New proposals aim to modernize U.S. payment system
Boston Fed faster payments ‘town hall’ gathers public input on future of U.S. payments system
Two years of study by a special task force on the need for a faster U.S. payments system ended with one clear message: The time is now. The convenience of a system that allows funds to be transferred anywhere in real time, instantly available to the people and businesses who need them, would benefit millions, but it’s about more than that.
Payment lag times hurt people with limited funds if their money isn’t in their accounts to prevent overdraft, late payment, and other fees. Businesses also often need instant access to their cash, to avoid short-term borrowing to cover critical costs, or to more quickly access the capital they need for growth.
The Faster Payments Task Force, convened by the Fed and made up of financial institutions, businesses, payment networks and processors, consumer groups, regulators and academics, has urged stakeholders “to seize this historic opportunity” to develop a ubiquitous, highly secure faster payments system. The Fed is now working to make it happen – and determine what its role should be. Last week, the Boston Fed hosted one of a series of nationwide town hall meetings on faster payments to gather information and input.
The town hall included a detailed presentation, and attendees asked questions and offered opinions to Fed officials, who, in turn, urged the public to submit comments through Dec. 14. Specifically, the Fed is inviting comments on actions it could take to support faster payments, including:
- Developing a 24/7/365 service for real-time interbank gross settlement of faster payments
- Creating a liquidity management tool enabling transfers between Federal Reserve accounts on a 24/7/365 basis. This would support services for real-time interbank settlement, regardless of whether those services are provided by the private sector or the Fed.
“The Fed is not going to do something this big unilaterally or in a silo,” said Marianne Crowe, head of the Payment Strategies unit at the Boston Fed. “We need to understand what the industry thinks about it. Is it helpful? What are the challenges? That feedback and insight is essential, because this could impact a lot of stakeholders.”
The U.S. trails a number of countries and regions in developing faster payments systems. The Reserve Bank of Australia and the European Central Bank, for instance, have already implemented or are on the cusp of implementing real-time payment systems.
“Today, our payment system is again at a crossroads,” said Governor Lael Brainard of the Federal Reserve’s Board of Governors, during a speech last month in Chicago. “There is a growing gap between the transaction capabilities we need and expect in the digital economy – fast, convenient, and accessible to all – and the underlying settlement capabilities.”
Without a unifying infrastructure, the U.S. currently relies on what Brainard called “a patchwork of systems” to move payments along, and that leads to delays in making the money available to recipients. That can hurt people living paycheck-to-paycheck, because it can lead to high-interest short-term borrowing and various fees or penalties if their accounts have insufficient funds.
The current system also settles funds between banks on a deferred basis, “like IOUs between banks,” Brainard said. The risks that come with a build-up of obligations between banks can be mitigated, but those risks are likely to grow as electronic payments grow, she said.
A Fed assessment over the last year found that modernizing its infrastructure to support 24/7, payment-by-payment interbank settlement in real time (known as real-time gross settlement, or RTGS) would have clear benefits in minimizing risk and maximizing efficiency.
“A 24 by 7 economy with 24 by 7 real-time payments needs 24 by 7 real-time settlement, and RTGS is the way to achieve this,” Brainard said. “That’s where we believe that the Federal Reserve and the private sector together need to make investments for the future.”
Crowe said the Fed needs to be out front on faster payments because of its historic role in ensuring the nation’s payments system is safe, secure and efficient.
“We are viewed as a trusted, neutral party,” she said. “We are committed to working with diverse stakeholders to decide what the right path on faster payments should be.”
Stakeholders in the payments industry are invited to submit public comment by Dec. 14.