Faster Payments, More Control

Faster Payments, More Control

The Financial Diaries: How Americans Cope in a World of Uncertainty

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Jonathan Morduch & Rachel Schneider

Jonathan Morduch and Rachel Schneider are the authors of The Financial Diaries: How American Families Cope in a World of Uncertainty (Princeton University Press; April 11, 2017).

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In our study, the U.S. Financial Diaries, we found widespread financial instability, even among households whose annual income placed them in the middle class. We saw both income and spending spike and dip throughout the year. Sometimes the spikes and dips can be managed easily, but other times, not. Challenges arise when paychecks arrive at the wrong time or in the wrong size relative to spending needs, even if annual income is sufficient to cover expenses overall. Similarly, the options for paying bills flexibly and quickly when families do have cash on hand can be expensive.

Sarah Johnson's experience is illustrative. In one of our first interviews, we asked Sarah what her main financial goal was. She and her husband Sam both worked full-time and owned a home outside Cincinnati, where they lived with their three children. Together, they earned right around the U.S. median income. Yet, she replied, "I just want to be able to pay the full electric and phone bills that come in, not in bits and pieces."

Sarah put real effort into piecing together their household finances, and while she had a straightforward system for paying their bills, she described it like a game of whac-a-mole. Sam was paid twice monthly, on the first and the fifteenth of the month. Sarah allocated his first check to their mortgage and his second check to their car and insurance payments. She paid other bills with whatever was left over plus her own paycheck. Sarah's paycheck came every two weeks (rather than on the first and fifteenth), so sometimes it arrived at the same time as Sam’s but other times not. (About half of the Diaries households share this pattern, with one worker's job paying twice each month and the other's paying every other week.) Sarah found that the months in which her paycheck alternated with Sam's were much easier to handle than the months when the checks piled up on top of each other, leaving wider spaces in between.

The digital age has afforded easier ways to help people match their earning with their spending needs. Since most employers pay their workers electronically, instead of by paper check, companies could, in principle, give workers access to their earnings on a more flexible basis. Ridesharing companies, such as Lyft and Uber, enable drivers to receive their earnings instantly, and third­party companies such as PayActive, Active Hours, and FlexWage have emerged to enable other kinds of workers to receive their pay outside of their usual pay cycle.

Families who experience roller­coaster finances often turn to the services of check cashers, paying a fee in order to get immediate access to cash rather than wait three to five days for a check to clear. They pay fees to rush bill payments in order to pay on the exact date the bill is due or because they don’t have the cash far enough in advance to risk mailing a check. They sometimes avoid bank accounts when they have volatile earnings and spending, in part to prevent overdrafts.

These families would benefit greatly if the financial services industry enabled real­time payments, but until recently, it has had little incentive to develop a faster system. The U.S. payments system moves a jaw­dropping $175 trillion through the economy on an annual basis in over 120 billion transactions with inspiring accuracy, so delays of a few days to move money have not been universally perceived as justifying the extraordinary investment and coordination required to develop the infrastructure for faster payments.

However, over the last few years, spurred on by the Federal Reserve's creation of the Faster Payments Task Force, momentum toward faster payments is finally building. The investment in this infrastructure is a lot more than an investment in efficiency. It would help people like Sarah Johnson become more financially secure, giving her more accurate real-time balance information and greater control over managing her day-to-day cash flows.

Excerpted in part from The Financial Diaries: How Americans Cope in a World of Uncertainty by Jonathan Morduch and Rachel Schneider. Copyright © 2017 by Jonathan Morduch and the Center for Financial Services Innovation. Reprinted by permission.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Jonathan Morduch & Rachel Schneider

Jonathan Morduch and Rachel Schneider are the authors of The Financial Diaries: How American Families Cope in a World of Uncertainty (Princeton University Press; April 11, 2017). Morduch is Professor of Public Policy and Economics at the Wagner Graduate School of Public Service at New York University, as well as a founder and Executive Director of the NYU Financial Access Initiative. Schneider is senior vice president at the Center for Financial Services Innovation, an organization dedicated to improving the financial health of Americans.

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