Emergence of Immediate Funds Transfer as a General-Purpose Means of Payment

Article excerpt

Introduction and summary

In a modern economy, we pay for goods and services and trade in financial markets by transferring money held in accounts with banks. For the better part of the last century in the United States, most noncash payments were made with the paper check, a payment instrument that met most needs for payment services. Since the mid-1990s, use of the paper check has been in decline (Gerdes, 2008), a development that reflects technological advances and innovations by providers of payment services in response to needs for new and different payment instruments. Today, individuals, businesses, and governments can choose from a variety of payment instruments, each of which is designed to meet their specific needs for attributes such as certainty, speed, security, convenience, and cost (Foster et al., 2010). The most advanced means of transferring money between bank accounts is immediate funds transfer OFT), which allows senders to pay receivers electronically in a highly convenient, certain, and secure manner, at low cost with no or minimal delay in the receivers' receipt and use of funds.

Today in the United States, IFT payments made through the banking system are mostly limited to large business transactions, interbank transfers, and specialized financial market transactions involving purchases of securities and the like. In total, these larger payments account for a small proportion of the total number of payments made throughout the economy. There is increasing evidence that the popularity of IFT is growing for everyday use, such as consumer purchases, payments between individuals, and small business accounts payable (Hough et al., 2010). To date, however, most general-purpose IFT payments are made on systems operated by nonbanks, the most familiar being PayPal. (1) The coverage of IFT systems supported by nonbank companies is limited to their closed customer groups, and transfers are made not in bank money but rather in special units of account defined by the nonbanks.

A notable development in a number of countries around the world is the everyday use of IFT for general-purpose payments using money held in accounts at banks. In these countries, banks have invested in applied technologies that allow them to provide low-cost IFT services to the general public, taking advantage of established national clearing and settlement arrangements that link all bank accounts together. As IFT innovators, banks in other countries are working together collectively and in cooperation with public authorities, such as central banks, to provide national clearing and settlement for the new IFT service.

This article examines the emergence of IFT as a general-purpose means of payment in the U.S. and in four other countries. We identify the public policy and business issues that arise when a new means of payment is introduced. We describe the attributes of payment instruments that users find attractive and compare the attribute profiles of different kinds of instruments, including IFT. We examine demand for IFT in the U.S. and present four international case studies of IFT. Finally, we discuss barriers to adoption of IFT in the U.S.

Payment attributes

Payments are made to satisfy personal or commercial obligations between and among individuals, businesses (including nonprofits), and governments. Cash is the most basic and widely used means of payment by individuals in industrialized countries for transactions up to about $25 (Rysman, 2010; Smith, 2010). Apart from small-value payments, however, cash is not a preferred means of payment. (2) Most money is held in transaction accounts at depository institutions. (3) Payment instruments that provide access to this "deposit money," such as checks and debit cards, are the primary means of making payments (See box 1 for discussion of the bank payment business). Payment instruments are generally either credit transfers, whereby a payer (sender) directly authorizes the movement of money, or debit transfers, whereby a sender indirectly authorizes the movement of money via the payee (receiver). …