time to remain compliant (PCI anyone?)...and they get it done.
This is not getting done because the banks make a lot of money not doing it, and lobby to keep it that way
https://www.statista.com/statistics/1211692/australia-number...
Your right in thinking the situation is different between the USA and Australia, but the different isn't 4ish vs 4,000 (it's really 100ish vs 4,000).
The immediate reason is that Australia solves these problems from the top down. We've done it over and over in banking. Credit cards were pushed down decades ago (ergo, we haven't needed cheques in that long), then EFTPOS with Chip&Pin (no signature) was pushed down, plus a list of other things. The latest thing (in the last few years) is the Reserve bank of Australia's new payments platform: https://www.rba.gov.au/payments-and-infrastructure/new-payme.... Osko is a instantaneous bank transfer system for us retail plebs that is built on top of it. Meanwhile the USA hasn't pulled this off once.
If you look deeper at Australia, you will see it isn't just banking. There was a recent headline here about engineered stone being banned. Wiping out an industry was Australias solution to it killing too many tradesmen in their 30's. In general strong federal level laws aimed at creating efficient markets is something the Australian system does, and it's something Australia's seem very comfortable with. The USA on the other hand is just hopeless at it, and the USA voting public phobia's about "big government" boil to the surface every time they try. An example of something the rest of the world pulled on that the USA can't: metric. And without that sort of leadership from the top you have no hope of corralling a herd of banks so they move in the same direction.
https://www.rba.gov.au/payments-and-infrastructure/new-payme...
Neither the government nor the banks can compete with tech startups in, well, tech, so they do so with overwrought legislation, nonsense rules, horribly outdated and absurd security practices, and more.
God, everything about the banking industry in the US is such shit. From a complete misunderstanding of the very fundamentals of security to forming a sort of moat with regulation to the government's incompetent inability to actually push FedNow to completion and adoption.
It's just a shameful, massive clusterfuck that describes everything wrong with the government's and the banks' approach to technology.
Assuming this is actually correct, I agree with you that this would be pretty successful. Although it still seems like FedNow should've existed years ago. I can deposit a check using the supercomputer/high-res-camera I carry around in my pocket, using a global information network. But it still takes 3 days for ACH to do its things. Companies can do hard things with the right incentives.
>Big banks, which spent more than $1 billion on their own real-time payments system, lobbied to stop the Fed from developing FedNow, which would compete with their network.
Seems like the incentives were in the wrong direction.
All of our major banks have PayID, which means you send money to a mobile number and the transaction is instant.
I agree 100% what you have said. Just showing that there is improvement in this space.
Having said that, Australia had Visa Paywave completely rolled out and ubiquitous before the US did... believe it or not
But you may also consider that if this is an “issue” for you, CBT therapy (that’s with a T, not a D) has helped a lot of people with extreme anxiety. Look into it, or don’t: it’s up to you :)
Why would banks be incentivized to speed up this process? They make money off the delay and get to blame the Federal government. Its the same reason a purchase can be done instantly but then it takes up-to (10) business days to be refunded. Banks and retailers make interest off the money they hold onto. Being able to make money off the refund is a probable reason why they are even offered. Otherwise it would be all-sales-final.
I think you vastly overestimate the amount of interest a retailer can make on that money vs. the cost of processing the refund, potentially not being able to resell already unpacked goods etc.
Purchases and refunds are also cleared and settled exactly as quickly, i.e. usually on the next business day.
In instances where you have to ship the defective product back. They don't send you an over-night, next day label to get the product back to them as soon as possible. They send it ground. So you paid for a product, you then wait for the product, you then call to get a refund, you ship it back, they receive and process and then you get refunded your original amount. That could be two weeks, even though your refund was settled next business day.
I'd be surprised if any retailer takes a loss with a refund that they can't send back to the manufacturer or write off.
It also seems that there isn't any set refund time limit and varies per state in the US.[1]
[1] https://www.freeprivacypolicy.com/blog/return-refund-us-laws...
The same thing that happens when you make a purchase on a Friday: It most likely gets posted to your account the following Monday. No clearing (or at least settlement) on the weekend goes both ways.
When I make a purchase I don't get to decide when to run the batch job for it to post/settle. Retailers however can determine when they want to actually process refunds. What can a customer complain about when the posted refund shows up on the following Monday, Tuesday, Friday, two weeks later?
To further my point of retailers not being incentivized to process your refund quickly there was a small study done that delaying refunds had customers "re-spending" the refund before it had fulled settled.[2]
[1] https://www.freeprivacypolicy.com/blog/return-refund-us-laws...
[2] https://hbr.org/2023/06/how-retailers-can-capitalize-on-the-...
IMF eLibrary with some example scenarios[2]. Granted they speak of most of the float data being analyzed with checks, it doesn't seem unreasonable to replace "check" with "credit card" transaction.
[1] https://www.investopedia.com/terms/f/float.asp
[2] https://www.elibrary.imf.org/display/book/9781557753861/ch10...
Looks like so far OpenAI, Google/DeepMind and Anthropic are ahead of Chinese companies in term of AI, but for how long?
If not for Elon Musk, China today would completely dominate EV and space launch industries.
The entrenched players figured out that they could instead of develop, research, and make new stuff, they could cripple existing stuff, and turn everything into a rental. And the players who showed up figured the exact same.
What do we get? A stagnating country. And nobody is willing to budge.
Every time I try to look, I just get depressed. There is no voting our way out of this. We're solidly on our way to 3rd world nation status... in fact much of the internal parts of our country are exactly that.
> Even more worrying it's China that in many areas leads the world - best highway, railroad, 5G networks, digital payments everywhere, huge production of electric cars, buses and batteries.
https://twitter.com/alvinfoo/status/1448461361181184005
China rail 2008 vs 2020.
Chinese Taxi 1 minute EV battery swap: https://www.youtube.com/watch?v=anXQfRuAkZw
Chinese massive reduction in pollution https://epic.uchicago.edu/insights/china-has-quickly-and-sha...
Chinese mega highways: https://www.youtube.com/watch?v=80IFicuNrQg
Whereas the USA can't get get its thumbs out of its collective asses to build even a moderately decent train network. The USA is a failing state. Can't wait till they start lashing out with all their hyper-futuristic weaponry our money goes to.
Would you rather be given $10M in a US bank account, or $10M worth of Yuan in a Chinese bank account?
Its all about diversifying your wealth. Hell, even the elites who run HN/Ycombinator have their own escape 'end of the world bunker' in New Zealand.
https://www.bloomberg.com/news/articles/2020-04-19/-we-neede...
Try harder.
Because it's wrong. America remains a net investment destination [1]. China is a net investor [2]. These metrics can't be evaluated in a vacuum, but broadly speaking, foreigners invest in America; the Chinese invest abroad.
> even the elites who run HN/Ycombinator have their own escape 'end of the world bunker' in New Zealand.
This is a silly meme. For starters, if America goes fascist it's not like they'll blanche because the kiwis said no.
[1] https://www.bea.gov/news/2023/us-international-investment-po...
The worse thing is that the west providing a place for corrupt individuals.