When instant payments come up in discussion, a few common use cases are often cited. For instance, friends can split a dinner check or businesses can pay a vendor to quickly release supplies. A few other common use cases are under the category of account-to-account (A2A)1 transfers — often referred to as “Me2Me” payments — which occur when an individual or business moves funds between their accounts at different institutions.
Read on to learn more about the kinds of scenarios that are well suited for this payment type and how various stakeholders may benefit, including brokerage and investment management firms, financial institutions, digital wallet providers and the fintechs that support mobile and online transactions.
Let’s start by defining a “Me2Me” payment. It’s most often defined as the transfer of funds from one account to another one owned by the same individual or entity. For example, someone might send funds from a savings account to a checking account. In many cases, these accounts are held at different organizations, like an investment firm and a financial institution (more on this example later).
For brokerage account owners, instant payment capability would allow them to transfer money immediately from a checking or savings account to the brokerage account to fund investment purchases — assuming both organizations support instant payments. Today, these types of transfers between financial institutions can be cumbersome and typically take days to accomplish.
By enabling instant payments for these kinds of transfers, brokerage and investment management firms can enhance their clients’ experience while mitigating credit risk. In many cases, a client can request a trade in a brokerage account, and if they have insufficient funds, they may have up to four business days after the trade date to transfer the money into their account. During this period, the firm takes on the credit risk that if the client fails to transfer the funds in time, the brokerage firm may need to reverse the trade and incur various costs. But if a firm offers instant payments, clients have the opportunity to settle the obligation immediately even if they wait until the fourth day to initiate the payment. Here are a few customer experience enhancements that clients are likely to find attractive when their brokerage firm adopts instant payments:
Instant payments may benefit those who want to transfer funds from a checking or savings account at one financial institution to a checking, savings or even loan account at a different financial institution, assuming, of course, both financial institutions are set up to send and receive these payments.
Similar to brokerage firms, instant payments can help banks, credit unions and savings associations enhance customer experience without taking on the credit risk associated with allowing a customer to access their deposited funds before the transfer has settled. Here are a few benefits that financial institutions could offer their customers when they take advantage of instant payments’ speed and irrevocability:
Instant payments may also benefit consumers who want to transfer money from financial institution accounts into and out of digital wallets. Digital wallets like Venmo and Square’s Cash App leverage closed-loop payment systems, meaning the payer and the payee can transact only through accounts offered by the single central provider. Funding and defunding these wallets rely on traditional payment methods like ACH and card payments, which can take a day or more to complete. Instant payments, in contrast, can help reduce this friction.
Like the two use cases above, instant transfers can reduce credit risk when the wallet provider allows immediate access to the funds a customer has moved into their wallet. And when a customer moves money from their digital wallet into their checking account using instant payments, they enjoy a more seamless experience because they can see and use the funds in their checking account within seconds.
By reducing friction, instant payments can help wallet providers enhance the services they offer their customers, including, for example:
In summary, Me2Me payments involve a person or entity transferring funds between two accounts that they own. These types of transactions occur frequently, and instant payments can be advantageous in a number of scenarios where speed and certainty are critical.
Instant payments in the Me2Me space can enhance the customer experience as well as provide benefits to financial institutions and brokerage firms, which, in turn, should also present an opportunity for fintechs and third-party software and services providers to enable the functionality. In other words, various players in the payments ecosystem should consider the benefits of instant payments for Me2Me transactions.
Learn more about instant payments and the FedNow Service, a safe and efficient instant payments infrastructure being developed by the Federal Reserve that will enable a broad range of use cases including A2A transfers (PDF).
1Technically, all instant payments involve A2A (account-to-account) transfers, including between two separate people or entities. However, the term A2A is most commonly reserved for fund transfers between two accounts owned by the same individual or entity.
2While instant payments allow the immediate transfer of funds to and from a brokerage account, they do not solve timing delays associated with the settlement process for purchases and sales of securities.
3An investment is not “sold” until the trade settles, typically a few days after the trade date.
4Without instant payments, a wallet provider may have to decide whether a customer has immediate access to funds before the provider receives the funds, which creates credit risk in the interim.