Why America Needs Real-time Payments

There are two types of people: those who never let their bank account get close to zero and those who at some point get near or below zero in their bank account. According to Aaron Klein, a fellow at the Brookings Institution (a government research center in Washington, D.C.), half of Americans have enough income and expense volatility that their bank accounts hit or get close to zero. Klein relents, “once you start getting near and hitting zero, the world becomes incredibly expensive: $35 for an overdraft, $50 for a payday loan, interest rates of 300-400%, late fees.”

We typically think that in order to solve these problems we need to increase wages and financial education, but the problem might be simpler than that. Klein states that many of these people have the money, it’s just not there yet. There’s an antiquated payment system that has funds sitting in inaccessible space for days while customers don’t have access to their paychecks. This isn’t really a problem for wealthier people, but for those living paycheck-to-paycheck, this can be extremely disadvantageous. The data proves it: there are $15 billion a year spent in overdraft fees, “real money out of a growing number of people’s pockets.”¹ A faster payment system would change all of this by people having access to their money in real time, allowing them to properly align their expenses and income.

You may wonder, though, is access of funds really the biggest cause of those living paycheck-to-paycheck running out of money? Is it possible that increasing wages, raising minimum wage, and educating these people on saving money is what’s needed? Klein argues that these solutions won’t solve anything. Minimum wage has increased several times and this problem still exists, and more telling, many people living paycheck-to-paycheck are earning far more than minimum wage—this is a problem affecting half of all Americans. And while more income and savings would be helpful, that requires a large-scale redistribution and will have other impacts to the economy and households. “The solution of faster payments reduces income inequality without requiring higher taxes, without requiring some sort of complicated distribution between people of different income levels. It simply makes the money move faster,” Klein states.

While budgeting and saving are helpful tools, he reminds “it’s very hard to budget and save when you don’t know how much money you have and when that money is available.” There is a common misconception, according to Klein, that lower-income people are not as financially educated or budget-savvy. He argues that people living paycheck-to-paycheck are actually more aware of their budget and keep closer tabs on their bank accounts than many very wealthy people, “the problem is that we have a system that doesn’t even let you know when your check is going to be available […] You deposit a check today, when can you use the money?” It’s hard to create and follow budgets when there’s uncertainty surrounding your income.

We still haven’t found a good answer for why the time it takes to clear a check hasn’t changed in 40 years. Many other countries such as England, Poland, Mexico, and South Africa have real-time payments, and the technology to do it is readily available for the U.S. to implement them, but nothing has been pushing this along.

We are already seeing outside companies like the Zell app and Clearing House’s real time payment system helping to fix this problem. Klein warns that “if the banking industry doesn’t make funds move faster, they risk uberization. The tying of the payment industry to the banking industry has been a marriage of economic logic and technological convenience for a very long time, but there’s nothing that requires that to be so.” This could be a similar situation to the taxicab system and Uber, where somebody notices the rising values and troubles with the system, comes up with an alternative, and it “catches on like wildfire.”

Source:

1. Penny Crossman, host. Aaron Klein, guest. “Why does a check take as long to clear today as it did in 1982?”American Banker. 4 Mar. 2019. Retrieved from Apple Podcasts.