U.S.-based faster payments systems are being set up in dozens of countries around the world, but when it comes to the prospect of connecting those networks, at least one Federal Reserve official has significant reservations.
Fed Gov. Christopher Waller, speaking at a financial technology conference in India on Wednesday, said he is "not entirely convinced" that interlinking will deliver the faster and cheaper settlements that consumers and businesses seek.
"Not all frictions that slow payments down are bad," Waller said. "Certain frictions are purposely built into the global payment system for compliance and risk-management reasons."
Faster cross-border payments could mean greater costs on banks and an uptick in undesirable activities such as money laundering, fraud and terrorism finance, Waller said.
"There is no silver bullet that increases speed and efficiency without tradeoffs," he said. "Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks that participate in them."
Waller said the technological innovations needed to enable cross-border instant payments would probably be the easiest hurdle to clear. The greater costs, he said, would come from the legal, compliance and operational considerations that come with interlinking instant payment systems.
Despite the global push for faster payments, Waller said that the demand for instant settlement is not universal. While those who would receive payments — be they employees or merchants — have an incentive to pay up for immediate access to funds, those sending payments do not.
One notable exception to this is remittances sent between family members. But Waller said those transactions alone would not justify the investment needed to build out an international instant payments system.
"Remittances are only a small percentage of the value of cross-border payments, so we'd need to weigh the benefits against the costs of a potential public-sector intervention to shift incentives," Waller said.
He also noted that bilateral agreements, in which two countries connect payment systems directly to one another, have failed to gain meaningful traction in the past. He pointed to the Fed's experiment in providing direct linkages to its Automated Clearinghouse, or ACH, service to Europe and Canada. Those arrangements were abandoned because of insufficient uptake. Waller worries that a similar fate could fall upon bilateral instant payment systems.
"Economic viability needs to be a cornerstone for any action we may take," he said.
Instead, Waller said a viable system would have to be multilateral, meaning many countries could connect to it at once. But such an arrangement would present its own set of challenges, given the disparity between regulatory regimes and the different market dynamics from one country to another.
Waller said that while it made sense for Brazil to mandate use of its domestic instant payments network and India had success partnering with the private sector to incentivize use of its network, the U.S. — with its 9,000 depositories of various sizes — has seen use of the Fed's FedNow platform grow slowly since it launched last year.
"We have close to 1,000 depository institutions on the network, including many of the largest banks that will drive origination volume," Waller said. "Yet, we are still at the beginning of a multiyear journey of establishing a ubiquitous network covering the majority of institutions in our country."
Despite his skepticism about the need or viability of connecting the world's growing collection of domestic instant payments systems, Waller said it is important for the Fed to collaborate with other central banks on ways to improve cross-border transactions.
"I do see the value of a coordination role for the public sector to improve cross-border payments, an effort in which the Federal Reserve has been and will continue to be heavily engaged," he said. "We will continue our engagement with international fora to improve the speed and efficiency of cross-border payments and to investigate the issues critical to interlinking payment systems."
