CHICAGO – In a payments industry in which traditional players fear less cooperation as competition heats up, the Federal Reserve Banks say they stand ready to work with anyone and everyone in the payments ecosystem.
Future collaboration is vital to improve the U.S. payments system, says Sandra Pianalto, president and CEO of Federal Reserve Bank of Cleveland.
Pianalto delivered that message in her keynote address Oct. 22 in kicking off the annual Chicago Payments Symposium at the Federal Reserve Bank of Chicago, saying such industry cooperation was the theme of the 2012 symposium.
"The Federal Reserve intends to be a partner and catalyst as the industry moves forward in the years ahead," says Pianalto, who chairs the Financial Services Policy Committee for the nation's Federal Reserve Banks.
To that end, the Federal Reserve has established a vision for what the U.S payments system will look like in another 10 years.
The payments system will move transactions faster from origination to settlement and function with much more efficiency while doing so, Pianalto says. In addition, consumers will demand many choices and, as such, the payments industry will have to develop an "array of payments instruments" that will satisfy those needs, she adds.
Increasing the speed of payment transactions calls for technology that will make electronic and mobile transactions as fast as cash payments, Pianalto says.
Cash is the fastest payments instrument because it is immediate and certain, Pianalto adds.
"The merchant has the money, the customer has the merchandise, and the transaction is complete," she says. "While cash as an instrument of commerce is declining as a share of payments, it nonetheless provides a standard for all other payment instruments in terms of speed of clearing, settlement and reliability."
When the transaction speed equation is solved, the industry must find ways to cut costs and make payments, especially business-to-business payments, more efficient, Pianalto says.
While mobile payment systems have yet to gain traction in the U.S., their momentum in countries like Kenya, South Africa, South Korea and Singapore "shows that the right combination of standards, teamwork and marketing can yield strong demand for mobile and contactless payments," she says.
The Federal Reserve Banks have been working with mobile industry stakeholders in the U.S. to get a better understanding of the direction of mobile payments and to "better understand the potential barriers and risks," Pianalto says.
In a panel discussion about the current state of payments, David Stewart, senior expert at McKinsey & Company, reminded symposium attendees that much of the movement and competition occurring in the payments industry results from the fact that "payments is a for-profit business."
"The industry will evolve as fast as the players within it will allow it to evolve," Stewart says. "Many of the winning strategies will be based on what the customer wants and needs."
Industry leaders will watch consumers closely to determine what they want, Stewart says. "We know it will likely be something very fast and very cheap," he adds.
Mark Veyette, senior vice president and chief information officer for Leap Wireless, dropped a bombshell of a hint about which way the payments industry could be headed without more collaboration amongst industry players because non-traditional players would gain all of the momentum.
"Imagine 10 years from now, your sons and daughters are at a cocktail party and someone asks them which bank they use, and they say Google," Veyette says.
In an attempt to illustrate to the bank leaders in attendance the risk of not advancing the payments industry and embracing new technologies, Carol Coye Benson, managing partner of Glenbrook Partners, pretended she was a music industry consultant addressing those in the industry in 1999.
She mentioned that consumers listening to online music would come along slowly, but it was coming.
In payments, Benson says "good federal regulations" that encourage innovation, such as occurs in other countries, would provide an incentive for those in the banking industry to not get caught trying to catch up to technology, as occurred in the music industry.
"We don't need heavy-handed regulation, but we need something to help push the industry forward," Benson says.
Without that, Bensons says her company foresees "a more fragmented payments landscape" in the future that would shift away from banks as the main revenue receivers.
It will benefit the overall payments industry if the Federal Reserve Banks can engage with traditional providers, such as the banking industry, and with new market participants and innovators, Pianalto says.
"Many successes in the U.S. payments system occurred as a result of teamwork between multiple industry participants, including the Federal Reserve," she adds.