On October 3rd, the Federal Reserve Board announced it was inviting comment on two potential actions it could take in regards to faster payments in the United States:
 
  1. The development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year (24x7x365); and 
  2. The creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks.1
As part of this comment period, the Fed is hosting a series of town hall-style meetings around the country to present its ideas as well as to hear feedback from industry participants. I attended the Fed’s November 9th meeting in Minneapolis and was able to hear from a diverse group on the Fed’s proposal as well as more details from the Fed itself. 
 
While the Fed’s presentation2 and detailed proposal3 can be read and dissected by all, it is the discussion and questions asked by the various industry stakeholders present at the meeting that provides the best insight into how the industry is viewing the proposal. A few key takeaways and thoughts are below:
 
If the Fed moves forward, the solution will be most relevant to community banks and those financial institutions who do not view faster payments as a priority
 
  • The reality of faster payments in the U.S. is that several solutions already exist and are active in the market today – namely The Clearing House’s (TCH) Real-Time Payments System (RTPS). When asked what the ideal time to market would be for the Fed, an attendee promptly responded, “Today.”  This response is telling and why the Fed proposal (or at least the timing of it) was a surprise to many in the industry. Larger FIs, especially those with international exposure, are already moving forward on faster payments and are not going to wait for the Fed – they simply can’t afford it. 
  • Community institutions are likely to wait and see what the Fed does before deciding on a strategy. While this could stifle innovation by several years, it makes sense since community banks are the most resource scarce institutions and will require a huge operational shift to offer 24/7/365 payments. The Fed is a known, trusted player and community banks are looking for more formal guidance on how to adopt faster payment capabilities, something which the Fed can provide.  
Fraud is the biggest concern when considering faster payments
 
  • As I highlighted in our July 2018 report, Faster and Real-Time Payments: New Players Primed to Overtake Legacy Solutions, the biggest concern of those FIs who have already adopted faster payments is around controlling risk. Since real-time payments are irrevocable and immediate, banks are understandably highly sensitive about managing fraud. This continued to be a hot topic at the meeting and specifically, what role the Fed would play, if any, should they move forward. When Fed representatives were asked about fraud, it was clear that they were relying on comments to decide how to tackle this issue including if they should offer it and, if so, what features should be included.
  • A few attendees made the point that current service providers already offer this technology. Rather, they posited (and I agree with) the Fed’s position should be about making sure they can operate within these systems rather than trying to launch their own fraud systems. 
Odds & Ends 
 
  • Roughly half the room raised their hands when asked if they thought the Fed should move forward with its proposal. 
  • A representative from a major U.S. merchant voiced its support for the Fed’s entrance into faster payments stating that it believes that without the Fed, there will be limitations to who can access faster payments, hindering the goal of ubiquity. 
  • Best quote regarding faster payments, “It’s not a revolution, it’s an evolution.”
  • If the Fed moves forward, what role they should provide in offering a directory will be a major talking point. The room seemed to agree a directory needed to be included but how it would be offered was widely discussed. 
  • The Fed said it would not leverage Fedwire technology if it goes forward since it is not fit for the anticipated throughput a faster payments system would require. 
  • As of the meeting date, only five formal comments had been submitted so far – if you have any thoughts, make sure to submit them by the December 14th deadline. 
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1https://www.federalreserve.gov/newsevents/pressreleases/other20181003a.htm
2https://fedpaymentsimprovement.org/wp-content/uploads/frn-faster-payments-settlement-assessment-town-hall-presentation.pdf
3https://www.federalreserve.gov/newsevents/pressreleases/files/other20181003a1.pdf

 

Author

About Rachel Huber

Rachel is an analyst in Javelin’s payments practice. Her focus is on the developing payments industry, with specific interests in e-commerce, person-to-person payments, digital wallets, and generational differences in payment preferences. 

Before joining Javelin, Rachel was an analyst in Fiserv’s global sales organization. She focused on competitive intelligence and thought leadership on emerging technologies in support of the card services division. Rachel began her career in investment management as a sell-side analyst before moving into mutual fund compliance at US Bank.

Rachel holds a BBA in finance and marketing and an MBA with specialization in investment management, both from the University of Wisconsin-Milwaukee’s Lubar School of Business.

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