The Federal Reserve (the Fed) has laid out the strategies for improving the U.S. payment system, including a view that the process should be highly inclusive with diversity of stakeholder views considered.
In the payments context, establishing an inclusive process is easier said than done, since the majority of stakeholders interact with payment systems at the periphery without much awareness of its inner workings. While payments are often compared to a "plumbing system" or rails, it's actually more helpful to see the ecosystem as a "highway."
Why a highway? The plumbing metaphor recognizes the fact that the inner workings of payment systems is hidden and out of sight and it isnt until some disaster or a leak occurs that we come to realize the importance of a payments infrastructure. And the term "rail" is generally used to describe core payments infrastructure and as such payments rail refers to the essential facility component of a payment system. These two metaphors are very limiting because they focus only on the basic payments infrastructure.
At first, calling payments a "highway" may seem esoteric and perhaps no different than the analogy of rails or plumbing. However, I would argue that the analogy between payment system and highway may be more fitting because of two main reasons; (a) commonalities in desired outcomes and (b) similar tradeoffs.
These desired outcomes are:
Safety. We want our highways to be a safe medium of transportation just as we want our payment system to be a safe mode for our payments.
Ubiquity/interoperability. The vast network of highways ensures that everyone in the U.S. is connected to everyone else in the country. Whats more is that the US highways are well integrated with highways of neighboring jurisdictions. This is the expectation from a payment system of the future as well, where anyone can send payments to anyone else resulting in a diminution of closed- loop systems as well as the unbanked population. Interoperability, ubiquity and standardization are thus crucial for both payment system and highways.
Efficiency. Highways continue to provide an efficient means of transporting people and goods. For payment systems too, efficiency is at the forefront of considerations because of its linkages with the real economy.
Level playing field. Safety, efficiency and confidence, in both the highway and payment systems, is only maintained when everyone plays by the same rules.
Risk-based oversight. To foster a more competitive environment, there needs to be a recognition that some payment types are intrinsically safer than others. For example, credit-push payments are typically considered as safer than debit-pull payments. Similarly, trucks are generally safer than cars which are generally safer than motorcycles. Thus, we observe that the use of safety helmet is mandated for motorcyclists while digital speed limiters are mandated for heavy trucks. The right regulatory balance between risk and efficiency is achieved when regulations are proportional to the risk posed.
Among those familiar with the inner workings of the payment system, there is generally a consensus that there is no free lunch when it comes to designing a safe and efficient system. These two objectives often compete with one another whereby an inverse relationship between safety and efficiency is observed. Just as high speed driving is likely to result in greater accidents, speedier payments makes fraud monitoring difficult and thus potentially increases risk. In both environments discussed here, it is important to establish a desirable level of risk and efficiency.
As with any analogy, there is a risk of over simplification of complex issues. Whether one thinks of a payment system as a rail, plumbing, highway or something even more arcane is not important. However, by simplifying things through the use of analogies one can make the issues of payment system broadly accessible and encourage dialogue where all stakeholders are able to come together and bring their unique perspective to the table. By doing so, we will be able to address some of the most pressing questions that we are faced with regarding the future of U.S. financial system. Some of the big questions we must answer are:
Who is responsible for funding the new payment system or improvements to the existing system? Who ultimately determines the desirable level of risk and efficiency? Who gets direct access to the core payment system? Who is ultimately responsible for setting the vision for a national payment system?
Sajjad Jafri is senior research advisor at the Canadian Payments Association. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of the Canadian Payments Association.