With faster-payment services growing in the U.S. and the Federal Reserve expected to announce Monday whether it will assume a direct operating role in a real-time gross settlement system, banks and payment processors have not yet considered all the risks associated with the new services, according to a new report.
Those potential pitfalls are outlined in a report released in July, “The Hidden Risks of Faster Payments,” by David Walker, president of the Dallas-based Tiller Endeavors LLC consulting firm. Walker was the president and chief executive of the Electronic Check Clearing House Organization (ECCHO), which created rules for the interbank exchange of check images. The Clearing House Payments Co. L.L.C. acquired ECCHO in 2017.
The Tiller report examines so-called credit-push payments, the operational backbone of some existing or prospective real-time payment systems. It further considers directories—or the lack thereof—of banking credentials that would enable anyone in the U.S. to send money electronically to anyone else at any time.
Credit payments in the world of automated clearing house or bank transfers are considered less risky than debit transactions because the former take money out of the payer’s account before sending, or “pushing,” it to the payee. With debits, the recipient’s account balance is increased first before the money is pulled from the payer’s account.
Still, there are risks in credit payments, and they apparently haven’t received as much attention as risks in debit. “Risks are better understood for debit payments than credit payments,” Walker tells Digital Transactions News.
Risks with credit-push transactions could emerge as real-time payment systems grow. Risk management is easier in closed systems, such as when a payer and payee both have PayPal accounts, for example. But as systems based on the credit-push model expand, the need for directories of routing and posting information will grow because many payers and payees will be using different providers, according Walker.
Among the many issues requiring attention are how many directories are needed, who will maintain them, and how often they will be updated, Walker says. If a directory isn’t updated quickly after a consumer opens a new bank account or changes an existing one, the potential for misrouted payments increases.
“Imagine the database directory, a single directory that has everybody’s record in it,” Walker says. “You think about the maintenance and updates on that. If the directory isn’t updated, the payments are going to go into the wrong account.”
And if a transaction goes wrong, liability could fall on the sender or receiver’s bank, the processors used by those banks, or even a consumer, the report notes. That makes clearly delineated procedures and agreements among the parties essential.
“Credit-push payments are not risk-free, and ubiquitous credit-push payments are dependent on the use of directories to route and post payments to the correct parties,” the report concludes. “The risks associated with credit-push directories are not well understood and could be indeterminately large, potentially including consequential damages. The industry can address these risks through multilateral, uniform agreements, but has not yet accepted that mantle.”