Article

In the US, it's a slow road to faster payments

Based on its Faster Payments study, the Fed seems to be driving toward an overhaul of the US payments system, but stakeholders prefer a more incremental approach.

September 11, 2014 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

In a Thursday afternoon session at the ATM & Mobile Innovation Summit in Washington, D.C., government and commercial enterprise came to clashing — but courteously  exchanged — opinions about the need for (or at least the desirable degree of) an overhaul of the U.S. payments infrastructure to accommodate real-time payments.

Connie Theien, VP of industry relations with Federal Reserve Financial Services, began the session with a preview of the soon-to-be-released Fed study on faster payments. The findings of this study boil down to a list of choices for improved payments ranging from small steps to sweeping overhaul. The options, as the Fed sees them, are to:

• evolve ACH — perhaps the quickest solution to implement with the fewest required changes. However, the result is near real-time, not true real-time, notification and clearing;
• evolve ATM/PIN debit infrastructure — incorporates real-time capabilities but presents challenges with aligning networks, integrating corporate cash management systems at FIs, expanding credit capability, and changing the economic model;
• direct clearing over public IP networks — leverages existing, low-cost communications networks used worldwide. However assuring stakeholders of the safety of the system will be challenging even if the required security exists;
• build new clearing-only infrastructure (legacy settlement infrastructure) — this might meet the needs for real-time in the target use cases within a reasonable timeframe, however integration with legacy settlement limits the flexibility of the design; or
• build completely new infrastructure — offers the greatest flexibility to meet future needs, but presents challenges of cost and time required for implementation, Theien said.

To illustrate the regressiveness of a payments system that still lets consumers fall back on the quaint explanation that, "the check is in the mail," Theien gave the example of trying to pay back $20 owed to a coworker.

"I sent her an email and said, 'If you use PopMoney or PayPal, I can get you your 20 bucks.' She sent me her address and said, "Mail me a check, or send me a $20 bill in a security envelope.'"

Then Leland Engelbardt, group head of global network products at MasterCard, used Theien's illustration to point out that consumers are perhaps less interested in payments speed than the Fed study assumes.

"The story you told is a good illustration of both sides of the coin — the other one being that the person to whom you were sending the $20 wasn't really that concerned that it arrive immediately. They were OK with a check or a $20 bill in the mail."

Panelist Troy Cullen, president of Elan Financial Services, a subsidiary of U.S. Bank, also expressed wariness about a radical system makeover.

"The outcome of the study was pretty assured," he said. "That's the culture we live in ... we want everything faster. That's just who we've become." But Cullen said that, while he did not take issue with the study contents, he did take exception to its conclusions.

"The main thing I disagree with is that we need to adopt a new infrastructure and a new system," he said. He pointed to the unveiling just two days before of the new Apple Pay concept, noting that while the concept is new, the components are not. "A lot of times people aggregate change by thinking about things in a new way, and I want to stay on that path."

Engelbardt stressed that, at the strategic level, MasterCard and indeed most of the payments industry is on board with the Fed's goal of a faster and more secure payments system. But he suggested that, in the absence of overwhelming consumer demand, continuous improvement of the existing payment system was a better way to go than reinvention of that system to enable immediate real-time payment.

Certainly, he said, there is no disagreement on the proposition that faster is better. "The questions come as we start to roll up our sleeves and in a collaborative fashion industrywide ask, 'How much better?'" He outlined several factors (at right) that come into play in framing an answer.

The more important consideration, he said, is to achieve a collaborative approach with the objective of coming up with a solution that not only achieves its intended result but also offers a business case that will draw all stakeholders into the process.

For the payments industry, this would be determined by ROI, as well as by the ability to offer U.S. consumers the benefit of payment integrity and satisfactory dispute resolution before the settlement of funds, he said.

Theien allowed that there might be many ways to get to the end goal of faster payment. In fact, speed was just one of five goals of the Federal Reserve Financial Services study, she said. The other four include:

• security — including protections and incident response that keep pace with the rapidly evolving and expanding threat environment;
• efficiency — reducing the average end-to-end costs of payment transactions while providing innovative payment services that deliver improved value to consumers and businesses;
• international applicability — giving U.S. consumers and businesses greater convenience, cost efficiency, timeliness and choice with cross-border payments; and
• collaboration — introducing improvements that are collectively identified and embraced by a broad array of payment participants.

As goals go, these are hard to reject. The understandable difficulty comes in reaching some consensus as to how they are best met.

In the final analysis, the Fed's options assessment suggests that building new infrastructure is the optimal solution for meeting the needs of targeted use cases, Theien said.

As custodians of the current U.S. payments structure see it, though, "optimal" does not play nicely with that other most-important criterion — "economical."

Theien said the next steps in the Fed's pursuit of faster payments will be to publish a roadmap that points to "a picture of where we'd like to go." The development of this guide will be the job of an industry task force that picks up where the Fed study left off.

But while all parties might be willing to move forward, a one-hour discussion was enough to confirm that it will be a slow road to faster payments.

cover photo courtesy of kevin stanchfield | flickr

About Suzanne Cluckey

---

Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.