2014 Series • No. 2014–5
Current Policy Perspectives
Costs and Benefits of Building Faster Payment Systems: The U.K. Experience and Implications for the United States
This paper studies the economic cost-benefit analysis behind the decision by the United Kingdom on how to implement its Faster Payments Service (FPS), which allows consumers and businesses to rapidly transfer money between bank accounts, and draws implications for the U.S. payments system.
- A new payment technology like FPS could benefit participants in the payment system by reducing float, improving information flows, and helping to avoid late fees, for example. The FPS may also yield benefits beyond speeding up individual payments, including facilitating business-to-business payments, mobile payments, payment security, 24/7/365 availability, person-to-person payments, and/or faster international payments via standards such as ISO 20022.
- The cost to U.K. banks of building, installing, and maintaining the British FPS was relatively modest. According to sources at the entity that operates the system's infrastructure, it cost less than ₤200 million (0.014 percent of U.K. GDP, or $307 million) spread over seven years, plus investment costs borne by each participating bank to connect to the FPS, yielding an estimated maximum total cost of less than 0.06 percent of U.K. GDP in 2008.
- U.K. decision-makers chose to build a new system to achieve their objective of faster payments rather than speeding up existing payment systems. A decision to separate the settlement stage from the authorization and clearing stages of the payment process and to allow banks to continue to settle three times daily via the Bank of England made it possible to build and implement the U.K. FPS so cost effectively. With this simplification, the cost of constructing a new payment network did not differ very much from the cost of enhancing an existing system.
Given the marked similarities between the U.K. and U.S. payment systems, the potential benefits of faster U.S. payments and the options to achieving a faster system are likely to be very similar to those in the United Kingdom.
If the United States were to implement a new system, productivity gains and technological learning from the experience of the United Kingdom and other countries could lower the costs; the larger U.S. economy, size of the population, and structure of the U.S. banking system, with a much larger number of depository institutions, could raise the costs. This last issue warrants further study, with emphasis on the cost to banks of various sizes of connecting to the new system.
Finally, an important issue is the question of who would own and operate a U.S. faster payment service. Options include: 1) private banks, 2) private-sector nonbank(s) with cooperation from banks, 3) a public-private organization, for example, a collaboration between the Fed (public) and the Clearing House (private) through a governing body such as NACHA, the Electronic Payments Association, and 4) the public via the Federal Reserve, U.S. Treasury, or other government body.
A number of countries have implemented faster payment services that allow consumers and businesses to rapidly transfer money between bank accounts. These services compete with slower, existing payment services. In 2008, the United Kingdom implemented its Faster Payments Service (FPS) at a cost of less than ₤200 million (.014 percent of U.K. GDP, or $307 million) spread over seven years, plus investment costs borne by each participating bank to connect to the FPS. This paper examines the economic cost-benefit analysis underlying the U.K. FPS investment decision and describes the subsequent diffusion and use of FPS through 2013. The paper also assesses the effects that FPS likely had on the rest of the U.K. payment system and highlights key unanswered questions for future research. Based on this U.K. experience, the paper describes implications for the U.S. payment system, which the Federal Reserve has proposed to make faster in recent policy announcements.