How Pay-by-Bank and Real-Time Payments Support Financial Inclusion in the U.S.

The United States ranks fourth globally in terms of financial inclusion. Is there an opportunity for a fintech and payments revolution to spark necessary change and boost the nation’s financial inclusivity?

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We often think about payments technology as a means to improve merchant revenue and consumer convenience. While this is true, there’s much more to be said about the national impact of the current payments revolution in the United States. 

Emerging solutions like pay-by-bank and real-time payments can benefit the greater good and dramatically improve financial inclusion in the U.S. 

Why do these fast, interoperable payment systems matter? 

This post explains the expected impact stakeholders like pay-by-bank and real-time payments will have on financial inclusion in the United States. 

First, some definitions

A couple quick reminders for context. 

What is pay-by-bank? 

Pay-by-bank (also called A2A payments) is a direct form of payment that enables an electronic transfer of funds between two bank accounts. 

The value of pay-by-bank is its simplicity. By linking two bank accounts using a bank aggregator, one party can either request or send money directly via ACH, RTP, or FedNow rails, without cash or cards. 

💡Learn more about pay-by-bank. 

What are real-time payments? 

Real-time payments, also called instant payments, are electronic transfers of funds between bank accounts that’s instant and available 24/7. Real-time payments are significantly faster than traditional payment methods, which can take one to three business days to complete.

💡Learn more about real-time payments. 

Real-time payments are a pay-by-bank offering. They facilitate an immediate transfer of funds for virtually any money movement use case, including:  

• From person to person (splitting bills, personal loans, gifting money)
• From person to business (automated bill payments, ACH rent payments)
• From business to business (supplier payments, invoice settlements, bulk orders)
• From business to person (payroll disbursements, expense reimbursements, refunds)
• From government to person (social welfare payments, tax refunds, pension disbursements) 
• From person to government (tax payments, license fees, fines)
• And more

Note: The United States offers real-time payments through RTP from The Clearing House and FedNow from the Federal Reserve. Right now, these services only offer instant payouts, meaning only instant withdrawals (pull payments) are supported. However, there are anticipated plans for FedNow to expand its services to support a full range of payment scenarios. 

What is financial inclusion? 

Financial inclusion refers to the availability and accessibility of efficient, secure, and affordable payment services to all individuals and businesses, regardless of their socioeconomic status. 

Financial inclusion ensures everyone, particularly underserved and marginalized populations, can participate fully in the digital economy by utilizing modern digital financial services.

To measure financial inclusion on a national scale, experts look at a country’s employers, financial systems and government initiatives to determine how effectively they support financial success. 

Why is financial inclusion important? 

Access to financial tools and services can catalyze different aspects of economic, social, and political development. It’s a foundational pillar on which successful nations are built.

Financial inclusion sparks a cycle of positive economic growth

Financial inclusion empowers individuals by providing them with the means to affordably and safely save, spend, borrow, and invest. This equitable accessibility provides economic opportunities to lift people out of poverty. It helps them start and grow businesses, invest in education, and generally improve their livelihood. 

When more people have access to inclusive digital finance tools (without the hardships of predatory fees, schemes, and penalties), the nation’s economy thrives, which in turn ignites a continuous cycle of mutual and recurring benefits between citizens, businesses, and the greater economy. 

This is why a broader financial inclusion strategy is particularly important to promote sustainable development goals in the United States. 

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Is the United States financially inclusive? 

Despite being a leading global economy, the United States has seen a decline in its financial inclusion ranking. According to the Global Findex, the U.S. fell from second to fourth place (globally) in 2023.

This dropoff is largely attributed to a decline in employer and government support. Still, the U.S. remains in the top position for financial system support.

Some areas in need of improvement for financial inclusion in the U.S. include: 

Access to funds

‘Time is money’ rings true for Americans in tight financial situations. Long processing periods to send, receive, and transfer funds can lead to consequences like overdraft fees, interest rate spikes, penalties, and generally higher costs to consumers already financially burdened. 

These factors contribute to the fact that only 49% of U.S. households report routinely positive cash flow, and about the same number indicate difficulty in coming up with emergency funds within 30 days​.

Additionally, only 18% of Americans say the largest emergency expense they can handle right now using only savings was under $100 according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2023. 

For the majority of U.S. consumers, the time it takes for paychecks or other fund sources to settle is critical.

High and unpredictable financial service fees

Banks, payment processors, and card networks are lucrative businesses for a reason. They are incredibly effective at making money by facilitating the movement of consumers’ and business’ funds. 

They’re also willing to charge steep fees when consumers violate their strict and sometimes predatory rules. 

For example, for consumers with one to three overdraft fees in the last year, 51% were surprised by the overdraft. As the share of U.S. consumers living paycheck to paycheck just hit a two-year high, there’s little margin for these unplanned expenses. 

Depending on the fee, there can be a considerable, generally underappreciated impact on financial inclusion. 

‍Junk fees 

The impact of junk fees was brought to light in a testimony presented by Adam Rust of the Consumer Federation of America (CFA) to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on May 9, 2024.

The testimony addresses various types of fees in financial services and rental housing, often referred to as "junk fees."

• Credit card late fees: In 2022, consumers paid more than $14.5 billion in credit card late fees. 
• Overdraft and insufficient funds fees: Banks and credit unions with assets over $1 billion charged $7.7 billion in overdraft and NSF fees in 2022. This amount dropped to $5.8 billion in 2023, reflecting a significant reduction due to changes in policies and increased regulatory scrutiny​. Though many banks have made a range of changes to their policies in recent years, some banks continue to charge overdraft fees as high as $37 each. Overdraft fees can total hundreds of dollars per day, exacerbating financial setbacks. And they can lead to account closures, essentially pricing people out of the banking system.
• Fees for Earned Wage Advances (EWA): Some companies charge between $1.99 and $3.99 for same-day disbursement of earned wages, despite the actual cost of processing such payments being less than ten cents​​.
• Convenience fees: Fees are often charged for paying bills and collecting rent online or by mobile phone, particularly by debt collectors, which are prohibited under the Fair Debt Collection Practices Act. Some online payment platforms even charge fees for school meal payments​​.
• Fees for sending money to incarcerated individuals: Sending $200 to an inmate's account can cost $9.95, even though the actual processing cost is much lower. These fees are often shared with correctional institutions, adding to the financial burden on families of incarcerated individuals​​.
• Fees to access basic bank account information: Some financial institutions charge fees for accessing basic account information needed for disputing unauthorized transactions or understanding account freezes​​.

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Interchange fees

Interchange fees or “swipe fees” are a 1-3% fee that businesses must pay to accept credit cards. Several parties get a cut of this fee, including the bank that issued that credit card used for payment, as well the card company, like Visa or Mastercard. 

Interchange fees have been the subject of scrutiny, merchant litigation, and government intervention due to their steep, duopolistic nature. 

While interchange fees are a direct cost to businesses, they also indirectly influence the cost of goods and services in the United States. Merchants tend to “offset” the cost of card processing by raising their prices. In turn, consumers end up paying more. 

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Interest charges

High interest rates make borrowing more expensive for consumers. For example, the average Annual Percentage Rate (APR) for credit cards has reached 22.8%, the highest level recorded since data collection began in 1994.

Excessive APR margins have resulted in an estimated additional $25 billion in interest fees charged to consumers in 2023 alone.

While credit cards are helpful in many instances, they are easily misused. This leads to high interest rates, late payments, and revolving debt that’s only good for lenders. This hard-to-break cycle is mentally taxing, and 48% of Americans with revolving credit card debt say they are stressed about it.

Real-time adoption

When it comes to faster payment systems like real-time payments, the U.S. has been slow to adoption compared to other, more emerging markets, like Brazil and India. In fact, the U.S. global powerhouse ranked 11th in the world in terms of global real-time payments adoption, falling to 35th in the world on a per capita count. 

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The largest barriers for real-time payments adoption in the U.S. are:

1. Reliance on legacy infrastructure. The US financial system is heavily reliant on legacy infrastructure, which poses significant challenges in transitioning to newer, real-time systems.
2. Consumer awareness. Many consumers and businesses either are unaware or still prefer traditional payment methods​. This is largely due to a lack of financial education around the benefits of real-time payments. The financial sector will play a proactive role in promoting these new technologies to ensure widespread adoption and integration across various payment platforms.

Can pay-by-bank and real-time payments improve financial inclusion?

Advancements in the payments landscape are changing the way we think about money movement. While the United States has a long history of reliance on and acceptance of traditional cash, check, and card payments, there’s been little done by policymakers in the way of positive change. 

But the plight of modern consumers, businesses and entrepreneurs has not gone unnoticed. There’s work being done right now to right the ship and set the U.S. on a course of financial inclusivity. 

For example, the Atlanta Federal Reserve Bank recently concluded a 2-year report on digital payments inclusion.

The report lays out seven barriers to payments inclusion:  

1. Stringent documentation requirements
2. Lack of access to broadband or smart technology 
3. High and unpredictable fees
4. Lack of availability of funds or of instant settlement
5. Limited acceptance of payment type by businesses
6. Security and fraud concerns
7. Limited financial and digital education

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Recently, Lali Shaffer, a payments risk expert at the Atlanta Fed, explained two specific barriers that instant (real-time) payments can help address; high and unpredictable fees and faster access to funds.

Combatting overdraft and NSF fees 

By allowing access to funds sooner, instant payments can alleviate the uncertainty of account balances and reduce potential overdraft/NSF fees. 

When consumers have immediate access to their paychecks or other deposits, they are less likely to overdraw their accounts, avoiding costly overdraft fees that disproportionately affect those living paycheck to paycheck.

Another benefit of instant settlement is a reduction in late fees for paying bills. As payments are processed in real-time, consumers can avoid penalties associated with late payments. 

As instant payments adoption increases, cost efficiencies will be realized in payment processing, reducing the need for firms to charge customers high fees to cover their costs.

Faster access to funds  

For person to person and person to business transactions, instant payments reduce the uncertainty that comes with settlement of funds. This is especially important for wages, as faster access to earned income alleviates financial stress and improves cash flow management. 

Other instant payments, such as insurance payouts, tax refunds, government benefits, and emergency payments, play a critical role in financial support, especially in times of crisis.

The Atlanta Federal Reserve Bank's report highlights that faster access to funds can help mitigate the negative impact of high and unpredictable fees on financial inclusion. For example, the widespread use of Earned Wage Advances (EWA), which sometimes incurs fees despite being necessary for many low-income workers, can be streamlined and made more cost-effective through real-time payment solutions.

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Additionally, pay-by-bank, real-time payments and the broader open banking revolution in the U.S. can support financial inclusion by: 

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Improving data accessibility and financial literacy

Open banking allows consumers to securely share their financial data with third parties, such as fintech companies and digital financial service providers, who offer personalized financial products and services. 

This enhanced accessibility and data privacy helps individuals better manage their finances, make informed decisions, and improve their overall financial health. 

For example, budgeting apps and financial planning tools can offer insights and recommendations based on real-time data, helping users to track their spending, save more effectively, and avoid debt.

Plus, financial literacy programs integrated with digital platforms can educate users on managing their money, understanding credit, and planning for the future. This combination of accessible data and education provides consumer empowerment, particularly those who are unbanked or underbanked, to participate more fully in the financial system.

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Sunsetting predatory credit card payments

Open banking payments (or A2A payments) are a viable alternative to traditional credit cards, which often come with high-interest rates and hidden fees that can trap users in cycles of debt. 

When compared with credit cards, accepting ACH payments offers faster settlements, better security, and lower merchant and consumer costs from interchange fees and interest rates. 

Instead, traditional credit cards can be used to build good credit or emergencies. They were never originally intended for daily purchases that build an endless repayment cycle.

Shoppers can still earn rewards (if incentivized) without annual fees, term loans, credit checks, credit limits, credit history, interest rates, or eligibility requirements.

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Enhancing security and reducing fraud

Pay-by-bank leverages advanced security measures such as biometric authentication, encryption, and real-time fraud monitoring for consumer protection. By enhancing the security of financial transactions, these systems build trust among users, encouraging more people to adopt digital payment methods.

Additionally, real-time payments reduce the window of opportunity for fraudsters, protecting small businesses and consumers as well as fostering a more equitable payments infrastructure that’s less exposed to risk.

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Pay-by-bank’s virtuous cycle of financial inclusion

New payment systems and financial technology are the catalyst for inclusive financial systems. They spark a cycle of financial inclusion that starts with simplified, more affordable, faster money movement.

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The future is instant 

The Atlanta Fed's recent Payments Inclusion Forum began with a fireside chat with Atlanta Fed president Raphael Bostic and Mark Gould, chief payments executive of Federal Reserve Financial Services. 

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The forum concluded with a clear goal: 

To truly be successful, we need financial institutions, processors, service providers, and fintechs to collaborate with the Federal Reserve to achieve widespread availability of instant payments. We invite everyone to work together to make this a reality. Our call to action is for these organizations to learn, innovate, experiment, and promote instant payments.

The path to improved financial inclusion in the U.S. lies in embracing and expanding real-time payment systems like pay-by-bank. 

These advancements have the potential to make financial services more accessible, affordable, and secure for all, fostering an inclusive economy that benefits everyone.