Does The U.S. Faster Payment System Need A Federal Mandate?

With thousands of U.S. financial players active in the payment infrastructure, is a government-backed mandate necessary to keep these various entities on the same page? That’s a question the Federal Reserve Faster Payments Task Force is considering as it looks at ways to make U.S. faster payments safer and more efficient.

The task force was created in 2015 to address rising demand from consumers and businesses for faster payment solutions, and to help guide banks and other financial organizations as they moved forward with efforts to offer faster payment capabilities.

The value of the faster payments market is immense, as outlined by the first of two reports issued by the Task Force earlier this year. The report, released in January, found the 2015 value of wire transfers was $1,200 trillion. ACH payments were valued at $145.3 trillion and check payments were worth $26.8 trillion. With this much money on the line, keeping payments secure and moving from sender to recipient quickly is clearly a top priority.

To protect such vast sums of money, the Faster Payments Task Force report indicated it had reviewed 22 faster payment solution proposals so far, and had analyzed some of the potential hurdles that could impede successful faster payment solutions. This included taking a closer look at provider interoperability, rules and standards, security and other faster payment issues.

But as additional faster payments solutions are introduced, will the Federal Reserve take on a more regulatory role? In late June, the American Bankers Association held its first ABA Payments Forum, gathering some of the top leaders in banking and FinTech to discuss a variety of payment strategies. One of the panels at the two-day conference, “Developing a Faster Payments System in the United States,” focused on whether an official decree from payment officials could or should be considered in the U.S. market.

While other markets have had some success in implementing mandates for faster payments systems, Roy DeCicco, managing director of corporate and investment banking at JPMorgan Chase, says a federally-backed mandate for faster payments is not the right approach for U.S. financial institutions. DeCicco, who moderated the ABA Payments Forum, recently told PYMNTS in an interview why a mandate would not work for banks and financial firms in the U.S. What will drive the development, DeCicco said, is a collaborative agreement and understanding between regulatory agencies like the Federal Reserve, the government body tasked with researching the best strategy to develop and maintain an efficient faster payments system in the U.S., and private stakeholders.

A ‘Moot’ Mandate?

In 2015, the Federal Reserve launched a task force to issue recommendations for improving the faster payments infrastructure in the U.S. Since its formation, the Federal Reserve Faster Payments Task Force has been working with more than 300 members — including DeCicco, who is on the steering committee — representing various parts of the U.S. payments ecosystem. The Task Force looks to develop a cohesive faster payments implementation policy focusing on initiatives designed to boost the U.S. payment system’s speed, efficiency and security.

Earlier this year, the Fed released an update on the progress of both the Faster Payments Task Force and its separate Secure Payments Task Force. A second Faster Payments Task Force report outlining recommendations for a U.S. faster payments system is expected to be released in July. While the financial world eagerly awaits the Task Force’s exact recommendations, DeCicco has a good idea for what won’t be included. Namely, a federal mandate.

According to DeCicco, the lack of an overarching rules mandate for the U.S. faster payments infrastructure makes the country’s marketplace “unique.” Other markets have implemented faster payment rules that come from a top regulatory agency or government.

“If you look around the world at the implementations of faster payment solutions, many of them were top-down, federal mandates, prescriptive and single-service provider solutions in the market,” said DeCicco.

But don’t count on a federal mandate to be implemented in the U.S., now or down the road, DeCicco said.

“In the U.S. I think it’s a moot point,” he said.

DeCicco noted that one of the factors that makes a mandated faster payments solution for the U.S. market “moot” is the U.S. Federal Reserve does not have the authority to mandate a faster payments solution for the U.S. market. Giving the Fed that kind of authority would require action by Congress, which is a tall order.

DeCicco noted that the size and scope of the U.S. banking marketplace, which is home to approximately 12,000 financial institutions, is unique in the world, making it particularly difficult to develop and implement a one-size-fits-all approach for faster payments.

“It’s a large, diverse marketplace as compared to almost any other market,” DeCicco said.

Studying Faster Payments Abroad

While the U.S. marketplace is different from other world markets, the Fed and its Faster Payments Task Force have been able to understand how well faster payment regulations in other markets have performed once implemented.

As an example, DeCicco pointed across the pond to the U.K., where the country’s Faster Payments scheme has been in operation since 2008. Establishing the scheme required the country’s major players — including regulators, banks and corporations — to work closely together to develop and agree upon an enforceable set of regulations.

Since the U.K.’s Faster Payments scheme was implemented, DeCicco said regulators and banks have continued to work together to improve the system. According to the most recent Faster Payments statistics, 141 million payments were processed in May 2017 and valued at £115 billion — $150 million USD. That’s an 18 percent increase from last year, indicating regulation is not slowing down the pace of payments.

DeCicco believes similar regulations or mandates would not work in the U.S. as they do in the U.K., mainly because of the size differences between the two markets. However, the lesson he takes away from the U.K.’s experience developing a faster payment scheme is to invite as many stakeholders to the table as possible.

“At the end of the day, when they completed their assessment working together, it was the regulators working together with the rest of the marketplace and agreeing on the way forward,” said DeCicco.

A Market-Driven Faster Payments Mandate

In some ways, DeCicco points out, a mandate on faster payments might have been an easier path for the U.S. The thinking is that a mandate could offer a guide for U.S. banks and other financial players by providing an outline for implementing safe and efficient faster payments.

But without a mandate in place, he said, it falls to the market to craft its own faster payments strategy.

“The challenge is, because we don’t mandate a solution or a next step, we need to develop it in a collaborative way, put it out there and get key stakeholders to agree that these are appropriate next steps that need to occur,” DeCicco said.

While he believes a top-down mandate to manage faster payments will not work for the U.S. market, DeCicco sees value in urging collaboration between key U.S. financial stakeholders through the Fed’s Faster Payments Task Force to get as many players on the same page as possible.

“The experience we’ve had in the Task Force with a large, diverse body has been positive,” DeCicco said. “We’ve seen diverse opinions and segment views working together to [help] us meet our objectives and produce the work that we’ve done. Now we need to continue with that spirit of partnership and collaboration through the next steps.”

Those next steps won’t be clear until the Task Force officially releases its second report in July. When the Task Force makes its recommendations, DeCicco says it will be important to keep a collaborative spirit between stakeholders to address the most effective ways to move forward.

“What standards need to be developed to make sure we’re all operating under a common set of standards that creates a level of efficiency in the marketplace?” DeCicco asked. “Is there a need for a universal or centralized directory service that the market could leverage, again for an efficiency purpose? Those are things we need to dive deeper into, and get key stakeholders in the marketplace to agree on the best way forward — and make that happen.”

Whatever recommendations come out of the Federal Reserve’s report, DeCicco sounds confident that they will be well-received by the financial market. After all, new policies are typically easier to abide by when they are built collaboratively.

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About the Tracker

The PYMNTS.com Faster Payments Tracker, powered by NACHA, is your go-to resource for staying up to date on a month-by-month basis. The Tracker highlights the contribution of different stakeholders, including institutions and technology coming together to make this happen.

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