Faster payments

What Is Faster payments?

Faster payments refer to modern payment systems that enable the near-instantaneous transfer of funds between bank accounts, often available 24 hours a day, seven days a week, including holidays. Unlike traditional payment methods, which may involve multi-day processing times, faster payments ensure that funds are credited to the recipient's financial institution account within seconds, with immediate availability for use. This category of financial technology aims to enhance the speed, efficiency, and convenience of money movement for individuals and businesses. Faster payments are a critical component of the evolving global financial landscape, driven by increasing consumer and business demand for real-time transactions.

History and Origin

The concept of accelerating payment processing has been a long-standing objective in the financial industry. Before the advent of modern faster payments, interbank transfers often relied on batch processing systems, leading to delays of one to several business days.

The United Kingdom was an early pioneer in establishing a widespread faster payment system. The UK's Faster Payments Scheme (FPS) officially launched on May 27, 2008, designed to facilitate transfers between different banks' customer accounts within a few seconds. This system represented a significant shift from older methods like BACS (Bankers' Automated Clearing Services), which typically involved a three-day clearing cycle.¹⁹, ²⁰ The introduction of FPS marked the world's first 24/7/365 instant payment system.¹⁸

Following the UK's initiative, other regions and countries developed their own instant payment infrastructures. In Europe, the European Payments Council (EPC) launched the SEPA Instant Credit Transfer (SCT Inst) scheme in November 2017.¹⁶, ¹⁷ This scheme enables transfers of up to 100,000 euros to another account within SEPA in less than ten seconds, available around the clock.¹⁴, ¹⁵

In the United States, the private sector's Real-Time Payments (RTP) network, operated by The Clearing House, launched in 2017. More recently, the Federal Reserve introduced its own instant payment service, the FedNow Service, which went live on July 20, 2023.¹², ¹³ This service allows participating U.S. banks and credit unions to transfer funds instantly, any day, at any time, aiming to expand the availability of real-time payments across the country.¹¹

Key Takeaways

• Faster payments enable near-instantaneous fund transfers, typically within seconds, available 24/7.
• They provide immediate availability of funds to the recipient, reducing the "float" period common in older systems.
• Major faster payment systems include the UK's Faster Payments Scheme, Europe's SEPA Instant Credit Transfer, and the US FedNow Service.
• While offering significant convenience, faster payments also introduce new considerations for fraud detection and cybersecurity.
• The adoption of faster payments is a global trend, driven by demand for quicker and more efficient digital payments.

Interpreting Faster payments

Interpreting faster payments involves understanding their impact on various aspects of financial transactions. For consumers, the interpretation is straightforward: money sent is money received almost immediately. This removes the uncertainty and delay associated with checks or traditional electronic transfers, making payments more akin to a cash transaction in terms of immediacy but with the security and traceability of digital systems.

For businesses, faster payments mean improved cash flow management. Companies can receive payments for goods and services in real-time, which can significantly reduce working capital needs and enhance liquidity. It also allows for immediate settlement of invoices, potentially reducing outstanding receivables. From a broader economic perspective, the widespread adoption of faster payments can foster greater efficiency in markets by accelerating the velocity of money. It also opens doors for new financial products and services built on the backbone of real-time payment processing.

Hypothetical Example

Consider Sarah, a small business owner who sells handmade crafts online. Historically, when a customer paid via a traditional bank transfer, Sarah would often wait one to three business days for the funds to clear in her account before shipping the order. This delay meant she couldn't immediately use those funds to buy more materials or pay her suppliers.

With a faster payment system, when a customer, John, purchases a craft for $50 and initiates a faster payment from his bank to Sarah's, the transaction occurs almost instantly. John receives a confirmation that the payment was sent, and within seconds, Sarah receives a notification that the $50 has been credited to her business account and is immediately available.

Sarah can now verify the payment and ship John's order on the same day. She can also immediately use the received $50 to purchase new supplies, improving her cash flow. This immediate availability of funds, facilitated by faster payments, streamlines her operations and enhances customer satisfaction.

Practical Applications

Faster payments have diverse practical applications across consumer, business, and government sectors:

• Consumer Bill Payments: Individuals can pay bills instantly, avoiding late fees and ensuring timely settlement of utilities, rent, or credit card balances.
• Peer-to-Peer (P2P) Transfers: Sending money to friends or family becomes immediate, which is useful for splitting costs, gifting, or repaying small debts.
• Business-to-Business (B2B) Payments: Companies can make and receive payments in real-time for invoices, supply chain financing, and vendor payments, significantly improving cash management and reducing settlement risk.
• Emergency Payments: In urgent situations, such as unexpected expenses or immediate payroll needs, faster payments ensure funds reach the recipient without delay.
• Gig Economy and On-Demand Payments: Freelancers and gig workers can receive payment for their services immediately upon completion, enhancing financial flexibility.
• Refunds and Disbursements: Businesses can issue instant refunds or make quick disbursements, improving customer service and operational efficiency.

For example, the FedNow Service, launched by the Federal Reserve, offers core clearing and settlement functionality and features like fraud prevention tools and request for payment capabilities, supporting a wide array of instant payment use cases across the United States.¹⁰

Limitations and Criticisms

While faster payments offer numerous advantages, they also present certain limitations and criticisms that need to be addressed by payment service providers (PSPs) and regulators.

One significant concern is the heightened risk of fraud, particularly authorized push payment (APP) fraud. Because faster payments are often irreversible once processed, fraudsters can trick individuals or businesses into sending money directly to their accounts.⁸, ⁹ By the time the fraud is detected, the funds may have already been withdrawn, making recovery difficult.⁷ For instance, the increase in instant payment adoption in certain markets has led to an uptick in fraud cases, with reported increases in consumer-authorized push payment fraud via real-time payment rails.⁵, ⁶

Another challenge is the potential for increased exposure to money laundering. The speed of these transactions can make it more difficult for financial institutions to detect and prevent illicit financial flows in real-time, as traditional anti-money laundering (AML) checks often rely on batch processing.⁴

Operational risks also exist. While faster payment systems are designed for high availability, any technical glitches or system outages can have immediate and widespread impacts due to the real-time nature of the transfers. Integrating new faster payment systems with legacy banking infrastructure can also be complex and costly for financial institutions.³ Furthermore, although the transaction limits on faster payment systems are often higher than traditional retail payments, individual banks may impose their own lower limits, which can restrict their utility for very large transactions.

Faster payments vs. Batch payments

The primary distinction between faster payments and batch payments lies in their processing speed and settlement finality.

Faster payments, by design, involve near real-time processing and immediate availability of funds. A transaction initiated as a faster payment is typically cleared and settled within seconds, and the recipient can access the funds almost instantly, 24 hours a day, seven days a week. This rapid completion is achieved through dedicated real-time gross settlement (RTGS) systems or similar infrastructures that process individual payments continuously.

In contrast, batch payments (such as those processed through the traditional Automated Clearing House (ACH) network in the U.S. or standard BACS payments in the UK) involve collecting multiple payment instructions over a period (e.g., throughout a business day) and processing them together in groups or "batches." These batches are then sent for clearing and settlement at pre-defined intervals, often once or a few times a day. Consequently, funds for batch payments are typically available to the recipient only after a delay, ranging from several hours to one or more business days. Examples of batch payments include direct deposits for payroll, recurring bill payments like a standing order, or large-volume direct debit transactions. The key difference is the immediacy of fund availability; faster payments provide it, while batch payments do not.

FAQs

Q: Are faster payments always truly "instant"?
A: While designed to be near-instant, typically completing within seconds, the exact speed can vary slightly depending on the participating financial institutions and the specific system. However, the intent and practical experience is one of immediate fund availability.

Q: Are there limits to how much money can be sent via faster payments?
A: Yes, most faster payment schemes and individual banks set transaction limits. While the scheme itself might allow for high values (e.g., the UK's Faster Payments Scheme can handle up to £1 million, though banks set their own limits), your bank's specific limits for personal or business accounts may be lower.
²
Q: Can a faster payment be reversed if I make a mistake?
A: Generally, faster payments are designed to be immediate and final, meaning they are difficult to reverse once sent, similar to handing over cash. If you send money to the wrong recipient or are a victim of fraud, you should contact your bank immediately, but recovery is not guaranteed due to the finality of the transaction.
¹
Q: What is the benefit of faster payments for businesses?
A: For businesses, faster payments improve cash flow significantly, as funds from sales or invoices are received and available instantly. This can lead to better liquidity management, faster access to working capital, and the ability to make immediate payments to suppliers or employees.

Q: How do faster payments impact consumers?
A: Consumers benefit from the convenience of sending and receiving money 24/7, enabling instant bill payments, immediate P2P transfers, and rapid access to funds, which can be crucial in emergency situations. This enhances overall financial flexibility and control over their money.