The Chicago Federal Reserve bank’s task force on improving the US payments system yesterday released a check list of criteria a new solution should meet. Ubiquity is important — it said that a new system should allow any individual or business to pay any other business or company. Or as participants in a recent payments meet at the Chicago Fed said, it should be as usable as cash or checks.
Photo by Tom Groenfeldt
The task force criteria come after several years of Fed study and consultation with banks, technology firms, consultants and users such as major merchants on what is needed in an improved US payments system.
This is “one of the most ambitious undertakings in the history of our national payment system—the public-private engagement that is taking shape to improve the system’s speed, efficiency and security,” said Esther L. George, president and chief executive officer of the Federal Reserve Bank of Kansas City in a presentation to the NACHA payments conference today.
She linked the need for faster payments to the growth of the internet, although she might also have noted that it is time for the US to catch up with the 20 to 30 other countries (depending on who is counting) that have already moved to real-time payments and others, like Australia, that are in the process of developing real-time payments.
Consumers expect speed
She framed the need around growth of the internet and the rising expectation of consumers and businesses for continuous improvements in speed and efficiency.
“This engagement is designed to meet the growing demands of American consumers and businesses that continue to shift toward e- commerce and Internet-enabled technologies in their daily transactions,” she said. “It is imperative that we modernize the payments system, and also that the Federal Reserve and the industry join together in this effort.”
The Fed has pursued collaboration and consensus. In some other countries real-time payments systems have been required by governments. But in the US, especially with the current political climate, no one has suggested a powerful government role in directing a new payments system would have a chance of success.
George of the Kansas City Fed apparently has no time for the money center bankers and the American Bankers Association who for several years insisted that the existing system was good enough, or that it’s 40 years’ existent proved its value. Those arguments have largely died out over the last two or three years. A payment technologist at the Chicago Fed’s meeting last year said the conversation has shifted from whether the US needed a real-time payments system to when it could be delivered.
“Simply put,” said George, “Americans who demand fast and dependable delivery of what they buy and sell want their payments to keep up…One-third of consumers and fully three-fourths of businesses want real-time payments, and they are now willing to pay for them.”
Lots of volunteers
Fed officials were a little overwhelmed when their invitation to a payments improvement task force drew more than 300 participants. They formed a steering committee which went to work, and they held two face to face meetings in Chicago that drew more than 200 participants, said Sean Rodriguez who had the somewhat daunting task of serving as the Fed’s strategy leader for the task force.
The effort began in June with a dialogue over what the criteria should be, Rodriguez said. The Oct. 5 release of the criteria is to broaden the discussion for people who haven’t been able to come to Chicago, he explained. The Web site, https://fedpaymentsimprovement.org, invites participation through a survey which is open until Oct. 16, he added.
The task force has moved quickly, especially considering that it has so many bankers.
“The process has gone way better than I would have thought when when 325 signed up,” Rodriguez said. “They came ready to work and willing to listen to other people’s views. It has been a lot more participative and productive given the numbers we were dealing with because people want to see something happen. The steering committee folks have been instrumental in leading discussions with their segments to bring people along, and have been very helpful in counsel to us as we led this process. It’s been very productive to have that leadership.”
For the task force, the next step is to identify the key underpinnings of an improved payments system and begin working toward solutions, which may come through an iterative approach.
“No payments system was built completely on day one,” Rodriguez said. “We envision an iterative process that would provide a capability over time.
Key challenges are in developing rules, governance, commercial interests and perhaps overcoming some regulatory barriers. Technology is not a problem, he added, noting that 26 or 28 real-time payments systems are already operating around the globe.
Criteria
In addition to ubiquity, the task force said a new payments solution should be usable through a wide variety of devices, including mobile, provide a predictable experience for users and deliver data, such as biller information, remittance information and short messages along with payments. It should also provide convenient and cost-effective cross-border payments and support multiple currencies, especially where one or more legs is denominated in US dollars.
The new system should also provide better service in areas the Fed has highlighted as underserved, such as B2B ad hoc low value, B2P ad hoc high value such as medical insurance claims, or B2P low value, such as wages for temporary works or P2P, paying a friend. It should also provide a way for businesses to pay people who don’t have bank accounts.
Competition
The solution should foster competition, in part by enabling portability and providing transparent pricing and minimal barriers to entry for payment service providers. The solution should also provide open and standards-based integration capabilities such as APIs. In addition, it should be cost-effective for end users and offer positive ROI for operators to justify initial and ongoing costs, and to motivate participation by payment service providers.
The report provides a greater sense of urgency than was apparent at last year’s meetings where the Fed talked of a 10-year implementation schedule, prompting some criticism from merchants who thought that was way too slow. The task force criteria includes a comment that the solutions should be implemented rapidly and use payment standards such as ISO 20022 that can interface with existing payment systems.
The solution should be comprehensive from initiation to reconciliation, while exceptions and investigations “must provide end users and their providers with tools and protocols to prevent, identify investigate and resolve exceptions and provide capabilities such as ability to trace previously originated payments.”
For some reason the group thought it useful to add that the system should be scalable to meet current and future demand.
Another Fed task force is working on payments security.
