The Fed has a key role to play in real-time payments
Policymakers in the United States have finally prioritized the need for faster payments. After a decade of task forces and reports, the Federal Reserve is now moving forward with a substantive real-time payments proposal. Two congressional committees recently held payments hearings, including one where I testified, and there seemed to be widespread support.
The private sector has made progress in recent years to increase the speed of domestic payments. Card networks have developed offerings like Visa Direct and Mastercard Send, while large banks are adopting services like Zelle by clearXchange and The Clearing House Real-Time Payments system. While these developments offer promise, the reality is the market and customer access to real-time payment rails are still incredibly fragmented.
By its nature as a central bank, the Fed is uniquely positioned to ensure ubiquity for financial institutions and inclusiveness for consumers. During my recent testimony in front of Congress on behalf of TransferWise, I called on the Federal Reserve to continue with its efforts to create a real-time payments framework. “FedNow,” once implemented, will be a real-time gross settlement system that evolves retail payments by debiting and crediting an institution’s account(s) with a Federal Reserve Bank, similar to how Fedwire works to settle “high-value” interbank wires today.
Real-time payment systems are here to stay as evidenced by what we are already seeing globally, where governments around the world are moving away from complicated, costly and antiquated systems, and instead launching faster payments schemes to increase payment efficiency for their citizens.
The United Kingdom was one of the first to adopt real-time payments and has been a model for other countries to follow suit. India launched Immediate Payment Service (IMPS) in 2010, Europe launched Single European Payments Area Instant Credit Transfer (SCT Inst) in 2017, and Australia rolled out its New Payments Platform (NPP) in 2018. In total, 45 jurisdictions now operate fast retail payment systems, and that number is projected to rise to 60 in the near future, according to the Bank for International Settlements, the bank for central banks.
Additionally, much like those countries recognize the need for faster payments infrastructure, many also see the benefits of accessibility and inclusiveness in the payments system. Many countries have allowed, or are in the process of allowing, non-banks to participate directly in the payments system.
This spurs competition and innovation, and reduces the systemic risks that come with a handful of banks hosting most indirect non-bank participants. As consumers increasingly utilize technologically-driven alternatives for their payment needs, non-banks are dependent on banks to gain access to U.S. payment rails, resulting in added costs, slower speeds, and user inconvenience.
In order to ensure that the public benefits from a faster payments system, we strongly support the Federal Reserve playing a key leadership role, just as central banks have successfully done in other jurisdictions. And we think the Federal Reserve should also rethink its membership rules in the payment system. American consumers will ultimately benefit from a payments system that moves their money instantly, conveniently, transparently, and at a low cost.