The U.S. payments system must continue its push to overcome the challenges inherent in creating a near real-time retail payment option, says Sandra Pianalto, president and CEO of the Federal Reserve Bank of Cleveland.
Cash and debit cards are the "closest thing" the U.S. has to real-time payments, but "there is demand for a better system," Pianalto says. "We are mindful of lessons learned in other countries that implementing a faster payments solution requires years of hard work."
The Fed has a future vision that most payments will be executed in real time, says Pianalto, who serves as chair of the Federal Reserve Board's financial services policy committee. Pianalto addressed the state of payments to open the 2013 Chicago Payments Symposium Sept. 24 at the Federal Reserve Bank of Chicago.
Under such a system, "any consumer or business would be able to make an immediate payment to anyone, electronically and conveniently," she says.
Ideally, the sender of a payment could initiate the transaction even without having the receiver's account information, and most payments would be accompanied by confirmation of "good funds and timely notification" to both parties that the transaction had been made, Pianalto says.
Over time, it will become clear that younger consumers have no interest in paying with paper checks, even though, currently, check payments represent almost 20% of all non-cash retail transactions, Pianalto says.
"That is 60 million transactions per day, and America's payments system is costlier as a result," she says.
Future generations will expect that any payment, whether online, mobile, or at the point of sale, to be executed immediately, Pianalto says. "They will gravitate to financial institutions and other providers that offer this level of service."
The U.S. can study how the U.K. developed its Faster Payments System and how Australia, Singapore, Poland and Mexico are plotting their own real-time payments systems, Pianalto says.
Pianalto warns that "faster" is not a solution, nor a stopping point. "A faster payment method that is not convenient and accessible to end users does not achieve the goal," she says. "A faster payments solution must be built on standards that preserve opportunities to offer unique services in the market while ensuring interoperability across the industry."
The projects in other countries illustrate that a "lengthy collaboration effort" was needed with financial institutions, processors, network providers, vendors, payment authorities and central banks to bring faster payments from idea to implementation, Pianalto says.
In addition to keeping real-time payments in a planning stage, the U.S. payments system needs more improvement in cross-border payments, Pianalto says.
The growth in cross-border business-to-business transactions is reflected in the value of imports and exports in the U.S. economy. This value has risen by 40 percent to $4.2 trillion a year over the past decade, according to the Fed.
"The value of remittance flows to developing countries has tripled to $351 billion annually over the same period," Pianalto says.
Yet, the options for cross-border payments have not kept pace, she adds. "Opportunities exist for improving the cost-effectiveness, timeliness, and convenience of cross-border payments," Pianalto says.
After 30 years with the Federal Reserve, Pianalto plans to retire early next year from her position at the Federal Reserve Bank of Cleveland.