“Collaboration” is the key word in the Federal Reserve’s plans to continue to develop a faster and more secure payments system in the U.S.
The agency outlined its next steps as it works with public and private payments system stakeholders, with a goal of achieving faster payments by 2020.
“With collaboration, inclusiveness, and transparency as guiding principles, the Fed will continue to advance improvements through leadership and action,” said Federal Reserve Board Governor Jerome Powell, who co-chairs the payments initiative’s oversight committee. “Our work with stakeholders over the past two years, including engagement with 500 task force members, has demonstrated that together we can help address industry challenges and seize opportunities.”
Diversity of stakeholders complicates mission
Industry observers and participants, particularly banks, generally are satisfied with the methodical, multi-year effort to improve the payments system. Unlike in other countries, the U.S. has to coordinate changes among a large and diverse number of entities, or “stakeholders” as the Fed refers to them.
“In general, we think the path we are following to faster payments in the U.S. is moving along at a good pace,” says Steve Kenneally, vice-president for payments and cybersecurity policy at the American Bankers Association. “We are relying on competing payment solution providers to develop new and better systems to attract customers. It can take time for a number of individual entities to roll out products, but the competition should result in an overall better solution than if one product was designated at the beginning of the process.”
Kenneally said it makes sense for the U.S. to let the market determine the winner or winners, producing a faster payments framework that is better—not just faster—even if it takes a little more time.
“You can have a faster payments system in place more quickly if there is only one provider,” says Kenneally, “as has been done in other countries where the government mandated a solution.”
Kenneally points out that the atypical nature of the U.S. banking system poses an additional challenge for developers of faster payments mechanisms.
“Any ʻsuccessful’ payments system needs to include all of the end points found at community banks and credit unions,” Kenneally explains. “A solution that reaches 90% of DDAs is not a true success.”
To reach all financial institutions, he says, “solution providers will have to dedicate special efforts to community banks and their core processors to ensure their inclusion.”
Fed’s 5 key goals
On tap, according to the Fed’s outline, are specific goals and objectives related to five objectives that ultimately would define what an improved payments system would look like:
1. Speed—A ubiquitous, safe, faster electronic solution for making a broad variety of business and personal payments, supported by a flexible and cost-effective means for payment clearing and settlement groups to settle their positions rapidly and with finality.
• In August, the Fed announced guidelines that will be applied in considering requests for establishing joint accounts at Federal Reserve Banks to facilitate settlement between depository institutions participating in private-sector payment systems.
• Also, the Fed noted that the payments industry has also begun exploring potential uses of digital currency and distributed ledger technology in delivering faster payment solutions, as well as well as the establishment of same-day ACH credit and debit payments.
• Later this year the Fed will kick off three collaborative industry work groups that will focus on faster payments rules, and standards, interoperable directories, and the payments regulatory landscape.
• The Fed will engage with industry participants to understand gaps and requirements for real-time retail payments settlement, as well as to assess alternative models for enhancing Federal Reserve settlement. The Fed is currently assessing demand for weekend hours.
• The Fed will assess whether it is appropriate to provide services to support the industry in addressing gaps in capabilities or barriers to achieving the desired outcome.
2. Security—A U.S. payments system security regimen that remains very strong, with public confidence that remains high, and protections and incident response that keep pace with the rapidly evolving and expanding threat.
• The Fed’s Secure Payments Task Force is addressing these specific challenges: payment identity management, data protection, information sharing for the mitigation of payment risk and fraud, and law and regulation coordination. The group also is collaborating on developing several open standards initiatives addressing card-not-present fraud, digital currency security, and strong authentication of web applications.
• Looking forward, the Fed will conduct a study designed to inform industry security improvement efforts by analyzing payment system security vulnerabilities and the costs and benefits of various approaches to mitigate them. As part of this study, the Fed will research the misalignment of incentives that impede the advancement of potential solutions, particularly the occasional lack of sufficient incentives for payment stakeholders to implement security protections.
Along these lines, the Fed will also engage in collaborative industry work groups focused on approaches for reducing the cost and prevalence of specific payment security vulnerabilities.
3. Efficiency—Greater proportion of payments originated and received electronically to reduce the average end-to-end costs of payment transactions and enable innovative payment services that deliver improved value to consumers and businesses.
• The Fed has engaged in ongoing collaboration with the industry to understand the barriers to electronic B2B payments adoption and possible solutions, to develop and promote standards to simplify B2B straight-through payments processing, and to help industry efforts to establish a B2B directory.
• Looking forward, the Fed will support a three-year initiative to catalog existing e-invoicing standards and design an electronic invoice interoperability framework for the U.S. market.
It also will support and guide a multi-year industry-led collaborative initiative to develop a remittance data standard and outline a roadmap for achieving widespread industry adoption.
To underscore this particular effort, the Fed plan pointedly remarks: “The Federal Reserve will also seek to understand more fully why small and mid-sized businesses use checks heavily for B2B payments.”
4. International—Provide better choices for consumers and businesses to send and receive convenient, cost-effective, and timely cross-border payments.
• Looking ahead, the Fed will develop and implement a strategy for engaging proactively with stakeholders to understand better the current landscape and perceived gaps and areas for Federal Reserve research or engagement.
5. Collaboration—Needed payments system improvements are collectively identified and embraced by a broad array of payment participants, with material progress in implementing them.
• The Fed plans to build upon the participation of roughly 500 participants from 400 public and private organizations in its faster payments and secure payments task forces.
However, it recognizes the potential for burnout among such participants. To that end, the participants in an “enhanced FedPayments Improvement Community” will have the opportunity to tailor their engagement by indicating which initiatives and topics are of interest to them and engaging only when and how they wish. Engagement will encompass an à la carte menu of online communication and interaction, webinars, and periodic in-person events.
The Fed also will enhance communication programs to promote the work of the task forces and other Federal-Reserve-sponsored collaboration efforts, as well as to educate stakeholders on desired improvements.