COMMENTARY: Getting to ‘Yes’ for Faster (And Secure) Payments—Part III

This third and final installment of the Faster Payments series examines some ways the payments industry can get to “yes” on viable solutions—and thereby actually make some progress in making payments more secure and efficient as well as faster.  The Fed will have an indispensable role in fostering paths to real improvements in security. By so doing, it could pave the way to more balanced, cost-efficient, and effective digital payments for the future.

Faster payments can help reduce fraud and inefficiency by moving funding more quickly, but high-speed processing challenges existing risk- management systems that over the years have depended on taking intervals of time to administer checks and tests for authenticity. That means, to get to the benefits of near-real-time execution of payments to support digital business needs, the industry’s existing risk-management and processing infrastructure requires a fundamental re-set.

To a great extent, the faster-payments solution proposals acknowledged changes needed in the payment system. But many relied on existing participants—including the Fed—to work out the details of security, legality, and governance. There was also widespread realization that truly fundamental, breakthrough solutions—digital identity, enhanced authentication, end-to-end encryption—won’t come naturally as long as there is no alignment of incentives to fix the system from top to bottom. This is not an industry that has resolved its problems judiciously or expeditiously.

So what’s the payment system—and the economy in general—to do?

Two parallel paths could and should lead the way to what’s needed: 1) encourage the free market to invest in innovation to fully tap the potential of digital technology in real time; 2) convince the Fed to fulfill the essential role of vetting that market and seeding it with scalable, fully secure, and integrated technology that’s affordable for the entire payments ecosystem.

The Fed’s Faster Payments initiative has already provided a powerful boost to the first path by, in effect, creating an industry showroom for digital innovation. The Fed should continue to look for ways to nurture these developments by providing an integrated default settlement system, committing to building and maintaining participant directories, and integrating its full panoply of services across what looks to be a number of faster-payment alternatives emerging over the next three to five years.

For the second path, someone needs to identify, vet, sponsor, and offer a chance to test and define standards for, the best and most cost-effective security available. The Fed is the obvious and best choice to do this, but—critically—it needs to pave the way to full security as soon as possible, right now.

It’s possible that the variety of faster-payments systems now emerging will find their way to full and real security in the competitive marketplace. If they don’t, when they come to market, the Fed will have already defined and developed baseline solutions that it can simply bequeath to the industry for general use. If they do find their way to full and real security solutions, the Fed can fulfill its typical role of helping the industry standardize upon the new infrastructure.

Either way, the industry—and U.S. economy—benefit. In the process, the Fed, as the arbiter of a new security foundation, provides both an essential insurance policy for digging out of the cybersecurity and fraud disaster we’re facing and a lifeline of sorts for an industry that badly needs to learn how to work together.

Steve Mott is principal at BetterBuyDesign, a payments consultancy in Stamford, Conn. Reach him at stevemottusa@gmail.com.