The US Instant Payment Challenge: Differences with Europe

The history of instant payments dates back to 1973, when Japan introduced the Zengin payment system, the first of its kind. This paved the way for other countries to develop their own instant payment systems. In Europe, Switzerland was the first to launch its SIC system in 1987, followed by the UK's Faster Payments in 2008, and SEPA Instant Payments in 2017. In the UK, Faster Payments have become an essential tool for consumers, revolutionising the way they handle their finances. Despite slower adoption in Europe due to a lack of PSPs (Payment Service Providers) connecting to the scheme, the European Commission aims to change this by mandating SEPA Instant access for a large group of PSPs. This has led to instant payments becoming the norm for domestic transfers in multiple European countries.

In the United States, RTP has been in operation since 2017, and the market is eagerly awaiting the release of FedNow, an instant payment scheme managed directly by the Federal Reserve, which is expected to be a major turning point in the US market. The question remains whether instant payments will ever become as mainstream in the United States as they have in the UK or Europe. Differences in consumer behaviour and the regulatory landscape suggest that there is still a long way to go for instant payments to live up to the hype surrounding them.

According to the Federal Reserve Bank of San Francisco's 2022 report on consumer payment choices, the evolution of consumer behaviour in the United States in recent years is depicted in the figure below. There has been a decline in cash and debit card payments and an increase in credit card and mobile payments, while ACH payments have remained steady, accounting for 10-12% of all payments. It is crucial to note that, from a consumer's perspective, payments made through debit cards, credit cards, cash, and mobile are already considered instant. This means that, in 2021, at least 80% of payments made by consumers in the United States are instant. This highlights the importance of understanding the major advantage of instant payments - their speed and ease of access.

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A significant challenge facing instant payments in the United States is that most payment types are already perceived as instant by consumers. For example, card payments, check imaging, and mobile payments all provide consumers with direct access to their funds at the time of the transaction, even though the settlement of these transactions in the background may not be instant.

Another challenge is that consumer protection for account-to-account payments is not as developed as it is for card payments. A study by the Federal Reserve Bank of Chicago, entitled "Credit, Debit, or ACH: Consequences & Liabilities - A Comparison of the Differences in Consumer Liabilities," explored the regulatory disparity between account-to-account payments and card payments. The research found that while a consumer's liability for unauthorised transactions is generally limited, it can increase for debit card and ACH users if they do not provide timely notice of unauthorised transactions and there continue to be unauthorised transactions on the account. The study also found that the practical consequences of unauthorised or erroneous transactions can be more severe when a debit card or the ACH is used than when a credit card is involved, based on the nature of the account being charged. This exacerbates the potential disadvantages of using debit cards or the ACH for internet sales transactions.

From a consumer's perspective, it is considered safer to share credit card information than routing and account numbers with different individuals when making a payment. The availability of payment services like Zelle reduces the need to share sensitive account information while still providing the user with the illusion of an immediate payment. However, to use FedNow and RTP, US consumers will have to become comfortable with sharing account information directly with the recipient in order to receive the payment instantly. In Europe, the protection of account-to-account transactions is managed differently, with legal measures in place to prevent unauthorised transactions and disputes. This allows European consumers to feel secure in sharing account information with anyone who requires it for making a payment.

For US consumers, there is no advantage in using instant payment mechanisms as their current payment methods are perceived as immediate. The lack of regulatory safeguards for secure transactions means that US consumers are not yet comfortable with using instant payments. The primary use of instant payments in the US will likely be for corporate purposes, such as payroll, disbursements, and other scenarios requiring rapid settlement. Some of the underlying systems used by mobile apps like Zelle may also seek to reduce settlement time and risk for the banks by leveraging instant payments. However, it is unlikely that a US consumer will use instant payments to settle a restaurant bill with a friend anytime soon.

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