US banks remain far behind on big tech issue

Home to tech behemoths like Amazon, Facebook and Google, one would think that the United States would have a mobile payments ecosystem that's both advanced and convenient. Instead, the U.S. struggles to keep pace with countries like China and the U.K.

For example, while more than 80% of Chinese consumers used mobile payments last year, adoption rates cracked less than 10% in the U.S. (odd, considering more than 81% of Americans own a smartphone). In today's digital age, spending and moving money should be like sending an email: instant. It's simply the digital movement of data. So why are we not there yet?

Stuck in slow, antiquated rails

In the past 45 years, we haven't really had a fundamental change in payment rails that handle a large majority of U.S. domestic payments. The ACH network, which handles electronic payments in the U.S., processes tens of billions of transactions per year including salaries, Social Security payments, mortgage and credit card payments and funds sent between friends' accounts.

While the ACH system has seen some improvements over the last few years, it fundamentally still operates on the same design principles it started with decades ago - a time when it was disrupting paper checks as a method of payment. "Other countries have recognized how having faster flow of, and access to, funds increases financial inclusion, lowers fees and creates faster access to capital - all a boon for the economy."

Since then, we have seen massive innovation in the payments industry in how consumers and businesses use financial services, but the underlying rails that support these new experiences are still the same. This leads to new experiences still being stuck with the slowness of the old system.

Meanwhile, other countries have recognized how having faster flow of, and access to, funds increases financial inclusion, lowers fees and creates faster access to capital - all a boon for the economy. Hence, governments have invested in upgrading their payment infrastructure to real-time payment systems and have seen their citizens benefit.

In the hopes of finding a better solution, I, alongside global fintech companies, recently testified before the House Financial Services Committee's Task Force on Financial Technology to call on the Federal Reserve to continue efforts to create an equitable real-time payments framework. You can find the written testimony here.

Once implemented, "FedNow" will be a real-time gross settlement system that settles retail payments by debiting and crediting an institution's account(s) with a Federal Reserve Bank. Alongside this, I proposed that the Fed should enable 24x7x365 access to a liquidity tool like FedWire for all financial institutions.

The hurdles preventing innovation While newer real-time payment systems will help the flow of funds, there is still a large hurdle that prevents real access of faster payments and innovative financial services at the cheapest cost to consumers and businesses. This is the lack of direct access to the domestic payment rails for non-banks. Unlike other countries, non-banks are dependent on big banks to gain access to payment systems in the U.S.

Preventing direct access to the payment rails and forcing access via banks leads to lower competition and higher costs for U.S. consumers and businesses. Also, such a model adds more inherent risk to the financial system as a handful of banks become access points for all non-banks to gain access.

This makes said banks single points of failure for a large number of financial services that people start to depend on, leading to a large impact if these partner banks have issues. Faster payments support financial inclusion, helping consumers avoid hefty fees from overdraft fees and check cashing. These systems also unlock working capital for small businesses who otherwise have to wait days for money to appear in their accounts.