An economy where people are financially resilient and have access to economic mobility and advancement is a healthy economy. Instant payments play an important role in advancing this goal.
Why? Because adoption of instant payments fosters a more inclusive economy by improving cash-flow management, increasing the consumer and business confidence in financial services, stimulating product innovation that better serves account holders – and much more.
A significant percentage of U.S. households meet the definition of financially fragile, that is, they would be unable to come up with $2,000 through assets, borrowing or friends and family within one month.
Resource constraints faced by small businesses are also well documented. The Federal Reserve Bank Small Business Credit Survey of 2019 revealed that two-thirds of small businesses faced financial challenges in the prior 12 months. Paying operating expenses was reported as a challenge by 43% of small employer firms, debt payments by 30%, and purchasing inventory or supplies by19%.
In addition to the resource constraints of small businesses, many consumers live paycheck to paycheck, so they face similar issues. According to a Faster Payments Council report, the figure could be between half and three quarters of U.S. households.
Both underserved businesses and consumers tend to need cash quickly, so waiting for mailed check payments, which can be lost, stolen, or simply delayed, can mean they are late on making a payment to a vendor or biller and thus be on the hook for expensive late fees. Even if a consumer or a small business is to receive checks regularly (e.g., end of every month, every two weeks, etc.), the uncertainty of U.S. mail delivery means no one can count on a mailed check arriving in a timely manner.
Minority-owned, owner-operated and other small businesses have the same issue with cash flow. Research has consistently found that, compared with larger more established enterprises, small and mid-sized businesses (SMBs)and minority-owned businesses have less cash on hand than do other businesses. They also have more limited access to mainstream financial services that can be sources of bridge funding when cash flow is constrained.
However, with instant payments, recipients of these payments can count on them not only being on time, but earlier than if sent via mail. Plus, there’s no need to deposit the check. With an instant payment, the funds go directly into the recipient’s account.
According to a report from the Federal Reserve Bank of Atlanta, instant payments also can help meet the needs of the 33.2 million small businesses in the United States by developing features like real-time transaction analysis, which can improve checkout conversions and reduce declined payments, as well as improve cash flow management.
Speedy payment processes can help attract new customers and top talent as well. For example, in today’s highly competitive job market, small- and medium-sized businesses that offer instant payroll could become more attractive to potential employees and be in a better position to retain talent.
Faster payments present a multitude of benefits for consumers and businesses alike, especially those who are underserved. Financial institutions that take steps to make faster payments possible will play a key role in fostering a more inclusive economy.
If your institution is looking to bring real-time payments to account holders, let’s talk!