Old-school payments networks are looking for ways to speed their pathways. Tech companies are looking to blaze new trails. In the end, however, all roads lead back to one issue security.
That was evident after just a few hours of discussion at a Conference of State Bank Supervisors hearing May 16 in Chicago, at which industry executives, trade group leaders and others answered questions from a nine-member task force of state regulators about how the evolution of the payment system will affect consumers, the law and various industry constituencies.
There was a flurry of questions and viewpoints, but the conversation often veered back to the same question: how can the industry use innovation to modernize the payments system yet better protect its users in the digital age?
The industry witnesses were short on specifics, but bullish on saying that the need for security is understood.
"We know that we have to take care of their privacy," says Bob Steen, chief executive of the $80 million-asset Bridge Community Bank in Mount Vernon, Iowa. "If things slip through the cracks we pay the price."
Steen describes himself as an "unabashed community banker" who has been advocating for an improvement of electronic payments for years. His vision calls for a system that would improve the existing infrastructure to allow for electronic payments to be processed the same day, not necessarily in real time.
Changing the speed of the network, which connects every U.S. bank and credit union, is up to the industry group Nacha. In 2012, the group's members, led by larger banks, shot down a proposal that would have enabled the processing of electronic transactions on the same day they're initiated. That was provided a payment was submitted before 2 p.m. Eastern time on a weekday.
In March the group released a more gradual, three-stage approach for improving the system.
Under that approach, banks would first make improvements to enable their customers to push money into other accounts without enduring waits of a day or more. The second phase would allow bank customers to pull money from other accounts on the same day the request is made. In the final implementation phase, banks would enable their customers to make same-day payments twice each weekday.
Charles G. Cooper, commissioner of Texas Department of Banking, asked Jane Larimer, the executive vice president of Nacha, why the system hasn't already been upgraded.
One reason was the objections of West Coast banks to the earlier plan, Larimer said. Under the earlier proposal, West Coast banks would have needed to submit their transactions by 11 a.m. Pacific time to squeeze into the same-day window.
An accommodation was made, Larimer said. The new plan would create a second payment time frame each day to accommodate West Coast banks and customers.
Greg Gonzales, commissioner of Tennessee Department of Financial Institutions, asked the panel how it planned to balance the desire to increase the speed with the need to prevent fraud.
"There is an inherent tension that is always the discussion: how do we provide frictionless transactions balanced with security?" said Chris Daniel, a partner at Paul Hastings. "I don't have a great answer other than to say people are focusing on this every day."
Besides focusing on security, the regulators also asked whether there are laws and regulations that could be hindering the advancement of the system.
Steen answered with an emphatic "yes." He referenced anti-money-laundering procedures for deposits greater than $10,000, while Larimer said that information technology teams at banks are burdened with implementing changes brought by the Dodd-Frank Act.
"Innovation comes below regulatory updates," she said.
A second panel of witnesses included executives from retail payment innovators Green Dot, PayPal and Isis. Jason Oxman, the chief executive of the Electronic Transactions Association, was also part of the panel.
The regulators again asked the question about which laws or regulations are hamstringing the companies. The companies all said that gaining market scale, not laws or regulation, was their primary barrier.
In many ways, the market penetration barrier is tied to security, the executives say. The key is building trust with consumers that their products are safe to use and that their accounts are not compromised by using the service.
"Consumers' first reaction is usually 'This is really cool,'" says Spencer White, general manager of mobile network operator partnerships for Isis, a venture of AT&T, Verizon Wireless and T-Mobile. "The second is 'Oh no, what if I lose my phone?' Security is top of mind."
Manuel Flores, the acting secretary of the Illinois Department of Financial & Professional Regulation, asked the second round of panelists for their take on the best approach to regulation essentially, should it emphasize compliance or safety and soundness.
John Muller, vice president of global payments for PayPal, said that a risk-based approach that focused on safety and soundness would be better than a "check all the boxes" approach.
Kevin Wack contributed to this article.