By Lou Grilli
Faster payments are beginning to replace some transactions that can benefit from being just that – faster. Many articles and thought leadership pieces focus on how faster payments can create efficiencies for big banks and financial institutions, while also touting the advantages they can bring to business-to-business (B2B) payments.
Although B2B industries that still rely heavily on paper checks to move money certainly benefit from faster payments, there are other industries – including the credit union space – that can realize benefits as well.
Take payroll, for example. The way employees and contractors are paid has not changed much since paychecks went electronic, with most employers continuing to pay employees on a bi-weekly, monthly or other set schedule. What has changed, however, is the expectation of many employees surrounding how quickly funds reach their bank accounts.
Two Drivers
Two new technologies are driving this expedited expectation. First, payroll companies have developed on-demand pay, also referred to as earned wage access, which allows a worker’s paycheck – including calculations for deductions and withholdings – to be disbursed electronically at the end of a shift. The second is faster payments, including real-time payments and push-to-card, both of which make funds available for spending in the recipient’s account within minutes or even seconds.
Numerous companies, along with the gig economy, have jumped on these new faster payments capabilities. Paychex, one of the largest payroll solution providers, last year became the first payroll outsource company to start sending payroll through The Clearing House (TCH) Real-Time Payments platform. ADP announced it would take advantage of faster payments to process off-cycle payments to employees. Uber offers its drivers and grocery deliverers the ability to cash out with Instant Pay up to five times per day, while DoorDash lets drivers cash out their earnings daily, rather than waiting for their weekly direct deposit.
Walmart, too, recognized the need for its associates to have quick access to funds at the end of a shift, which in some cases helped eliminate the need for costly payday loans.
While payroll as a use case for faster payments may be stealing headlines, there are many more that can make lives better for consumers. Account-to-account transfers is one such situation: Retirees, for example, who take a monthly distribution from an IRA held in a brokerage account typically have to wait days for the money to show up in a share draft account or checking account. During that time, there is no visibility into the location of those funds or progress of the transfer. With faster payments, funds are settled and available in the receiving account immediately. Even better, transfers happen instantly on nights, weekends and holidays.
Ripe for Replacement
Retail wire transfers are especially ripe for replacement by faster payments. Wire transactions are costly and time bound, as they can only be conducted during bank business hours. But some transactions, such as buying a car or boat over a holiday weekend, could take advantage of immediacy, irrevocability and 24/7 availability.
For the time being, wire transfers will continue to play an important role since real-time payments platforms are currently limited to $100,000. It is expected this threshold will increase over time.
Small businesses, even sole proprietor businesses, can take advantage of instant funds availability as well. A home remodeler needing to buy materials using funds from a homeowner’s progress payment does not have to wait for the funds to settle or float the money to continue the project, for example.
These are just a few use cases that dispel the myth that faster payments are only for big banks. More importantly, each of these examples fits squarely within the typical profile of credit union members. The DoorDash driver, the retiree and the home remodeler could all be credit union members who can benefit from having access to funds sooner rather than later.
Lou Grilli is a Senior Innovation Strategist at PSCU. In this role, Lou is tasked with building and shaping a superior payment and member experience capability for PSCU and its Owner credit unions. Lou’s long career in payments includes product management, product development and thought leadership in credit, debit, loyalty, mobile payments and digital wallets. Lou has spent the last six years in roles dedicated to the credit union industry.