Robinhood debacle revealed flawed payment system
Recent events such as the Robinhood-GameStop controversy and the financial difficulties caused by the pandemic have highlighted a pressing underlying problem: America’s financial infrastructure is too slow. The snail pace of the system prevents consumers and businesses from accessing their money when they need it, with crucial tasks such as collecting a salary payment or transferring money to members of the community. family that take too much time. In a confirmation hearing earlier in March, Rohit Chopra, the new director of the Consumer Financial Protection Bureau, recommended for a “real-time system” as a tool to achieve equal access. So what’s holding us back?
Of a lot political debates that arose in February when Robinhood became a household name due to the GameStop controversy, CEO Vlad Tenev city the two-day trade settlement policy as the main reason for the trade slowdown. While multi-day settlement can be a burden on investors, America’s sluggish payment infrastructure also negatively impacts millions of consumers and businesses every day. Although payment technology companies are leading critical innovations, they continue to get bogged down in the archaic system in place. We expect our emails and texts to be sent instantly – why not our money?
The outdated Automated Clearing House (ACH) network – the most widely used money transfer system in the United States – bars payment technology companies from really solving their problems. In 2020, the ACH Network processed 26.8 billion transactions, generating $ 61.9 trillion in money movements. Yet only 2% of these trades and 0.7% of the massive volume were settled on the same day.
This delay has real implications. Someone might not have received their money on time to pay rent or buy groceries, putting them even more in debt. Businesses couldn’t access their money to pay vendors or do payroll. Critical funds that could be used by charities or humanitarian organizations to help those in need have been delayed. In fact, the speed of money – the number of times a dollar is used to purchase final goods and services – is an indicator of the health of an economy. The faster a dollar can change hands for the goods and services provided reflects the productivity of an economy. If money gets stuck in the system for days on end, it essentially slows down our entire economy and the cycle of financing goods and services.
For example, if funds reach bank accounts at payroll time, there will be fewer people paying overdraft fees or taking on high interest debt. In a next-generation real-time payment system, add-on services like Zelle and Venmo wouldn’t need to exist.
Right now, we are investing energy in dressing solutions that treat the symptoms of slower money movement, rather than addressing the root cause. There are banks and entire businesses that tout access to your paycheck a few days in advance, sometimes for a fee, for those worried about delays. In a real-time payment system, this is a non-existent problem. Finally, financial apps like Robinhood and Venmo have a feature that allows you to access a percentage of the money you transfer from your bank account once they authorize the transaction, due to the fact that it takes three to five days to complete the transfer. the ACH system.
The technology we need to change that is available, but we are using it for workarounds, rather than improving the existing system. What’s even more alarming is that these fixes get heavier and heavier over time, and consumers and businesses bear the cost. This year has proven time and time again that instant digital payments are now an expectation and that the majority of Americans – and not just those with privileged access to the system – are what drives our economy. Anyone can impact the stock market, and small businesses can pivot overnight to easily accept digital payments. Instant access to funds is essential for economic access for all.
How do we fix this? Ultimately, consumers are the solution. The first step is to raise awareness of how implementing a real-time payment system will make a difference in achieving equal access and giving consumers more control over their money. Meanwhile, case studies other countries, such as the UK, point to regulators and lawmakers as the necessary change agents. Allowing payment technology companies to access the payment system through regulatory reform will encourage competition, encourage innovation, reduce risk, and ultimately deliver faster and cheaper services. dear to consumers.
The good news is that we are getting there. As Chopra said during his confirmation hearing, efforts to modernize the U.S. payments system and achieve equal access are a priority for him. If we do not move forward, millions of people will be forced to continue to wait for access to their hard-earned dollars, and our country will continue to lose economic value because of an outdated payments system.
Harsh Sinha is the CTO of Wise (formerly known as Transferwise).