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A task force convened by the Federal Reserve has made substantial progress in its first few months, but the path to real-time payment in the U.S. is still littered with challenges.
September 23 -
The financial industry and the Federal Reserve are finally on the same page about the U.S. payment system's need for speed. But achieving consensus about what the new system should look like remains a tall order.
March 30 -
Speedier transactions could make a big difference for a wide range of consumers, from hourly workers to patients waiting for medical insurance claims to clear.
March 30
On the road to build a real-time, nationwide payment system, the Federal Reserve is putting its foot on the gas pedal.
Kansas City Fed President Esther George said in a speech Tuesday that she is encouraged by the progress made by a six-month-old faster payments task force. The group has more than 320 members, mostly drawn from banks, tech companies and other firms with a stake in the outcome of the process. Its job is to bring the U.S. payment system into the digital age.
"Simply put, Americans who demand fast and dependable delivery of what they buy and sell want their payments to keep up," George said. "One-third of consumers and fully three-fourths of businesses want real-time payments, and they are now willing to pay for them."
One day earlier,
Perhaps the biggest headline from the newly released document is that the authors hope the modernization project can be completed no later than 2021, which is two years earlier than the date established a Fed paper from 2013.
The document also sets tentative parameters around how fast is fast enough. For example, private-sector proposals would be deemed effective if they enable transactions to be approved within 15 seconds or less. If the funds are available to the recipient within 30 minutes, a plan would again be deemed effective.
Those proposed standards are a far cry from today's U.S. electronic payment system, where funds are often unavailable for three days or longer.
The task force's criteria also state that a modernized payment system should be available to users 24 hours a day and 365 days a year. It should allow the sender to initiate payments based on minimal information, such as the recipient's name, email address or phone number. And it should be available through mobile devices.
In addition, the criteria also lay out detailed safety and security standards. For instance, the two parties to the transaction should not learn each other's bank account numbers, or any other sensitive information.
During two recent interviews, Sean Rodriguez, the Fed's faster payments strategy leader, spoke to American Banker about the task force's work.
The interviews touched on the criteria that are being developed to judge private-sector proposals, the Fed's remaining options if task force's efforts fail, and why the task force is pushing for the completion of a new system before 2023, which was the project's original target date. The interviews have been edited and condensed.
You've set up a process for private-sector companies to submit proposals. Do you think we'll see a lot of interest?
SEAN RODRIGUEZ: That's our goal. We want the best and brightest ideas on the table, and I think the fact that we have 320 folks on the task force initially is a clear sign that folks are enthused.
The enthusiasm that you're referring to, my impression is that wasn't necessarily present, or not nearly as prevalent,
Well, I'd like to give all the credit to the Fed. [Laughs.] Yeah, that's tongue in cheek, of course.
All of the input and dialogue we've been facilitating with the industry — people went from this notion of "What problem are what we collectively trying to solve?," "What's the business case for some of this?" to, "You know, the rest of the world's moving forward here."
I think the financial institutions were looking at some of the innovation that's happening, particularly from the West Coast with some of the nonbank providers of payment services, saying, "Hey, we should pay attention to this."
In 2013 the Fed
To clarify that, that 10-year horizon I think gets misconstrued at times, in that we put that as a suggestion in what we called the consultation paper. And it was universally called out as kind of, '10 years is way too long.'
Based on my reading of the criteria, a proposal would be deemed "effective" if it's deemed a credible plan to achieve initial implementation by 2019, and ubiquity by 2021. And then something would be "very effective" if it was implemented faster than those dates, and less effective if it fell behind that timeline. How did the group reach those goals or dates?
I would consider those drafts at this point, and still under debate and discussion.
In the criteria document, there's also a discussion of the costs of building a faster payment system. That's been a barrier to action in the past, the idea that you would need to show how banks will make money from a system before you start building it. How is the group thinking about these cost issues today?
There's a bit of debate on both sides of the question there, of how much should we be focusing on that. It's a sizing issue in terms of what it would cost the industry to implement a faster payments capability, versus how you would actually pay for it. So it may be that that cost criteria gets modified quite a bit based on the current dialogue of the task force.
This is, intentionally I think, a pretty ambitious document. Is it realistic to think that any proposal you get is going to meet every one of these criteria that you've laid out?
I think everybody believes this is ambitious. If someone could jump over each of these bars that are laid out now, as most effective, it's going to be tough. It's going to be really tough.
Of course we're not going to get to something great unless we have some tough work to do. So I think the sentiment is that it's aspirational in many ways. But it at least gives folks a roadmap to think about how they could address some of these needs and issues.
The Fed has a responsibility to the public interest. And this process has a major role for the private sector, including either the construction of a new system, or the construction of improvements to the existing systems. At the end of this process, who's going to own that system? Or is it too early to say?
I think your last comment is most accurate. Too early to say.
Could the Fed establish a mandate for banks to set up a faster payments system on its own? Or is that something that the Fed would need to get congressional approval to do?
We don't have any regulatory or legislative mandate, or ability to establish a mandate. That's outside our purview, as the central bank. It would have to come from a higher authority, of course being the Congress in this case.
And obviously you're hoping it doesn't come to that. But is that something that's a possibility, that the Fed would go to Congress and seek that authority?
I think that would be pure speculation on my part. I've got great faith in the process we've lined up, and more importantly than the process is the people that are engaged here. We've got the U.S. payment system's best minds engaged here.
