Spotlight: the payments framework in USA

All questions

Payments

In the United States, the primary payment methods are cash, debit card, credit card, prepaid card, cheques and automated clearing house (ACH) transactions. The Federal Reserve estimates that in 2018 alone there were more than 174 billion non-cash retail payment transactions in the United States, with a value in excess of US$97 trillion.⁶ Further, while the most common payment methods continue to be card-based (debit, credit and prepaid), ACH transactions have grown sharply from 2018 to 2020 in both number and value.⁷

Although there is a great deal of industry interest and activity around online and mobile payments, to date, most online and mobile payments are processed using traditional payment infrastructures. Nevertheless, emerging payment solutions can leverage a number of enhancements over traditional payment methods, including improved customer interfaces, increased use of customer data, and integration with customer loyalty or reward programmes or other third-party services used by consumers. These enhancements have the potential to lessen friction and promote consumer conversion and usage rates. Many of the novel legal and regulatory issues surrounding emerging payments are related to these enhancements.

On 11 August 2020, the Federal Reserve published service details on the Federal Reserve Banks' new interbank faster payments system, called the 'FedNow' service, which has a targeted launch date in 2023 or 2024.⁸ FedNow will be a real-time gross settlement (RTGS) system that will allow payments to be settled in a matter of seconds, under which settlement entries will be final and irrevocable after a transaction is processed. Following up on this announcement, on 11 June 2021, the Federal Reserve published proposed amendments to Regulation J to govern funds transfers through the FedNow service by establishing a new Subpart C.⁹

A private-sector RTGS is already in place in the United States; however, the Federal Reserve has indicated that the existence of a competing publicly provided RTGS may enhance efficiency and safety issues that could arise in a single-provider market, including by promoting competition, spurring innovation, lowering prices and creating buffers against a single point of failure in the payment system.

Once operational, banks will be able to accept, transmit and settle payments 24 hours a day, seven days a week and 365 days per year. The FedNow service is expected to support credit transfer use cases, including peer-to-peer payments, bill payments and low-value business-to-business payments. Initially, FedNow will process and settle payments up to US$25,000. The FedNow service will be available to banks in the United States and permit customers to send and settle payments instantly through online banking platforms.¹⁰ Once the sender initiates the payment, the recipient will receive a notice from FedNow containing information about the payment and receive a prompt to accept or deny the payment. If the customer accepts the payment, FedNow will transfer the funds to the recipient's bank account and the bank will settle the transaction in the moment. While en route, funds will be held by the Federal Reserve accounts associated with each party's bank. Completed payments will be final.¹¹

On 9 September 2021, the Conference of State Bank Supervisors released a model Money Transmission Modernization Act for adoption by the individual states.¹² The model law seeks to replace state-specific money transmitter laws with a single set of nationwide standards. The model law would establish a common regulatory approach to several elements of money transmission, including stored value, sale of payment instruments and transmission of virtual currency.

In October 2021, the CFPB issued orders to several large technology companies operating payment systems in the United States to collect information on their business practices.¹³ The CFPB issued the orders on the basis of its authority to monitor for risks posed to consumers,¹⁴ pursuant to Section 1022(c)(4) of the CFPA, and it is still reviewing the responses received.¹⁵