Regional Feds launch push for faster payments

The Federal Reserve Banks have outlined a 10-year plan to improve the US payment system and are looking to the payments industry and general public to provide the detail.

In a consultation paper published yesterday, the regional reserve banks identify what they believe are the "key gaps" in the payment system and set five broad targets to address them.

The paper asks the wider payments industry to suggest specific tactics for meeting these targets and to comment on the role the reserve banks should play in implementing them.

Innovation in the US payment system has historically been driven by the private sector. Its payment networks were initially founded by the banks and later sold off to the likes of Visa and MasterCard.

However, the reserve banks say: "It is sometimes beneficial for a central co-ordinating body to take steps to facilitate co-operation to address network or co-ordination challenges that otherwise impede innovation, efficiency, and other public benefits."

The Fed's strategic direction (updated in October 2012) sets out the need to improve the speed and efficiency of the payment system with a particular focus on the end user – the person or institution originating or collecting the payment.

Yesterday's paper stresses the need to speed up retail payments. "Today, US consumers can't make a near-real-time payment in a convenient and cost-effective way from any bank account to any other bank account," it says.

Moreover, the reserve banks say there is a growing demand for most steps of the payment process – the account validation, notification of payment, availability of funds – to be conducted in or close to real time.

At a minimum, the reserve banks say, within 10 years the industry must have collectively identified improvements to make and have made "material progress" in implementing them.

The paper calls on the industry to establish a "ubiquitous electronic solution" for making retail payments that does not require the sender to know the bank account number of the recipient. A "near-real-time" retail system, it says, could also "spur" innovation in mobile payments.

Claudia Swendseid, a Federal Reserve Bank of Minneapolis senior vice-president, welcomed the existing mobile developments in a presentation last week.

She said applications that allow smartphones to be used for payment activities are "a really interesting change on the front end [of transactions]" but rejected the suggestion they are especially revolutionary. Most of the payments originated by a mobile device are still being cleared by a card, she explained.

Swendseid also noted that "very few consumers are actually using their phones for payments". Around 56% of US consumers use smartphones and, of them, only 29% use it for mobile banking. Even then, she said, most will only use it to check balances rather than make payments.

The reserve banks expect that over the long run the increasing "electronification" of the system should also reduce the average societal costs of payment transactions. They suggest that "more aggressive actions" may be needed to accelerate the modest decline in cheque writing.

Consumer and business, they add, should also have a wider choice when it comes to making cross-border payments, which the reserve banks say are currently "slow, inconvenient, costly and lack transparency regarding fees and timing".

Finally, the reserve banks say they will work with the industry to promote better security.

Swendseid, who liaises with payments groups on behalf of the Fed, warned there is "no such thing as a foolproof system" but insisted the Fed's infrastructure has a good track record. "None of our payment services have been compromised, hacked, violated in any way shape or form to date," she said.