Boston Fed asks: Can faster access to their own money benefit lower-income communities?
“Faster payments” could mean fewer fees for households living paycheck-to-paycheck
Does it cost lower-income people more to keep up with their bills?
The answer is often yes, according to research from the Federal Reserve and other organizations. That’s because lower-income households often end up paying more fees (e.g., overdraft, late), and they’re also more likely to rely on costly services that offer quick access to cash.
One possible solution: making bank payments faster, so people can send and receive money instantly, with no lag time.
“If people had broader access to faster payments – meaning they could receive their money instantly and send it where it needs to be instantly – it could help alleviate some of these issues related to fees or penalties,” said Brian Clarke, senior business strategy manager at the Federal Reserve Bank of Boston.
Clarke’s team has long investigated how faster payments may benefit low- to moderate-income people, and the research is particularly relevant with the Fed’s instant payments system, the FedNowSM Service, scheduled to launch in mid-2023.
“We want to know what's happening in the marketplace and how that’s affecting individuals – especially lower-income users – as faster payments become more widespread,” said Clarke, who works in the Bank’s Regional & Community Outreach department.
Faster payments could help resolve fees caused by timing issues
Americans paid $10.7 billion total in overdraft fees in 2021, with lower-income households alone paying $6.7 billion, according to the Financial Health Network, a nonprofit research organization.
“Overdraft fees can be as high as $35-$40 each time an account is overdrawn. That’s a stiff penalty to pay for overdrawing by a few bucks, and it can quickly add up,” Clarke said.
Because overdrawing is often an issue of timing, faster payments could help prevent it, he said. PNC Bank, which allows customers 24 hours to fix an overdrawn account, found that 63% of those with a negative balance were able to fix it in half that time.
Low-income populations are also more likely than those with higher incomes to rely on alternative, fee-heavy financial service providers (such as check-cashing, money orders, or in-person bill payment providers) – even if they have bank accounts, Clarke said. For instance, the Federal Reserve Bank of Kansas City found that fees to pay a $100 bill in-person using cash via a third-party service provider can climb as high as $12.99.
Currently, most banks don’t charge customers for bill payments initiated using their website or mobile app. However, the payment can take several days to process. That means bank customers don’t know for sure when they’ll receive credit for payments with their billers.
“It’s frustrating for individuals. Money will come out of your account instantly, but it takes a while to get credit with the biller you owe, so payments may be considered late,” Clarke said.
Once faster payments are more widely available, people will ideally be more likely to conduct these types of transactions at their bank – while also having assurance that their money arrived at its destination instantly, and their account is in good-standing, he said.
Info gained by studying new tech will inform community outreach
Despite their best efforts to study potential impacts of faster payments, Clarke said his team is aware that the new technology has many unknowns.
Clarke said it will be important to track how quickly and widely lower-income customers are adopting faster payments, how much it’s costing them, and whether they end up paying less in fees or other charges. This information could help the team improve community outreach strategies, he said.
Learn more about the Boston Fed’s community development work here.
“FedNow” is a registered service mark of the Federal Reserve Banks. A list of marks related to financial services products that are offered to financial institutions by the Federal Reserve Banks is available at FRBservices.org.