Recent events such as the Robinhood-GameStop controversy and financial hardships brought on by the pandemic have cast light on a pressing underlying issue: The U.S. financial infrastructure is too slow. The snail’s pace of the system is denying consumers and businesses access to their money when they need it, with crucial tasks such as collecting a salary payment or transferring money to family members taking far too long. In a confirmation hearing earlier in March, Rohit Chopra, the newly appointed director of the Consumer Financial Protection Bureau, advocated for a “real time system” as a tool to achieve equal access. So, what’s holding us back?
Of the many policy debates that arose in February when Robinhood became a household name due to the GameStop controversy, CEO Vlad Tenev cited the two-day trade settlement policy as a key reason for the slowdown of trading. While multiday settlement might be a burden for investors, the slow speed of the U.S. payments infrastructure also negatively impacts millions of consumers and businesses every day. Though payment technology companies are leading critical innovations, they continue to be bogged down by the archaic system in place. We expect our emails and texts to send instantly—why not our money?
The outdated Automated Clearing House (ACH) Network—the most heavily used money-moving system in the U.S.—prohibits payment technology companies from truly solving problems. In 2020, the ACH Network processed 26.8 billion transactions powering $61.9 trillion of money movement. Yet only 2% of these transactions and 0.7% of the massive volume was settled on the same day.
This delay has real implications. Someone may not have received their money in time to pay rent or buy groceries, leading them further into debt. Businesses couldn’t access their money to pay suppliers or make payroll. Critical funds that could be used by charities or aid organizations to help those in need were delayed. In fact, the velocity of money—the number of times $1 is used to purchase final goods and services—is an indicator of how healthy an economy is. The faster a dollar can change hands for goods and services provided reflects an economy’s productivity. If money is stuck within the system for days, it essentially slows down our whole economy and the cycle of funds for goods and services.
For example, if funds hit bank accounts the moment payroll runs, there would be fewer people paying overdraft fees or taking out high-interest debt. In a next-generation, real-time payments system, supplementary services such as Zelle and Venmo would not need to exist.
Right now, we’re putting energy into Band-Aid solutions that deal with the symptoms of slower money movement, rather than treating the root cause. There are some banks and entire businesses that tout access to your salary a few days early, sometimes for a fee, for those worried about delays. In a real-time payment system, this is a nonexistent problem. Finally, financial apps such as Robinhood and Venmo have a feature to provide you access to a percentage of the money you transfer from your bank account once they’ve authorized the transaction, because of the fact that it takes three to five days to clear through the ACH system.
The technology we need to change this is available, but we are using it for workaround solutions, rather than improving the system in place. What’s even more alarming, these fixes are only getting more burdensome over time, and it’s consumers and businesses who are bearing the cost. This year has proven time and time again that instant, digital payments are now an expectation, and the majority of Americans—not just those with privileged access to the system—are what drive our economy. Anyone can impact the stock market, and small businesses can pivot overnight to accept digital payments with ease. Instant access to funds is critical to economic access for all.
How do we fix this? At its core, consumers are the solution. The first step is raising awareness around how implementing a real-time payments system will make a difference in achieving equal access and giving consumers more control over their money. Meanwhile, case studies from other countries, such as the U.K., point toward regulators and lawmakers as the necessary changemakers. Granting payments-technology firms access to the payments system through regulatory reform will encourage competition, foster innovation, reduce risk, and ultimately provide faster and cheaper services to consumers.
The good news is, we’re getting there. As Chopra stated during his confirmation hearing, efforts to modernize the U.S. payments system and achieve equal access are a top priority for him. If we do not move forward, millions will be forced to keep waiting for access to their hard-earned dollars, and our country will continue to lose economic value because of an antiquated payments system.
Harsh Sinha is the chief technology officer of Wise (formerly known as Transferwise).