A recurring theme for Federal Reserve Banks in 2013 had a familiar and highly complicated ring to it for the payments industry. The Fed banks want faster payments in the U.S., but the larger retail banks want to preserve their investments in earlier technology.
The Federal Reserve Financial Services, a non-regulatory unit of the Fed, spent the better part of the year putting together a report on the gaps and opportunities for improving the U.S. payments system. The report became centerpiece for a series of town hall meetings at Federal Reserve Banks throughout the country to address the pressing needs of an old payments system facing rapid technological change.
At a Chicago Federal Reserve Bank event in September, it became clear that payments industry leaders were looking to the Fed to take on more of a leadership role.
"In gathering feedback, we have heard it often that someone needs to step up and take the lead here," says Sean Rodriguez, senior vice president of industry relations for the Federal Reserve system.
Rodriguez conducted a town hall meeting at the Chicago Federal Reserve in November, emphasizing that the Federal Reserve Financial Services' strategic focus was on end-to-end payments, from the start of a transaction to settlement, rather than just on bank-to-bank payments.
In pinpointing gaps and opportunities in the current payments system, the Fed says too much paper remains, mostly through continued use of checks. In addition, too many closed payment systems are being established, and the traditional payments channels lack contemporary features.
The payments system, overall, is too slow and won't be able to keep up with oncoming mobile technology. Ubiquitous real-time retail payments are a top priority.
Obstacles also remain in international and cross-border payments, which lack detailed information, are expensive for banks and remain extremely slow.
As technology advances, so do security concerns in a world in which cyberattacks such as the massive Target data breach have become common. But no one wants security to slow down payments.
"The consensus is we don't want to throw out the current payment rails, but we want to build on them," Rodriguez says.
Mostly, the payments industry wants banks to take an active role.
"Congress would never figure out something that would work for us in payments, so we need to figure it out ourselves," Rodriguez says.
Ideas offered at the Chicago town hall meeting included development of data and mobile technology to connect closed-loop payments systems to allow consumers to send real-time payments to another person without being restricted because they joined a particular service, whether it is PayPal or a person-to-person system such as Fiserv's Popmoney.
An ACH system operating as a real-time 24/7 operation would be a goal worth pursuing, some say.
However, banks thwarted a previous effort by Nacha, which oversees the automated clearinghouse network, to speed up ACH payments. And in the closing weeks of 2013, larger banks making up the Clearing House filed their own report, responding to the Fed's public consultation paper and presenting a view that any modernization of the payments system has to generate a reasonable return on the banks' investment.
Many in the U.S. point to countries that have already adopted a faster payments system, particularly the U.K.
VocaLink won a government contract in the U.K. six years ago to establish the Faster Payments Service. Company CEO David Yates has expressed a desire to help U.S. banks set up a similar initiative.
The Federal Reserve Financial Services estimates the transition to a faster payments system will take 10 years.
Supporters say this timeframe is an eternity for a payments system undergoing rapid technological advancements from the card brands and third-party providers. They insist that the industry has to move faster, taking "baby steps" consistently to achieve goals.
Any consumer or business may soon be able to execute a real-time payment, Sandra Pianalto, retiring president and CEO of the Federal Reserve Bank of Cleveland, said in her final speech at the payments symposium as chairman of the Financial Services Policy Committee.
"It is pretty clear that future generations will not use paper checks," Pianalto says. "Future generations will also rely less than we do on cash, although I hasten to add that cash will remain widely used and widely accepted."
Future generations will expect any payment, whether made online, on mobile or at the point of sale, to be executed immediately, Pianalto adds.
"They will gravitate to financial institutions and other providers that offer this level of service," she says.