Make Payments Faster, And Stop Trying to Start New Networks, Fed Conference Speakers Say

When it comes to payments, the United States might be considered the land of the gap, according to a Federal Reserve assessment issued earlier this month. The assessment is the first of a three-part research study aimed at spurring the modernization of U.S. electronic payments, which many public-sector researchers and private-sector payments executives say lag behind faster and more secure payment systems in other countries.

“At the heart of the strategy is a vision to improve the end-to-end speed, efficiency, and safety of the U.S. payments system over the next decade,” said Sandra Pianalto, president and chief executive of the Federal Reserve Bank of Cleveland and chairperson of the Federal Reserve’s Financial Services Policy Committee. “By end-to-end, I mean more than just interactions between banks; I mean from the point of payment origination to the point of receipt.”

Pianalto made that comment Tuesday while giving the keynote address at the Federal Reserve Bank of Chicago’s annual payments conference. A key conference topic was the Fed’s “Payment System Improvement—Public Consultation Paper” released Sept. 10 that outlined eight “gaps and opportunities” in the U.S. payment system. Each topic qualified as a both a gap and opportunity:

• The persistence of paper checks. “There is still too much paper,” said Pianalto. “While the share of check payments in the U.S. has been declining for many years, it still represents almost 20% of all non-cash retail transactions, or 60 million transactions per day. America’s payments system is costlier as a result.”

• Lack of real-time or near-real time payments when such systems have been or are in the process of being implemented in the United Kingdom, Australia, Singapore, Poland, and Mexico.

• The difficulty of newer payments services in gaining market penetration because of the deep roots of legacy payment systems.

• The shortcomings of those legacy payment systems (credit/debit cards, automated clearing house, checks, and wire transfers), which to greater or lesser degrees lack real-time account validation, assurance that a payment will not be reversed or returned, timely notifications of receipt, real-time posting, and data masking, which forces end-users to disclose bank-account information to each other.

• Slow, inconvenient, and costly cross-border payments; complex business-payment systems, and consumer fears over security. Mobile devices also make the list, although the paper plays up their opportunities for payments.

Pianalto didn’t attempt to offer a solution to every problem listed, though she envisaged what an ideal payments landscape would look like it 20 years. Its chief attributes will be speed, ubiquity, and security.

“Our vision is that most payments will be executed in real time,” she said. “This would mean that any consumer or business would be able to make an immediate payment to anyone, electronically and conveniently; the sender of the payment could initiate the transaction even without having the receiver’s account information; most payments would be accompanied by confirmation of good funds and timely notification to both parties that the transaction had been made; and the automated payment instruction would accommodate additional information, such as invoice details, to ease reconcilement.”

But achieving payments nirvana will require plenty of effort. Some conference attendees suggested that an authority, presumably governmental, to force upgrades should be tried in the U.S. as it has in other countries, a suggestion others rejected. Still others noted that advancements can be made by collaboration between erstwhile competitors, a phenomenon that has existed in the highly nuanced payments business for years.

Addressing that very topic was another speaker, Boston Consulting Group senior partner Carl Rutstein, who headed up the online travel-booking service Orbitz when Boston Consulting launched it. Rutstein needed to persuade highly competitive airlines to work together, which he did, and noted for his payments audience that some of today’s high-profile newcomers that need collaboration to work may not be trying to solve the right problems.

He cited Merchant Customer Exchange (MCX), the retailer-backed mobile-payments network, and Isis, a mobile-payments system that uses near-field communication (NFC) technology and is sponsored by three big mobile-phone carriers, as examples of trying to do something others have done. “We would argue that trying to create another payment network is folly,” he said. Referencing what he calls low acceptance of NFC technology in the U.S., he described his first reaction to hearing about Isis as, “That is the stupidest idea I ever heard of.”

The real goal of collaborative payment services should be improving the customer’s experience and convenience, according to Rutstein. He praised as an example of productive collaboration the project some banks and The Clearing House Payments Co. LLC announced July 1 that will create a cloud-based service to mask payment data during transactions, enhancing security. “There are plenty of examples of people focusing on the right problem,” he said.