Inside seven plans for a faster U.S. payments system

Inside seven leading plans for faster payments

A task force convened by the Federal Reserve has released its evaluations of 16 proposals to build a faster U.S. payment system. The plans were judged by the task force’s consulting firm, McKinsey & Co., based on how well they satisfied 36 criteria related to speed, security and other attributes.

What follows is a brief look at the evaluations of seven proposals that received high marks.

The Clearing House and FIS

This proposal is one of three that was judged either “effective” or “very effective” for all 36 criteria designated by the task force. It drew praise for being based on internationally tested solutions – the proposal uses technology from VocaLink, which played a key role in the construction of the U.K.’s faster payment system.

The system would be available 24 hours a day and 365 days per year, and financial institutions would be able to connect to it either directly or through a core processing firm like FIS or Jack Henry. The system, which is expected to be launched soon, does not yet include cross-border capabilities.

Kalypton Group Ltd. and ECCHO

This plan was also judged either “effective” or “very effective” for all of the criteria. The solution is designed to approve and clear payments in less than a second. It has the capability to make cross-border payments. And it can be used for all of the major payment types – person-to-person, business-to-business, person-to-business and business-to-person.

On a less positive note, the evaluators said that the proposal would be strengthened by more clearly articulating the value proposition it offers to banks.

WingCash

This is the third of the proposals that was judged “very effective” or “effective” for all of the criteria. It would rely on a digital currency, issued by the Federal Reserve, known as “digital Fed notes.” Each digital Fed note would be a unique webpage with an unchangeable URL and a permanent value. Payments would be conducted by changing the possession of the URL.

The proposal would not require users to have bank accounts, and it drew praise for its broad accessibility. But it would require a game-changing commitment from the Fed, and it is not clear that the central bank is prepared to move so aggressively.

“The solution has already been deployed on a smaller scale and has a proven track record,” the proposal’s evaluation states. “However, the solution depends on central bank adoption to issue digital fiat currency and to act as the operator, as well as on regulatory changes."

Dwolla

The Des Moines, Iowa-based firm would approve and clear payments within two seconds of when they are initiated, according to the evaluators. Dwolla also won praise for its cryptographic safeguards, and for enabling nonbanks such as PayPal, Western Union and Square to participate.

The proposal got lower marks for its three-year implementation plan, its handling of disputed payments, and the fact that it does not yet support cross-border payments.

Mobile Money Corp.

This plan is targeted at consumers who lack bank accounts or rely heavily on nonbank financial service providers. Account holders could receive their paychecks in the system, and then use the funds to pay utility bills, send money to other account holders, or buy goods at agents where the payments are accepted.

Evaluators said that the technology has been deployed in El Salvador, but they questioned how it can achieve a large scale in the U.S. – the plan calls for 450,000 agents within five years. Another issue is that the plan would require substantial support from the Fed.

nanoPay Corp.

This system is already in limited operation in Canada. Evaluators said that the technology can be used to store and transfer digital assets between users on a single verifiable platform.

The proposal would only require a unique identifier – perhaps an email address, a phone number or a Facebook username – to send or receive a payment.

It drew a critique for leaving ambiguity about how payment disputes would be handled. “In the event of fraud, the solution does not provide businesses with 100% protection, as it focuses on prevention rather than remediation,” the evaluation states.

University Bank

This system would allow users to load value from an account at any depository institution. Once the new account was loaded, users could make payments via email and text message.

The evaluators praised the proposal for its security measures – end-user data would be encrypted – but also said that University Bank’s ability to deliver hinges on its ability to enlist financial institutions as clearing banks. “It is unclear how easy this task will be,” the evaluation states.