The Federal Reserve System recently issued a paper titled Strategies for Improving the U.S. Payment System that provides a roadmap for end-to-end payment system advances over the short and long term.

Background

The Fed announced its refreshed strategic focus on the development of payment system improvements in an October 2012 speech, which was followed by a September 2013 Payment System Improvement – Public Consultation Paperthat sought industry input on a number of issues. We previously blogged about the Consultation Paper here and here.

Summary of the Fed’s Latest Paper

The Fed’s latest paper distills industry comments to identify specific goals, as well as strategies and tactics to achieve them. While the Fed acts as a service provider to the payments industry, it expects industry to lead payment systems innovations with the Fed in a dual role as leader and catalyst for the improvements it supports.

The Fed’s goals are to:

  1. Increase the speed of payments through electronic solutions, including flexible and cost-effective clearing and settlement processes, in ways that draw more of the unbanked or underbanked into the mainstream financial system;
  2. Deploy strong and dynamic security systems that bolster public confidence;
  3. Reach maximally efficient operations by increasing the proportion of payments conducted electronically (the report references “ubiquitous” electronic payments 47 times to convey that electronic payments must be found everywhere for them to be efficient);
  4. Support an international system for convenient, cost-effective, and timely cross-border payments; and
  5. Continuously collaborate with industry stakeholders to identify the best payment systems improvements.

Strategies and tactics to achieve these goals include:

  1. Collaboration through issue-specific task forces, including a Faster Payments Task Force and a Payment Security Task Force. The Fed will also conduct live forums, surveys, webinars and other events to promote industry discussion on these topics. Those interested should subscribe to receive email updates via www.FedPaymentsImprovements.com. That website will also feature the Fed’s latest research and a schedule of upcoming events;
  2. Identifying faster payment alternatives through the Faster Payments Task Force, including initiatives to overcome core infrastructure, security and operational challenges, as well as the cost and time to implement alternatives. The Fed will consider policy issues that may arise in connection with a multi-provider environment;
  3. Improve safety and security to reduce fraud. Methods may include improving authentication of transactions, parties, and equipment, and sharing fraud and cyber-threat information. The Fed may provide additional payment security research to the extent needed;
  4. Enhance end-to-end payment efficiency, including: A) implementation of the ISO 20022 financial services messaging standard for US payment transactions; B) developing technologies, such as payment directories, that foster the interoperability and security of P2P, P2B, and B2B payments; and
  5. Enhance the Fed’s settlement services, including by expanding hours, although a 24×7 expansion is not expected to be explored until 2016. The Fed will also explore expanding its risk-management services and, with the National Automated Clearing House Association (NACHA), a new same-day ACH settlement service.

The report’s appendices provide a substantial amount of information that supports the Fed’s goals, strategies, and tactics including: descriptions of the Fed’s stakeholder engagement efforts, a summary of industry feedback from the 2013 Consultation Paper, qualitative insights on end-user demand for select payment attributes, and a study on the payments security landscape.

The appendices also include the findings of a consultant hired by the Fed to assess the faster payment alternatives. The consultant identified four options:

  1. Evolve ATM/PIN debit infrastructure to leverage existing real-time functionality;
  2. Facilitate direct clearing between financial institutions on public IP networks using common protocols and standards for sending and receiving payments;
  3. Build new (near) real-time payments infrastructure to address targeted use cases, leveraging legacy infrastructure for settlement; and
  4. Build new (near) real-time payments infrastructure that would also process transaction types handled by legacy ACH and check platforms and, potentially, wire platforms as well.

The consultant also identified a number of options that were not ripe for additional consideration, including: evolving the existing ACH, wire, check or telecom infrastructures; a digital transfer vehicle, e.g. leveraging decentralized IP networks for point-to-point communications, comparable to the bitcoin and Ripple payment protocols (for an interesting discussion of a Fed backed digital payment protocol by David Andolfatto, an official at the Federal Reserve Bank of St. Louis, click here); and building a network switch for P2P transfers.

Our Assessment

This Fed initiative provides industry a significant opportunity to engage with the Fed on the development of key payment system innovation, and the Fed appears to favor consensus-driven, industry-implemented modernization tactics. Indeed, the Fed states that it “would not consider an operational role in providing this faster payments capability unless [there are] clear public benefits [and that] other providers alone could not be expected to provide this capability with reasonable effectiveness, scope and equity and following public comment.” We will keep PaymentLawAdvisor readers apprised of developments in this space as they occur.