Federal Reserve says faster payments “must be addressed” to meet growing customer demand
The US Federal Reserve Banks have begun planning for a faster payments system in the US, following research that found US consumers favoured such a system and would be willing to pay more for it.
Earlier this year, the Federal Reserve Banks commissioned McKinsey to study demand for faster payments. The results showed that 70 per cent of consumers preferred instant or one hour payments and were willing to pay for them. In response, the Fed carried out a faster payments assessment to identify the use cases for faster payments, develop potential options to accelerate the US payment system, consider the impact of each option and provide an implementation plan.
The options considered included improving the automated clearing house (ACH) system to provide faster and more frequent batch clearing, upgrading the ATM and PIN debit infrastructure to make it more real time, direct clearing over public IP networks and building new infrastructure to support faster payments. The infrastructure could be a new single item clearing infrastructure or a new clearing and settlement platform for retail payments. The Fed is now running a Payments System Improvement consultation to consider the options.
“We are not saying the Fed has made a decision to build a faster payments system,” said Gordon Werkema, first vice-president and chief operating officer, Federal Reserve Bank of Chicago, at a breakfast session yesterday. “We have a process in place for consultation and workshops and then a roadmap. We outlined a process to define how it would go. That would then drive a calendar and time frame. We don’t know the answer until we sit down with the industry.”
The Fed acknowledged that there will be challenges with all of the options. For example, improving the ATM and PIN debit infrastructure would involve aligning many different networks, integrating with corporate cash management systems at banks, expanding the ability to use those networks for credit-push payments changing the economic models behind them. Building entirely new infrastructure allows for more flexibility, but is also the most costly option, while simply improving ACH does not resolve the problem of dealing with systems that were not designed for near real-time notification and clearing.
Despite the challenges, according to Sean Rodriguez, senior vice-president, payments industry relations, Federal Reserve Financial Services, the decision to explore faster payments in the US does reflect a positive change in the public demand for faster payments in the US.
“Six to eight months ago people weren’t sold on the need for a faster payments system,” he said. “That has changed. We are now talking about what it should look like and how we can fit it in. We think there are gains to be had from faster ACH and we are working on that. We will work on collaboration through the councils. Look at our websites and forums – there will be a lot more to come. This will lead to significant improvements in payment system capabilities.”
Werkema added: “The need for faster payment systems must be addressed.”