A number of daunting challenges face the U.S. payments industry as it sets out to make speedier transactions available everywhere in the country within three years, according to a report released this week by Aite Group, a Boston-based consulting firm. Among these challenges are the absence of an industrywide mandate and the need to integrate swifter processing with pokier systems left over from an era of more leisurely payments, argues Linda Coven, an Aite senior analyst, in the report.
Last month, the Faster Payments Task Force released a final report setting out that ambitious 2020 deadline for what is widely expected to be near-real-time payments processing. The Task Force’s 300-plus members, most of them executives with payments companies, had met for two years under the aegis of the Federal Reserve to evaluate faster-payments proposals and hash out a way forward for the U.S. payments system. The group was reacting to a concern the United States was at risk of falling behind other countries that had already moved to real-time systems.
But those countries had in many cases moved to faster processing in response to national mandates set by banking regulators, something the Fed has studiously avoided. That could be a significant problem now that payments officials must roll up their sleeves to meet the 2020 deadline, says Coven. “There are certainly hurdles to overcome, and one hurdle may well be the lack of a mandate,” she writes. “The U.S. has decided initially to let the market forces move the [financial institutions] toward a ubiquitous network supporting [real-time payments].”
That hands-off approach may encourage a wealth of ideas—the Task Force report presented evaluations of some 16 proposals—but it could also slow things down. Coven contrasts the Fed approach with that of NACHA, the governing body of the national automated clearing house system. NACHA is introducing same-day ACH processing under a rule requiring that financial institutions be prepared to receive same-day transactions. Same-day credits began on schedule last September, with same-day debits expected to follow as planned next month.
But the hurdles don’t end there. Another issue is the nation’s aging processing systems, Coven says. “[Faster-payment] solutions will need internal integration with legacy systems, which tend to be batch-oriented and not designed to handle continuous flows of messages and responses 24/7,” Coven argues in her report.
And the update needs to be more sweeping than just payments systems, she adds. “It’s not just the payment rails but also the bank systems that need to change. To drive 100 miles per hour, you need both better cars and better roads,” she writes.
The requirement for speed, reliability, and low risk will force financial institutions to adjust more than just technology. Changes or additions to “staffing, hardware, fraud prevention, and services designed to ensure high availability,” will be needed, Coven says. She adds that phrases like “end of business day” may well lose significance as processing is required 24 hours a day.
Coven recommends several steps that could make the job easier. For one thing, she argues, starting with peer-to-peer payments is a natural. The processing challenge here is less complex, she says, and a national directory can be more readily compiled because each consumer is likely to have a unique mobile number, if not email address. Business-to-business payments, on the other hand, will present a much more complicated challenge.
She also recommends heavy reliance on payment vendors that have considerable experience with faster payments overseas. These companies, she says, “can prove great resources for bankers.”
Her final words of advice are to adopt an attitude of urgency. “Banks should not be in a wait-and-see stance,” she writes. “[Real-time payments] is going to happen, and there is a great deal of work to be done to prepare.”
Digital Transactions magazine will present a full report in its upcoming September issue on the work of the Faster Payments Task Force and the related evaluations of 16 vendor proposals for real-time payments.