Considering the speed of technological progress over the past two decades, the financial sector has moved surprisingly slow. It can sometimes take up to several days — a lifetime in tech terms — for payments to “clear” into a checking account, and sending or receiving money internationally can take even longer, depending on how the payment is made.
Fortunately, thanks to the proliferation of cryptocurrencies such as Bitcoin and the deployment of real-time payment systems, it’s going to get a lot easier for consumers and merchants to settle their bills and get paid. We partnered with Braintree to show you the latest developments toward real-time domestic and international payments, highlighting the key institutions that are making it possible.
Online payment systems are only the beginning
Online payment services like PayPal and Venmo have surged in popularity in recent years because they allow funds to be transferred in real time. Nevertheless, the transfer of funds only happens in real time when money moves within the payment platform itself. Moving these funds into an actual bank account can take anywhere from three to five business days. This is because the transfer of funds is processed by an intermediary called an automated clearing house, or ACH (you’ve probably seen this acronym on your bank statement), which typically executes credits and debits in batches, at the end of the business day, adding to the delay.
Automated clearing houses process a whopping US$79 trillion worth of consumer transactions each year, so batch processing all money transfers between institutions in one daily installment makes a lot of sense: It’s generally cheaper (fee-wise) and it’s less complicated than handling millions of separate third-party transfers. However, the system isn’t ideal for bank clients who deal with time-sensitive issues like sending emergency funds or making a last-minute payment.
Bitcoin and the like, which allow for instant payments on a global level, offer a workaround. Bitcoin users don’t suffer from less-than-favorable currency exchange rates for their international payments, and since there are no intermediaries, they’re also able to avoid transaction fees. But cryptocurrencies — despite their accounting for millions of transactions on a daily basis — can be impractical for daily use. Bitcoin’s value is much more volatile compared to other currencies (daily fluctuations of 10 percent are not uncommon), vendors have been slow to accept it, and non-tech-savvy consumers are puzzled by it.
Although cryptocurrencies will continue to be useful in sidestepping certain money-transfer speed bumps, to achieve real usability on a commercial scale, the technology most likely needs to come from the banking industry itself.
Upgrades on the way
One of the most influential players in banking transactions is The Clearing House, the oldest banking association in the U.S., jointly owned by some of the largest banks in the world. Each day, The Clearing House processes over 65 million transactions — many of which are large-value corporate transactions — with a total value of US$2 trillion.
To speed up the settlement of these transactions, The Clearing House is developing a new system that it calls Real-time Payments, which will enable instant, round-the-clock payments for consumers and businesses.
The commercial applications of Real-time Payments include allowing businesses to instantly invoice clients, track extensive data about sent payments, refund customers, and pay suppliers.
The system is set to launch in early 2017, and the pilot programs are expected to include instant bill pay and business-to-business transactions, with new features coming in the second half of the year as more banks join the system.
Instant borderless payments, on the horizon
The Clearing House’s Real-time Payments will only be deployed domestically, but there is another initiative underway by SWIFT, a longstanding member of the financial industry, to get real-time international payments on the market.
If you’ve ever sent money from your bank to another foreign bank, chances are you’ve used a SWIFT code, which identifies participating banks to send or receive money. However, SWIFT-coded transactions can still get held up by the receiving bank’s batch processing system.
To eliminate these delays, SWIFT is launching its Global Payments Innovation Initiative in 2017, enabling member banks (75 at launch) to credit and debit their clients around the world in real time. Unlike The Clearing House’s Real-time Payments, SWIFT’s initiative is built on the existing infrastructure, in part to speed up its deployment.
One of the biggest benefits of the initiative, according to the global head of SWIFT’s banking market, Wim Raymaekers, is a cloud-based end-to-end tracking system, which will allow corporate customers to verify payment information and connect invoices to payments, increasing business-to-business transparency and reducing disruptions to product shipments.
The service will first be offered to corporate accounts, or 90 percent of the total volume of SWIFT’s network. But as is the case with many new technologies that are initially adopted by corporations, it’s likely that the service will soon trickle down to everyday consumers.
With the quickly approaching rollout of both domestic and international real-time payment systems, consumers and users will soon be able instantly send and receive money, making the wait for their funds to clear a thing of the past.
Sending and receiving money is the lifeline of any business, and thanks to advances in payment technology, your business will soon be able to do that in real time. Now that you know how your funds will be transferred, consider Braintree as your payments platform to take care of the rest.