In all the exciting news about the development of real-time and faster payments, a message is being broadcasted that the current means of delivering payments to consumers, particularly payroll deposits, by check or ACH direct deposit are too slow.
Critics argue that the slowness of these payment methods has a negative impact on those who are living paycheck to paycheck. While this is a very real problem that some consumers face, the advent of real-time and faster payments does not mean that payday will magically come earlier or that checks will clear in an instant. An employee paid via ACH direct deposit every other Friday will still get paid every other Friday, even if that deposit was made through a real time payment transaction.
As Jane Larimer, president and CEO of NACHA, wrote in the American Banker:
“Direct deposit via the automated clearing house (ACH) network is the way in which nearly 93% of Americans get paid, according to a 2018 American Payroll Association survey.
Most importantly, by using direct deposit, workers get the money in their accounts at the opening of business on payday, without having to wait for a paycheck to clear. For example, an employee with a payday on Aug. 30 using direct deposit will have funds available for withdrawal or to cover payments at the start of that day, prior to Labor Day holiday weekend.
We are starting to see a number of general purpose reloadable prepaid card providers offer consumers access to their payroll direct deposit two days early and there are solutions available through providers like FlexWage and DailyPay that offer options for employees of participating employers to receive a portion of their earned wages before pay day, but these are unique programs.
Will real-time and faster payments clear paper payroll checks more quickly for the 7% of American getting paid that way? Quite doubtful. That would require taking check images once they are deposited and sending them through a real-time network. It would also require investment in a new process for paper checks, which would be a poor investment given the decline in check use.
Will employers stop writing payroll checks in favor of a real-time disbursement to their employees? Perhaps, but businesses have had a more efficient and less expensive alternative to checks for the last 40 years: ACH. The 2015 AFP payment study concluded that the median cost of writing a check for a business was $3.00. The median cost of an ACH transaction to a business was $.57 including both internal and external costs.
If businesses haven’t make the switch to ACH yet, what will compel them to use a real-time or faster payment rail? While faster and real-time payments open up a new world of better and more efficient transactions, let’s be clear about what it will and will not accomplish.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group