U.S. Real Time Payments: Full Steam Ahead?

Real time payment adoption has progressed at a snail’s pace. With the United States already behind more than 35 countries in terms of real time payments, there are many stakeholders in corporate, financial, and public sector worlds ready and waiting for the rise of faster payments.

2015: The Federal Reserve Releases Strategies for Improving Payments System

After sifting through responses to the Federal Reserve’s 2013 Payment System Improvement – Public Consultation Paper, the Fed provided its recommendations and strategies for faster payments in January 2015, releasing Strategies for Improving the U.S. Payment System.

In the report, the Fed highlighted five key strategies, and five desired outcomes, shared in a figure by the Mercator Advisory Group.

Outcomes:

• Speed: A ubiquitous, safe, faster electronic solution(s) for making a broad variety of business and personal payments, supported by a flexible and cost-effective means for payment clearing and settlement groups to settle their positions rapidly and with finality.
• Security: U.S. payment system security that remains very strong, with public confidence that remains high, and protections and incident response that keeps pace with the rapidly evolving and expanding threat environment.
• Efficiency: Greater proportion of payments originated and received electronically to reduce the average end-to-end (societal) costs of payment transactions and enable innovative payment services that deliver improved value to consumers and businesses.
• International: Better choices for U.S. consumers and businesses to send and receive convenient, cost-effective and timely cross-border payments.
• Collaboration: Needed payment system improvements are collectively identified and embraced by a broad array of payment participants, with material progress in implementing them.

Strategies:

• Actively engage with stakeholders on initiatives designed to improve the U.S. payment system
• Identify effective approach(es) for implementing a safe, ubiquitous, faster payments capability in the United States (beginning in 2015)
• Work to reduce fraud risk and advance the safety, security and resiliency of the payment system (beginning in 2015)
• Achieve greater end-to-end efficiency for domestic and cross-border payments (2015 and beyond)
• Enhance Federal Reserve Bank payments, settlement and risk-management services (2015 and beyond)

These five strategies are the first step, followed by buy-in from other stakeholders, including that of NACHA and The Clearing House, both of which are already working on establishing real time payment frameworks.

What Pushes the Need for Real Time Payments

In a recent article featured in Banking Exchange, the need for and drivers behind real time payments were highlighted, noting the following four in the move to real time payments:

• Regulatory pressures. In many countries that have already adopted it, the main impetus has come from regulators.
• Growing demand. A sense of urgency is growing, albeit slowly, and a need for accelerating real-time adoption in the U.S. is seen as increasingly necessary.
• Consumer expectation. In this country there is an emerging recognition that customers not only expect real-time settlements of their payments, but wonder why they don’t already have it.
• Bonuses for banks. Most important—some observers in fact do see hard-dollar advantages and revenue-generating capabilities, once the real-time payment protocols are established here.

Challenges and Opportunities

Two of the challenges, as highlighted in the report from Mercator, were those of stakeholder communication, setting a realistic timeline, and finding a way to make a multiprovider model work.

The first issue, stakeholder communication and project leadership, starts with the question of leadership and Federal Reserve control. Who will lead the conversation? Will the Fed act as a facilitator, a leader, or will it stay behind the scenes?

The second issue behind adoption is that of timeline design. In Strategies for Improving the US Payment System, the Fed provided perspective on activities and timelines needed to move forward. However, some are broad timelines associated with specific actions, some contain target completion dates, and some contain no specific dates at all. A few of the dates highlighted were as follows:

• 2015: Establish Faster Payments Task Force
• 2015: Establish Payment Security Task Force
• Late 2015-End of 2016: Examine policy issues with multiprovider solution
• Late 2015-End of 2016: Examine approaches for faster payments implementation
• Early 2015-2017 and Beyond: Explore Potential Improvements to Publicly Available Payment Fraud Data
• Mid 2015-2017 and Beyond: Develop Implementation Strategy for ISO 20022
• Early 2015-End of 2016: Develop and implement B2B electronic payment education programs/toolkits

A final consideration, according to the report, is the question of “how?” How will a multiprovider model work in real time payments? Part of the Fed’s plan, the need for a multiprovider model is inevitable, and the answer lies in being able to make multiple forms of real-time payments platforms work together.

For more information, contact the Mercator Advisory Group to download the full whitepaper, Faster Payments: Developments and Challenges for U.S. Commercial Payments.

Related Real Time Payments Resources

• The Changing Landscape of Real Time Payments
• The Global Adoption of Real Time Payments Systems
• Real Time Payments on the Horizon for the US
• Real Time Payments: Are They Already Here?