CHICAGO – The Faster Payments System in the U.K. and the New Payments Platform in Australia serve as excellent models to emulate, but it is not likely that the U.S. can create similar systems.
"There are big differences in the U.S. as far as bank concentrations, weaker regulatory powers and many political differences," said Charles Kahn, chair professor for the department of finance at the University of Illinois.
In addition, the U.S. faces fierce rivalries between entrenched bank payments and non-bank payments, Kahn said during a Sept. 24 presentation at the annual Chicago Payments Symposium at the Federal Reserve Bank of Chicago.
The Federal Reserve System has worked for the past three years on establishing a framework for a faster payments system in the U.S., getting input from a task force of more than 300 payment system stakeholders. The faster payments initiative addresses the speed of authorization, clearing, settlement and notifications of various types of personal and business payments.
While the pursuit of a faster payments system makes sense for banks to continue to compete with other systems and be interoperable with other countries, there is not a significant need for the service in many areas, Kahn said.
"Faster payments are good for person-to-person payments, for emergency bill paying or for companies to fix payroll mistakes, but there is not a pressing issue for entrenched providers," Kahn added.
An incentive for economy-wide coordination for faster payments does not exist in the U.S., Kahn said. "It may work OK within a bank or a group of banks of similar sizes," he added. "But there is big tension between the small and larger banks involved in this."
The large banks' clearXchange has developed a person-to-person payment system it says can be the foundation for a real-time payments network, but few small banks are involved in that initiative.
In the meantime, the Federal Reserve has expressed its support for a same-day clearing proposal as endorsed by Nacha for ACH transactions in a faster payments network.
Still, the U.S. is likely to fall into the trap of developing trusted and ubiquitous networks, but not with open standards, Kahn said. "I guess two out of three ain't bad," he said.
Because banks fear becoming irrelevant, competition will nudge them toward establishing faster payments, Kahn said.
"But the entrenched players may set the rules too high for others to participate," Kahn said. "There is no doubt the U.S. payments industry can provide innovation at the top levels, but rather than being seamless to the bottom tiers, I see all sorts of chokeholds that would keep others out."