I believe most people want to hold on to their money longer and get paid sooner. Consumers need to first use the financial system to enjoy these benefits.

The Atlanta Fed's Special Committee on Payments Inclusion has laid out seven barriers to payments inclusion with considerations addressing each. Payments inclusion is when everyone can use efficient, secure, accessible, and affordable payments services in the economy. What barriers can instant payments break down? Instant payments settle within seconds, are immediately available to the receiver, and are irrevocable. They have the potential to address at least two barriers:

  • High and unpredictable fees
  • Funds availability timing

High and unpredictable fees are a common concern for those who do not fully participate in the traditional financial system. A Consumer Financial Protection Bureau report on overdraft and non-sufficient funds (NSF) fees showed that the median fee was $35. For those with one to three overdraft fees in the last year, 51 percent were surprised by the overdraft. Furthermore, when segmented by income, education, and race, households charged with overdraft/NSF fees were more likely to come from economically disadvantaged households.

Consumers may leave traditional financial services to seek more transparency in fee structure. However, when consumers go outside the financial services system, they will likely spend more on fees in the long run. Consumers typically pay more for reloadable debit cards, payday loans, or check cashing services. Additionally, consumers who have variable or volatile pay cycles may have irregular cash flow and try to avoid fees when they seek alternative financial services that provide more control.

By allowing access to funds sooner, instant payments can alleviate uncertainty of account balances and reduce potential overdraft/NSF fees. Another benefit from instant settlement is a reduction in late fees for paying bills. Furthermore, as instant payments adoption increases, cost efficiencies will be realized in payment processing, hopefully reducing what firms need to charge customers.

Households living paycheck to paycheck or with income variability often face challenges with cash flow management. Timing of funds availability is the foremost benefit of instant payments. Federal Reserve data show that 21 percent of households with less than a high school degree report experiencing hardship from income variability. When asked about the largest emergency expense they could cover using only savings, 18 percent of adults could cover an expense only if it was under $100. Thus, the time it takes for paychecks or other fund sources to settle can be critical for vulnerable households.

For payments made to other consumers or to businesses, instant payments reduce the uncertainty that comes with settlement and credit risks. In addition to wages, other instant payments could come in the form of insurance payments, tax refunds, government benefits, or emergency payments.

The US Department of the Treasury is piloting certain types of instant payments on the FedNow service. Reaching ubiquity of instant payments will take time but faster payments will be worth the wait.

Read the Atlanta Fed paper to learn more about how instant payments can support a more inclusive economy.

Portrait photo of Lali Shaffer, payments risk expert
By Lali Shaffer, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed