Digital Transactions Authoritative, insightful and timely information for payments professionals
In a blueprint released Monday for a faster and more secure U.S. payments system, the Federal Reserve called for industry task forces to form early this year and for a “framework” to emerge by 2016 to set rules for near real-time payments.
The banking regulator also set out five broad, longer-term strategies to create the new system, and released research indicating the cost to the industry of implementing faster payments over a 10-year span will total between $3.8 billion and $7.2 billion.
Monday’s announcement caps an 18-month investigation at the Fed of the need for faster payments and of ways to make them a reality. In a press conference, Fed System staff made it plain the Fed now intends to act a facilitator in establishing the new system, leading discussion and action but leaving planning and implementation to financial institutions, networks, processors, and other payments players.
The Fed’s announcement also follows efforts to move to faster payments at both NACHA, the regulatory body for the automated clearing house network, and The Clearing House Payments Co. LLC, a New York City-based processor and technology vendor controlled by the country’s largest banks. NACHA announced its plan for same-day settlement early last month, following The Clearing House’s October announcement of a plan to build a real-time system.
It wasn’t immediately clear Monday how the NACHA and Clearing House plans will fit into the new Fed blueprint. In the Monday press conference, the Fed system officials merely indicated that both organizations have been consulting with the Fed.
Commenting on Monday’s development, Janet O. Estep, NACHA’s president and chief executive, said the organization’s efforts complement those of the Fed. “NACHA applauds the Federal Reserve for its leadership role … and shares much of its vision for the future of payments,” she said in a statement sent to Digital Transactions News. The Clearing House did not immediately respond to a request for comment.
The Fed plan, and any specific rules resulting from the task forces, will apparently not be binding on payments-industry players. The Fed officials said the agency’s authority is limited in this matter and that private-sector firms will have to decide in the end whether to implement the plan.
The Fed has limited its faster-payments considerations to five specific sectors of the payments business where its research indicated real-time or near-real time authorization and clearing make the most sense: peer-to-peer payments, person-to-business transactions (such as expedited bill payments), business-to-person payments (such as wages for temporary personnel), high-value business-to-person payments (for example, insurance settlements), and business-to-business transactions.
These five categories account for 29 billion transactions annually, or 12% of all U.S. payments, the Fed said. Fed officials Monday ruled out point-of-sale payments, arguing these were already well provided for with debit and credit card options. These payments from consumers to merchants have become a battlefield lately for financial institutions, merchants, and technology firms looking to establish mobile services.
A paper the Fed also released Monday, “Strategies for Improving the U.S. Payment System,” sets out four possible ways to design a faster-payment system, based on Fed research and surveys. These include leveraging existing PIN-debit networks, direct clearing on a public Internet Protocol network, building a new network while leveraging existing settlement systems, and building a new network while incorporating features from the ACH, checks, and possibly wire transfers.
The paper lays out a quintet of strategies toward this goal, including engaging with stakeholders, identifying effective approaches, working to cut fraud risk, increasing efficiency for international payments, and enhancing existing Fed payment services. In pursuit of the first strategy, the Fed issued a call for industry executives to participate in two task forces, one on faster payments and the other on payments security, due to be set up early this year.
The Fed’s research includes an estimate of cost and possible revenue. Based on an estimated price of 27 cents per transaction, the Fed paper says a 10-year faster-payments effort for the five so-called use cases will result in a yield ranging from a gain of $1.8 billion to a loss of $900 million.
The paper calls this a range of neutral to net-negative results, but adds it is based on conservative estimates and doesn’t consider revenue from possible add-on services. It also says revenue accelerates toward the end of the 10-year period.
Reacting to the plan, some payments players express impatience with what they see as a slow-moving Fed effort. Jordan Lampe, an executive at Dwolla Inc., a Des Moines, Iowa-based alternative-payments startup that has been a prominent voice in promoting faster payments, says the Fed had to balance the interests of many entrenched stakeholders in the payments business and thus took a “very measured, rational approach to doing this thing.”
But the private sector can’t wait too long for a Fed solution, according to Lampe, whose title at Dwolla is builder. “The market’s not going to wait,” he says. “We’re already having conversations with banks that understand this and want this. The real-time winners are going to be the ones that move first to adoption.”
Of the four options the Fed identified for creating a faster-payments system, Lampe says Dwolla is “probably closest to No. 2,” the one that calls for direct clearing between financial institutions on public Internet Protocol networks. But banks and payment companies will need platforms and applications that differentiate their services, not just speed, he says. “Speed is going to become commoditized,” Lampe says.
