To move the U.S. toward a faster electronic payments system, it may be necessary to design a completely new payments infrastructure.
The Federal Reserve Financial Services unit, which serves all of the Federal Reserve Banks, has reached this preliminary conclusion after nearly a year of intensive research and industry feedback on what it will take to improve the speed, security and efficiency of a dated U.S. payments system.
"We believe it is the best option for moving forward to design something new, with new governance and new formats," says Terry Roth, vice president of the Federal Reserve Bank of Cleveland.
"We want to engage the entire industry and build a system from the bottom up," Roth told attendees at an open forum June 17 at the Federal Reserve Bank of Chicago to discuss faster payments.
The Federal Reserve Banks are hosting a series of open meetings this week across the country to continue a process that began in September when they issued an extensive report on options to improve payments technology and systems in the U.S.
While it's not clear which organization might spearhead the development of a new payment system, banks and payments providers have looked to the Federal Reserve Banks to lead the discussion.
As such, Roth and Sean Rodriguez, senior vice president of payments industry outreach at the Federal Reserve Bank of Chicago, outlined possible next steps at the open forum.
The financial services unit was careful to say that building a new payment system did not mean abandoning the current one. This goal could be reached in incremental steps, such as by adding technology as users' needs demand it.
The Financial Services unit predicts it will take 10 years to implement such changes.
Audience members expressed concern that private sector companies are already developing new payments systems, but Roth says the Fed would continue to welcome innovation and competition while establishing "a stake in the ground" on the banking industry's initiatives for all payment types.
Faster payments options could include the evolution of the Automated Clearing House to provide increased batch clearing, or leveraging the ATM/PIN debit infrastructure's existing real-time functionality. In addition, direct clearing could take place between financial institutions using common protocols and the public Internet in a "distributed architecture," Roth says.
A new infrastructure would focus on a single-item clearing that leverages legacy ACH, wire and check systems for settlement, as well as a new clearing and settlement platform for retail payments or a new clearing and settlement platform for all payments.
"Direct clearing supported by common rules and procedures could be considered a component of any design," Roth says. "And a common platform could replace one or more legacy systems and lead to significant efficiency and flexibility in the system."
If a faster payment system is going to become a reality in the U.S., the country's National Settlement Service has to improve, Roth says. The service provides payment settlement to depository institutions that settle for participants in clearinghouses, financial exchanges and other groups. An improvement can start by simply extending the service's hours, Roth says.
The service currently operates from 8:30 a.m. to 5 p.m. ET, or a traditional banking day on the East Coast. "We have to solve the West Coast issue," Roth says. As such, extended hours of 7:30 a.m. to 5:30 p.m. could be a first phase, with a later goal of opening at 9 p.m. for next-day business to coincide with the Fedwire Funds Service.
Exploring the possibility of the service becoming 24/7 would be a goal of any faster payments improvements, but represents "a really challenging, huge leap," Roth says. "Still, there are models out there for us to look at in doing this," he adds.
Sixteen other countries are working on faster payments, with some systems already in place, Roth says, citing the U.K.'s Faster Payments Service, South Africa's Real-Time Clearing and Australia's New Payments Platform as examples.
In light of ongoing cyber attacks and high-profile data breaches, security of a faster payment system has to be a top priority, Rodriguez says.
"The misalignment of participants' incentives results in security weaknesses," Rodriguez adds. If consumers are aware banks or payment providers have a zero liability policy, they may not be diligent in protecting their accounts, Rodriguez says.
The Federal Reserve Financial Services unit says establishing an executive-level advisory council on payment security through Fed leadership could help form a consensus on critical issues.