By Dr. Jorge Jimenez, President, Juniper Payments
Commerce has come a long way — from ancient bartering to the modern fiat currency system we use today, from sending money across the country via telegram to transferring funds electronically from your computer or mobile phone. Despite how far we’ve come, considerable advances in payment technologies have not made it to the U.S. until the last decade. While the rest of the world is seemingly 15 years ahead, we have continued mailing checks to pay bills, as technology has not been readily available or accessible for financial institutions to implement without high costs and extra resources. Thanks to APIs and a holistic approach to automation, adopting and deploying instant payment technologies and rails is becoming more accessible.
The time to adopt these emerging technologies must be now — or financial institutions risk not meeting their customers’ evolving expectations. Financial institutions are already losing deposits due to consumers’ use of PayPal, Venmo and similar applications – losses to which they should pay close attention. We live in a “now“ world – consumers want instant gratification in nearly all aspects of everyday living, including how they bank and make payments, and they are not waiting on banks to provide the pipelines. So what main electronic payment options are available?
Wire Transfers and ACH Payments
Wire transfers – the original “faster payments” – go back to when long-distance communication was done via telegraph wires. Today, making a wire transfer or payment means transmitting funds electronically between people or businesses in real time between financial institutions. While no physical banknotes are exchanged, the balances of the involved financial institutions will be updated in real time by the Federal Reserve (or CHIPS, the Clearing House Interbank Payments System). Wire transfers can efficiently send larger transactions from one financial institution to another, and the transfer will be executed instantly. Domestic wire transfers could post in the beneficiary’s account instantly or by the end of the business day, depending on the level of automation the financial institution implements.
While ACH – which is governed by Nacha (originally the National Automated Clearing House Association), the ACH network rules creator – was formed in 1974, the first ACH transactions started before then to help improve the U.S. payments system and reduce the number of paper checks processed. ACH transfers typically involve loan and bill payments, while employers like to use the network to pay their employees with direct deposits. Businesses use the ACH network to send payments to vendors, receive payments from customers, and transfer money from accounts at different financial institutions. The ACH network processed 30 billion electronic payments in the U.S. valued at $76.7 trillion in 2022, according to Nacha, and it keeps growing.
So what are the differences between wire transfers and ACH transfers?
- Reversibility: Wire transfers are final and irrevocable. ACH payments can be reversed. (I would not advise taking payment for a house on ACH!)
- Cost: Wire transfer costs range from $10-$35 for domestic transfers to end users (international wire transfers cost even more). ACH payments are very low cost, sometimes just a few cents or even free to end users.
- Speed: Wire transfers can be sent and received on the same day. ACH may be same day, but most are next day. Neither wire transfers nor ACH transfers can be received after-hours, on the weekend, or on a federal bank holiday.
Speed and cost are probably the biggest detriments to the use of wire and ACH transfers in today’s instant, on-demand world. Instant payments cover this gap — providing the instantaneous speed that wire and ACH transfers lack. It makes it possible to pay payroll at midnight or purchase a motorcycle on a weekend without loans, credit cards or an iffy personal check. Instant payments can be made and received 24/7, 365 days a year, giving greater speed and control to consumers and businesses. In 2017, The Clearing House introduced its version of instant payments, called Real Time Payments (RTP). The Federal Reserve’s version of instant payments, called “FedNow Service,” will launch this July, helping make instant payments more accessible. (We shared more about instant payment basics in a previous blog.)
Instant Payments Benefits
There are significant benefits for customers and financial institutions when offering instant payments, especially when integrated with their mobile banking application. Because bank customers already know and trust their bank, they are more willing to look to them for new tools and services. Financial institutions also see the following benefits:
- Reduced Errors: Providing access to these new instant payments online eliminates manual uploads and re-entry, reducing the likelihood of errors throughout the origination process. Through applications that can be customized to your financial institution, threshold levels can be monitored, and payments can be immediately delivered to the Federal Reserve Bank through a FedLine Direct Interface.
- Improved Efficiency: Partnering with a fintech service provider like Juniper Payments that has a proven history of providing reliable online technology in a single platform for operational convenience – including integrated origination, reporting, auditing, transmission and monitoring of payments – will help realize operational efficiencies.
- Scalable for Growth: A positive user experience will help grow your instant payments service.
While there are many positives of instant payments, businesses and consumers do need to be cautious of fraud and scams, as transactions made through those systems are final and cannot be revoked, unlike credit card transactions. Currently, the liability for any issues that arise falls on the consumer using these systems. It will be paramount for financial institutions to look at fraud holistically as they plan to send to the instant payments platform.
Instant payments offer benefits for consumers and financial institutions alike, and it is crucial for banks to take advantage of the upcoming increased access to these instant payment rails to offer the services that customers are coming to expect — and demand — to stay competitive in the industry. It may seem daunting, but with the right partner, it is possible to maximize opportunities with these new payment rails. Fintech financial service providers can also help financial institutions better automate back-office processes for wire and ACH to finally automate transaction posting, and these efficiencies can be a stepping stone to deploying an instant payments solution.
Make sure to select a fintech partner with significant knowledge of the systems and tools required and established connectivity to The Federal Reserve and The Clearing House. Juniper Payments was one of the FedNow Service’s pilot service providers and recently completed testing and certification in FedNow Service, proving they are ready to help financial institutions seamlessly reach their instant payment goals.
Remain cognizant that “time [literally] is money” in today’s world, which means financial institutions must value their customers’ time and their own as consumers are accustomed to experiencing results in an instant or near-instant real time. It is critical for financial institutions to innovate and optimize their payment systems to be instant to stay in line – or even ahead – of what customers expect.
Dr. Jimenez is the President of Juniper Payments and Global Fintech Forum LLC, which collaborate on international and instant payments for 3,000 bank customers. He is an expert in payments systems, fintech, and international relations. Dr. Jimenez has worked with governments and central banks in over 50 countries to implement new payment infrastructures, including the European Central Bank, U.S. Treasury, and Federal Reserve, where he was Product Development Director for their international ACH solution.
