The journey to quicker money movement with FedNow
The journey to our modern day payments landscape is surprisingly linear. There are a number of different innovations that have all brought us to the current environment. These new technologies are improving the speed, safety, and settlement of payments. The forefront of all of these is in the ACH space where new services like Same Day ACH and FedNow are starting to make moving money from one account to another within the same day possible.
So what are those innovations?
It all started with Magnetic Ink Character Recognition (MICR). In the 1950’s, the American Bankers Association invented a way to speed up check clearing and reduce fraud. At the time, clearing checks was entirely manual and fraud detection was simply comparing customer signatures where it was available.
Magnetic Ink Character Recognition allowed banks to clear checks automatically and quickly simply by scanning the routing numbers on the checks. It also added a new line of defense against check fraud. The ink had to be a specific kind in order for a check to process, which made it much harder for fraudsters to forge checks.
At the same time as MICR was being rolled out, Diners Club (later to become Discover Card) launched in 1950, with the first universal charge card offered to consumers in 1952. This card allowed customers to make purchases and then settle the entire balance at the end of the month. Charge cards had existed since the 1920’s but were tied to specific stores. The Diners Club card was the first one to be accepted at more than one store. American Express launched the world’s first credit card in 1958. BankAmericard was launched in 1976 by Bank of America and was later rebranded to Visa.
The final innovation on the way to universal revolving credit was the magnetic stripe. IBM developed this in 1969 and it started the credit revolution. The next real innovation in the payment space was the adoption of EMV (Europay, MasterCard and Visa). Adding the chip to cards has reduced in-person fraud significantly. MasterCard reported a 54% drop in fraud following the adoption of that new technology.
All of these innovations have been leading us to being able to pay more quickly, more safely, and to get money moved to where it needs to be at an ever-increasing rate. The actual process of moving money though is still done over the traditional ACH network. It takes 3–4 days for money to follow the payment.
Today, the real innovations are in the money movement space; new companies and technologies are being launched so as to get money from one place to another within 24 hours. Companies like Zelle, and Venmo are at the frontier of this revolution. They capture a specific place within the economy by guaranteeing that money gets from one place to another within 24 hours. The actual movement of the money happens through the Federal Reserve’s ACH network and usually takes 2–3 days, but these companies make money by assuming the risk and sending money before it settles.
The Federal Reserve and the Automated Clearing House network are taking notice and have started to innovate with things like Same Day ACH and FedNow. These new technologies allow for sums of money to be moved either the same day as it was sent in the case of Same Day ACH, and instantly for the FedNow platform.
The innovations in the payment space have given rise to a need for faster money movement. Getting the funds to match with the faster payment processing is a priority for intergovernmental agencies as well as Banks. Services like FedNow offer an inexpensive and quick way to offer P2P payments for both consumers and small businesses.
The Road to FedNow...
Image Credit: Trish Brumett for Ippon Technologies
How to keep up with the innovation?
As the internet evolves and as innovation in the marketplace continues, it is important to make sure customers are given access to the latest and safest technology. Integrating new technologies into older software platforms can present technical challenges that require more than just out-of-the-box thinking. Ippon Technologies can help with both the planning and execution phase of these types of projects. More examples of our Success Stories can be found on our site, or contact us to talk to one of our payment Subject Matter Experts, and Let’s discuss your project.
Written by James EASTLEY
Short bio: James is a Product Manager at Ippon Technologies USA with over 15 years of experience working in the Financial Services and Payments industries.