The Fed’s Slow March To Maybe Faster Payments

The payments world was literally sitting on pins and needles waiting for the Fed to disclose more specifics on its 18-month study about how to deliver “faster payments” here in the U.S. This anxiety was created after the Fed floated its preliminary report last year that seemed to take the position that real-time payments would generate “social benefits” even though the banks that would be tasked with creating it would lose money.

But yesterday (Jan. 26), we learned their plans.

Which is to do more planning.

The Fed’s proposal to improve payments in the U.S. is to organize a “heterogeneous” task force to sort it all out.

This proposal is methodical and definitely a more cautious and collaborative approach to assessing what needs to be done to achieve faster payments. The Fed, during its briefing yesterday, emphasized many times that success was closely tied to having a collaborative approach that would thoroughly listen to all sides, opinions and issues.

But it’s also a bit anticlimactic.

And even a bit ironic that a move to deploy faster payments seems to be moving along so slowly.

The Fed’s payments improvement initiative started in October 2012 and was prompted by the view that the U.S. payments system, then, was at a “crucial juncture in its evolution.” The U.S. has been criticized by many as the world’s payment’s industry Luddite for not having implemented “faster payments” sooner, like a few of its counterparts in Europe and Asia have already done.

In 2014, the Fed gave us all a peek at the progress it had made to that point. That peek included a proposal to create an entirely new set of rails built by the banks. Concerns immediately surfaced over the potential cannibalization of bank revenue streams, the lack of a business model to cover the costs of the investment in this new system and who would run it. The expectation set as a result of the Fed’s sneak preview last year was that some of the details related to making this new system a reality, including the business model that would underpin such a new system and who would ultimately operate it, would be made known soon.

Instead, that will be for the new taskforce to sort out.

The taskforce will include stakeholders from across the payments ecosystem (banks, merchants, acquirers) and be appointed in “early 2015.” The identification of effective approaches for implementing faster payments will be done by the end of 2016. Obviously implementation of those approaches, if they were agreed to, would take place in 2017 or later if they stick with this schedule.

The specifics of the work that the task force will take up is outlined in the Fed’s 56-page document entitled “Strategies For Improving The U.S. Payment System.” Their efforts will be focused on achieving the five desired outcomes that the Fed has identified for a newly designed U.S. payments system – speed, security, efficiency, international/cross border capabilities, and collaboration among key stakeholders. The Fed has also provided five strawman strategies for achieving those outcomes. The Fed said that it views its role as a leader/catalyst and not the operator of any new system, at least not for now.

According to the Fed’s report, the efforts to make faster the U.S. payments system is not focused on improving the speed and security of all payments but rather the 12 percent of payments (29 billion or so transactions) that cover these specific use cases:

• Business to Person payments which are medical insurance claims, insurance claims and FEMA settlements, representing an unknown percent of payments volume; and
• Person to Person payments which is the perfunctory example of people splitting the check at a restaurant, representing 2 percent of payments volume;
• Person to Business payments which are emergency bill payments, or 4 percent of payments volume;
• Business to Business payments which are defined as just in time supplier payments, representing 5 percent of payment volume.

Retail point of sale payments are not included given the efficiencies already associated with those (private sector) systems. Federal Reserve Staff spokespeople did suggest that faster payments would also improve settlement windows which would, in turn, benefit retail payments on the backend.

Esther George, president of the Federal Reserve Bank of Kansas City and executive sponsor for the payments improvement initiative, said that the Fed’s “plan reflects the contributions and commitment of thousands of payment system participants who shared their expertise and perspectives during the past 18 months.” She added, “We believe the strategies and tactics in the plan have broad support and strong prospects for success.”

Meanwhile, NACHA is moving forward with its Same-Day ACH initiative which would bring faster payments to reality starting in 2017. The NACHA members need to approve this, and the proposal presented to the banks is open for comments until Feb. 6. The Clearing House (TCH) also has an initiative in the works to pursue “real-time payments” but it’s unclear whether TCH members have formally approved that or when it would likely get off the ground.

For now, anyone who wants to split their dinner bill with a friend will have to do it the old-fashioned way—plop down cash or cards—or use PayPal or a variety of other mobile apps.

And with cash, you can even get the money in real time!