In the U.S., paving the path to faster payments requires patience. Lots and lots and lots of patience. For when it comes to the Federal Reserve’s work with the Faster Payments Task Force, there has been no express lane, speedway or interstate—nor could there be, really.
The journey began with a January 2015 paper, “Strategies for Improving the U.S. Payments System.” The task force formed in May that year, comprised of more than 300 participants from all walks—from ADP to the IRS, Wells Fargo to WalMart, Visa to NASA . (Yes, NASA. Their payroll is astronomical, you might say.)
And the task force finished its work in July 2017 after—deep breath—252 meetings and teleconferences, 19 surveys and votes, and 120,000 estimated hours of work, the chronological equivalent of 13.7 years. The work yielded two reports totaling 126 pages, part one released a year ago this month, part two in July.
And in retrospect, that might be the easy part.
The goal to create a faster payments system U.S. by 2020 is not only ambitious: It’s multi-faceted as well. These lickety-split payments must also be efficient, secure and open to everyone.
Now task force members will spend the next two-and-half years implementing those recommendations to create a unified method of handling real-time payments.
To be certain, fast payment options already exist in the market today. But they aren’t always available to every person, business and every, let alone embrace various types of payments such as checks and credit cards.
Equality and quality in the ecosystem
“There are systems that work in closed networks to facilitate a fast payment between two parties. But if a third party comes in, that last party may not be able to make a payment with the same level of security and speed,” says Ian Schweid, head of product management for Coral Gables-Fla.-based Mercantile Bank and a member of the task force.
And task force leaders contend that situation is just not good enough.
“We need an ecosystem that allows anyone to pay anyone they want, anyway they want in an efficient, safe manner,” adds James Angel, associate professor at the McDonough School of Business, Georgetown University, who was on the original task force. He has since been assigned the Governance Framework Formation Team, an interim work group to implement the recommendations.
That established, “We’re not starting from a blank slate,” says Sean Rodriguez, strategy leader for faster payments for the Fed and task force chair. “There are capabilities currently in the market that already have highly engaged users. But coordination work needs to be done to continue the momentum of these efforts.”
Angel believes interoperability represents one of the keys to that happening—the path to faster payments literally connecting many other roads. “We’re at the same stage as the early days of the interstate in the 1960s,” he says. “There were highways you could travel on real fast, but they were not always connected.”
Rodriguez says The U.S. Path to Faster Payments papers contain “a treasure-trove of ideas. Twenty-two faster payment solution proposals were submitted within the task force process. You will see that 16 of them were willing to move forward with publication in the final report.”
Before the faster payments task force was ended in July, a collaborative work group was established to develop a governance framework. “What governance framework will be needed is yet to be determined. Will it be a trade association? Who will be the members? Will it be financial institutions only or will businesses, consumer groups, technology companies, advisors and academics be included?” asks Rodriguez, who will also be chair of this industry work group.
While early 2018 will focus on laying the groundwork, the group should move on by midyear to deal with advocacy, education, emerging technologies, cross-border payments, fraud detections and reporting, Rodriguez says.
This could—and ideally should—mark a major turning point, as the patience required to construct the blueprint turns into full-bore road construction.
What’s more, many capabilities will be considered. Enabling the inclusion of contextual payment information with the actual payment can prove a game changer, Rodriquez says. For example, a company may electronically submit a payment to a second company, but detailed billing information related to the payment is most times passed along in a separate communication stream. This requires manual reconciliation challenges and payment posting delays, something the new system will hopefully alleviate.
Another key feature of a new payments system is “transparency.” Consumers can often make an instant payment, but not get a notice that the payment was received until hours or even days later. “Notifications often lag the actual payment. Ideally, a new payments system would act like FedEx or UPS where you can go online and find out exactly where your payment is,” Rodriguez says.
Some view the U.S. payments industry as lagging behind other regions where payments are often much faster. In November, banks in eight European countries—including Italy, Spain and Germany—began to offer an instant payment system that can send roughly $18,000 within 10 seconds.
Rodriquez takes exception to such comparisons. “We’re not trying to fix something that is broken. The U.S. is a $18 trillion economy with more than 10,000 financial institutions and more than 21 million businesses making payments. Given this complexity, it’s understandable that pursuing an improved payment system would take time.”
Still the U.S. clearly has some disadvantages to facilitating real-time payments. The magnitude of the number of financial institutions involved alone is staggering.
Even Canada has less than a dozen big banks that set standards for payments. Getting a handful of banks to agree on a standard is a lot easier than getting thousands. Another difference between the U.S. and other countries is that elsewhere, a central bank sets the rules that everyone follows.
“In other countries one entity decides what everyone else has to do,” Schweid says.
“Instead, we have decided to take a market-driven approach that will allow for more innovation.” While Washington could’ve set the rules on its own and required everyone to follow them, Schweid notes that “the Fed wisely chose to facilitate the effort, not mandate it.”
“We want a system that allows for fair competition that anyone can plug into,” Angel says. “We don’t want a system where one player wins—like you had with VHS versus Betamax [videotape] or when Microsoft Windows became the standard."
Having more technology options should also allow more consumers and businesses to participate. “We want it so that someone who is unbanked can pay Joe the Plumber,” Angel says. “It might be by e-mail or by mobile phone, but our dream is to make anything possible.
Some see the 2020 goal of a ubiquitous, safe and faster payments capability in the U.S. as overly ambitious. But the looming deadline does not scare Rodriguez.
“In this country, we already have considerable capabilities in the marketplace today along with some that are in the pipeline. Additionally, the task force participation levels and its results reflect the strong enthusiasm and momentum for this goal in this country, so I say it is 2020 or bust,” he says.
And so, while the U.S. path to faster payments is under construction, that sound you hear is one of businesses, banks, retailers and consumers revving their engines.
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Lauri Giesen, a contributor to BAI Banking Strategies, has spent more than 25 years covering banking technology and payments for many financial publications.