April 22, 2020 Reading Time: 5 minutes

The Federal government has started sending relief funds to Americans. But, according to the New York Times editorial board, it is not doing so quickly enough. “The government has made matters worse by dawdling,” it writes. 

The editorial board is right. Americans have been promised $1,200 in relief funds. But it took almost a week for the first direct deposits to arrive in people’s bank accounts. Worse, those relying on checks may be twiddling their thumbs for months. When emergency funding is promised, recipients shouldn’t have to wait.

As a cure, the Times endorses the idea of FedAccounts. Under the FedAccounts plan, the government would give Americans the option to have accounts at the Federal Reserve. These low-fee accounts would presumably attract Americans who do not have a bank account, thus making it easier to electronically disburse emergency payments. To boot, the Times suggests that a payment made to a FedAccount could go much faster than a direct deposit to a regular bank account.

FedAccounts are overkill. Come the next crisis, there are much simpler ways to streamline the process of rapidly paying out emergency funds.

Let’s quickly review the issue in question. The CARES Act, which became law on March 27, entitles any American who earned less than $75,000 to a $1,200 payment. The government finally pressed the button to send the payments two weeks later, on Friday, April 10.

But the payments didn’t arrive immediately.

First they had to be processed. Unfortunately, the intervening weekend meant that the systems responsible for clearing electronic fund transfers, the automated clearinghouses, would be closed. To compound matters, Monday, April 13 was a holiday. So processing only began Tuesday, with the funds not beginning to hit bank accounts till Wednesday, April 15!

Many Americans can’t even expect to receive a direct deposit. This is because the Internal Revenue Service (IRS) has been tasked with making payments. To do so, the IRS is relying on information from 2018 and 2019 tax returns. Some filers didn’t provide electronic payment details because they weren’t entitled to receive a refund in 2018. Others were entitled to a refund but preferred a check. Since the IRS only has their address, these people will have to get their relief in the form of a check, which the government hasn’t even started to send out yet. They may end up waiting for months.

Some people did not file a tax return at all in 2018 because their income was below threshold reporting levels. And so the IRS has neither their address nor their electronic payment details.

There are two problems here. The first is that the government lacks information about Americans’ electronic payments details. The second is that, even when this information is available, the electronic payments are going too slow.

FedAccounts might help address these problems. But there are much cheaper and simpler fixes to ensure that, the next time there is a disaster, funds move quicker. Here’s how to go about it.

First, let’s look at the information problem. The IRS needs to do a better job compiling up-to-date electronic payments information about Americans. This means continuing the ongoing process of shifting more and more tax filers onto direct deposit and away from checks. The good thing is that this is already happening. In 2010, just 68% of refunds were paid in the form of direct deposit (32% as check). By 2015, this was at 75%. In 2019, 82% of refunds were direct deposits. So far in 2020 this number is up to 84%.

That still leaves a big gap. Many people haven’t provided their electronic payments information because they are not entitled to a refund. This seems like a simple fix. Even if people do not get a refund, the IRS can prompt them to provide their bank account information.

For the unbanked, the IRS might ask for a prepaid debit card number. A growing number of Americans are choosing to be differently banked. They get electronic payments services via prepaid debit cards, which are often offered by non-banks like Walmart or Netspend. Government payments can be directly deposited onto a prepaid card in the same way that they can be transferred into a regular account.

Getting information about people who do not file tax returns at all is trickier. Here, the IRS is doing the right thing. It has recently introduced a website that allows non-filers to provide their payment details.

These simple ways of getting more information should make relief payments move faster the next time there is an emergency. 

Would FedAccounts help solve the information problem and increase the number of Americans who receive electronic relief payments? Probably. 

As I pointed out earlier, there are many unbanked Americans who already receive direct deposits via their prepaid debit card. But many do not even have this option. This means that a physical check is the only route to reaching this group. It is possible that a portion of them, if given the chance, would open a FedAccount. And so the government would have the necessary information on hand to pay them electronically in future emergencies.

But it isn’t necessary to reach this group by introducing an entirely new, and potentially expensive, payments system like FedAccounts. The Federal government has issued its own prepaid debit card, the Direct Express card, since 2008. Recipients of federal benefits like Social Security are eligible to get one. If eligibility were widened to include low income individuals, then the government would be able to include more recipients in its electronic payments campaign come the next emergency. Unlike FedAccounts, the Direct Express system already exists, is tried and tested, and doesn’t require a big investment.

Now let’s move onto the speed problem. After all, it still took five days (from Friday, April 10 until Wednesday, April 5) for the payment to arrive in a recipient’s account when the IRS had their information on file.

FedAccounts might be able to speed this up. But, again, it certainly isn’t necessary.

Part of the problem is the sluggishness of automated clearinghouses. But automated clearinghouses began to provide optional same-day services in 2017. This means that, as long as a payment order is submitted by 14:45 EST, it can be processed that very day. No more waiting around for twenty-four hours. A recipient who logs into their account before supper will be able to spend their funds. 

For some reason, the Federal government chose not to disburse relief funds via same-day service. It would be simple to make this switch. And Americans would get their money 24 hours earlier.

Another option would be to send relief payments via The Clearing House’s Real-Time Payments (RTP) network, which became available in 2017. Not only are all payments routed by RTP processed instantly, but they can occur on the weekend and holidays! It would be silly not to exploit this route in a subsequent crisis, when emergency funds are needed quickly.

There is another quick fix. Even though a regular ACH payment takes a day or two to process, there are hacks around this. For instance, users of prepaid cards issued by Netspend or accounts issued by non-banks like Chime received their $1,200 in stimulus payments on Friday, April 10. 

How did they beat out big banks like Chase and Bank of America? 

These prepaid card issuers recognize that their clientele, many of whom are unbanked and have low incomes, are more sensitive to payment speed than others. When Netspend and Chime receive the first bit of information that an automated clearing house payment from the government or an employer has been submitted, they front their customers the funds. 

Why not ask banks to adopt these measures during a crisis? It would be far cheaper than setting up a FedAccounts system.

Finally, the Fed could open both its ACH and Fedwire payment systems on weekends. That would cut down on payment wait times.

There might be good reasons for FedAccounts. But the weaknesses exposed by the coronavirus are not sufficient to implement an entirely new, expensive, and potentially risky system. There are plenty of easier fixes to be made. Hop hop!

J.P. Koning


J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.

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