By Bill Camarda
The recommendations define what must happen by 2020 to establish an advanced payment system that’s “faster, ubiquitous, broadly inclusive, safe, highly secure, and efficient.”2 As expected, the recommendations assume competition and collaboration between multiple payment services providers, rather than top-down imposition of a single faster payments system. In such an environment, “all payment service providers [should be] capable of receiving faster payments and making those funds available to customers in real time.”3
The U.S. approach to faster payments differs from the approach taken in some other countries. As the Task Force puts it, “Globally, a number of countries have addressed these challenges through mandates and/or the development of a national faster payments system with a single operator. In contrast, the United States is taking a market-driven approach to payment system innovation that avoids government mandates.”4 As one member of the Task Force board noted, “the U.S. Federal Reserve does not have the authority to mandate a faster payments solution... Giving the Fed that kind of authority would require action by Congress,” which some experts believe is unlikely.5
The Task Force report says that the multi-operator approach can lead to greater customer-focused innovation. However, it also presents challenges due to the “competing interests of solution operators, service providers, and end users.”6 Moreover, if multiple interoperable systems exist, a weak link could compromise security, increase settlement risks, and discourage participation. Nevertheless, the Task Force report argues, its own experience shows that a decentralized approach can work:7 since May 2015, it brought together over 300 stakeholders, attracted 22 widely diverse proposals, and offered detailed feedback to improve each solution, rather than “pick a winner.” Sixteen of these proposals have been made public, and all of them informed the Task Force’s recommendations.8
Proposals came from key players in the existing payments system, independent bankers, pioneering financial technology (fintech) companies, and other sources. Some build on existing systems, use familiar centralized structures for clearing and settlement, and rely on traditional assets. Others propose entirely new distributed systems, and reliance on cutting-edge technologies or emerging digital currencies.9
The Task Force report said that many of these proposals could indeed improve speed and efficiency, and some “chart a way forward for payment safety and security, employing a variety of approaches for payer authorization, fraud prevention, data encryption, and use of aliases.” But it also found significant shortcomings in how many of the proposals addressed security, governance, scalability, adaptability, inclusivity, and other issues. Those limitations helped focus the report’s recommendations in these areas:
Governance and regulation. The Task Force proposes creating a voluntary, industry-led framework for collaboration and decision making. It also recommends developing rules, standards, and baseline requirements to ensure secure and practical interoperability; and active collaboration amongst regulators to modernize existing rules so they accommodate faster payments.10
Infrastructure. The Task Force proposes quickly developing a design for directory services to serve as the foundation of interoperability, noting that several competing directories are already in the works, and need to be reconciled.11 As payment services provider The Clearing House has noted, a directory-based approach improves processing efficiency, “eliminates [the] need for bilateral exchange of banking information/credentials, limit[s] instances of sensitive data,” and gives financial institutions more flexibility in choosing service providers.12 The Task Force also says the Federal Reserve will need to update its settlement mechanisms, and might need to play a wider operational role in areas such as transaction processing, network access, security, and cross-border payments.13
Sustainability and evolution. For faster payment services to succeed, the Task Force says, there must be better methods for “fraud detection, reporting, and information sharing,” as well as better industry-wide education and advocacy, and more research on the opportunities and risks associated with emerging technologies. Noting that international payments present unique security, settlement risk, and regulatory challenges, it proposes more “research and analysis” to understand these, and plan for interoperability with faster payment systems in other countries.
While this report ends the Task Force’s official work, it has handed the baton to an Interim Collaboration Work Group (ICWG) which is already working to propose an ongoing governance framework. The goal is to establish industry-wide governance should be in place by Summer 2018 – a key step towards executing on many of these recommendations.14
Some recommendations, however, such as enhancing the Fed’s settlement systems, would require action by the Fed itself. The Fed’s leadership plans to review these recommendations. According to Federal Reserve Board Governor Jerome H. Powell, co-chair of the Fed’s payments improvement initiative oversight committee, the Fed “look[s] forward to communicating our next steps in the coming weeks."15
The U.S. has moved one step closer to a faster payments system, as a Fed Task Force outlines the steps needed to get there by 2020. The Task Force recommendations assume voluntary competition and collaboration between multiple payment services providers, rather than top-down imposition of a single system.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “The Global Adoption of Real-Time Retail Payments Systems,” SWIFT, 7-8; https://www.swift.com/node/44536
2. “Faster Payments Task Force Final Report Part Two: A Call to Action,” 3, Federal Reserve Faster Payments Task Force; http://fasterpaymentstaskforce.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf
3. “Federal Reserve commends efforts as Faster Payments Task Force concludes,” Federal Reserve, https://www.federalreserve.gov/newsevents/pressreleases/other20170724a.htm
4. “Faster Payments Task Force Final Report Part Two: A Call to Action,” 4, Federal Reserve Faster Payments Task Force; http://fasterpaymentstaskforce.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf
5. “Does The U.S. Faster Payment System Need A Federal Mandate?” PYMNTS.COM; http://www.pymnts.com/news/faster-payments/2017/federal-mandate-us-payment-system/
6. “Faster Payments Task Force Final Report Part Two: A Call to Action,” 29, Federal Reserve Faster Payments Task Force; http://fasterpaymentstaskforce.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf
12. “The Value of Bank Owned Directories,” The Clearing House. http://www.prodevmedia.com/WACHA/2014/Presentations/9_The_Value_Proposition_Mills.pdf
13. “Faster Payments Task Force Final Report Part Two: A Call to Action,” 31, Federal Reserve Faster Payments Task Force; http://fasterpaymentstaskforce.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf.
15. “Federal Reserve commends efforts as Faster Payments Task Force concludes,” Federal Reserve, https://www.federalreserve.gov/newsevents/pressreleases/other20170724a.htm