After years of study, conferences, prodding, engaging consultants, trying to embarrass banks at how far the U.S. payments system lags behind other countries, and deflecting attempts at analysis paralysis, the U.S. Federal Reserve System has published a lengthy report with 10 recommendations for making payments faster (in effect, real-time) – and immediately noted that they didn’t reflect any position held by the central bank.
The report’s recommendations are:
- Establishing a formal governance framework
- Establishing rules, standards, and a baseline set of requirements for the faster payments system that would enable payments to cross solutions securely and reliably, and ensure that end users have predictability and transparency in certain key features pertaining to timing, fees, error resolution, and liability
- Evaluating laws and regulations affecting payments and payment service providers to ensure that they are suited to the unique characteristics of real-time payments
- Developing a design for faster payments solutions to interoperate via directory services
- Requesting the Federal Reserve develop a 24x7x365 settlement service
- Requesting that the Federal Reserve explore and assess other operational role(s) it might need to play to support ubiquity, competition, and equitable access to faster payments.
- Developing methods for fraud detection, reporting, and information sharing to continuously advance the safety and security of the faster payments system
- Creating advocacy and education programs to support broad adoption
- Researching cross-border payments to identify and address gaps and barriers to enabling faster payments for this use case
- Continuing research on emerging technologies to deepen understanding of the risks they may pose as well as the benefits they may offer, including the potential for serving underserved end users and use cases
The recommendations come from the Faster Payments Task Force, a group of more than 300 participants from banks, corporations, consultancies, technology firms, non-bank payment providers, government bodies, and consumer groups that have been working on the recommendations since May 2015.
The oddity of the current state of the American political system is reflected in the structure of the task force and its report. In the face of politically powerful banks that were reluctant to spend money on updating the payment systems – an expensive project with no immediate and obvious return on investment – the Fed’s role has been to convene meetings and point out the problems created for consumers by slow payments, such as financial penalties or utility shutoffs unless they drive to a utility office to pay in cash.
The Fed hired McKinsey & Co. to conduct an extensive study to get the discussion started and then again to evaluate proposals submitted to improve the payments system. It has acted as a catalyst and brought together payment participants including users, banks, tech companies, retailers, consultants, and academics.
Yet the introduction to the report includes this disclaimer: “This report is a product of the task force and does not reflect the official views or positions of the Federal Reserve System.”
The absence of a central authority directing the development of a real-time payment system for the U.S. helps explain the report’s heavy use of terms like stakeholders, collaboration, and interoperability. Faster payments will probably come to the U.S. through several providers, and one of their challenges will be to make payment channels work together without active oversight of a regulator.
Just look at how many of the 10 recommendations are aimed at the gaps and shortcomings of a decentralized operating model with multiple players.
The report notes that a multi-provider system does raise some concerns:
“While the eventual number of solutions in the market cannot be predicted, it is desirable to broaden the reach of all solutions by enabling faster payments transactions to cross between them,” the task force noted. “Technical and business process issues can inhibit this interoperability. In addition, solutions may have different rules, policies, and functionality resulting in variations and ambiguity in the end-user experience.”
Security is also of a concern when several companies are involved in the solution.
“When multiple solution operators pass payments and share information, a security weakness in any one solution makes the system as a whole more vulnerable.” The report refers to this as a “market-driven approach to payment system innovation that avoids government mandates” and said it “believes its efforts demonstrate that such pro-competitive, voluntary collaboration is possible and can serve as the foundation for the work that lies ahead.”
It doesn’t cite any other country that is using voluntary collaboration to achieve real-time payments.
The new systems, running on an international standard for payments known as ISO 20022, will combine billing, information, and payments in a way that today’s systems don’t. In the words of the report: “it will benefit businesses and government agencies by delivering real-time, data-rich payments that enable straight-through transaction processing from the point of invoice generation to final reconciliation.”
Sean Rodriguez, the faster payments strategy leader for the Federal Reserve System, had initially been concerned about a task force with 300 members, although much of the work was done by a smaller committee.
“We had no idea of whether we could work together and be productive,” Rodriguez said last week after releasing the recommendations. “It could not have worked out better. People showed up with big ears and smaller mouths and listened to one another’s viewpoints. The 124 points of what we as U.S. payment stakeholders want was inspiring.” The goal of the task force is for banks and businesses to be ready to receive real-time payments by 2020.
The next step is to key up new working groups to focus on gaps that need to be addressed to meet a goal of real-time payments by 2020. The groups will focus on domestic payments before they look at cross-border, he added.
“I couldn’t be more proud of the people who came together to move the ball forward with effectiveness criteria which will serve the market well,” Rodriguez added. He complimented participants for the time they spent thinking of giving the country and industry stakeholders a goal within three and a half years.
The task force report is available at FasterPaymentsTaskForce.org.
Traditional banks are having a hard time keeping up with changing technology. Check out 4 Top Challenges Facing The Banking Industry Right Now.Comments