Planning Faster Payment Services for the World's Most Complex Market

With over 10,000 financial institutions, 21 million business payers, and an $18 trillion economy, the U.S. is world's largest and most complex marketplace for payment services.1 Compared with nations where a relatively small number of banks dominate the entire financial system, any plan for real-time payments in the U.S. must consider the concerns of an exceptionally large and diverse set of stakeholders.

As many payers know, faster payments do already exist in some corners of the U.S.. But these have been closed networks created by bilateral or multilateral private agreements. They aren't available to all consumers or businesses, don't encompass all payment types, and don't consistently interoperate.2

In contrast, the Federal Reserve has set the ambitious goal of making faster payments "ubiquitous, broadly inclusive, safe, highly secure, and efficient."3 The challenge is magnified by the Fed's early decision to avoid top-down mandates wherever possible, encouraging innovation via a market-driven approach relying on voluntary collaboration among payment services and stakeholders. Accordingly, end-to-end secure interoperability must be planned, established, and managed with exceptional care.

As the Fed's Faster Payments Task Force put it last summer, cross-solution rules and standards need to "encompass a baseline set of requirements that enable payments to move securely and reliably between solutions, and ensure end users have predictability and transparency in certain key features pertaining to timing, fees, error resolution and liability."4

By the time the Task Force concluded work in July 2017, it had evaluated input from 300+ financial institutions, nonbank payment providers, merchants, corporations, consumer advocates, government agencies, regulators, standards organizations, industry trade groups, consultants, and academics.5,6 With help from McKinsey & Company consultants, it had reviewed 19 detailed proposals for how faster payments might work, assessing each against 36 effectiveness criteria.7

Defining Governance for Multiple Interoperable Systems

Under the Fed's supervision, the Task Force published two lengthy reports, and handed its work off to a new Fed-selected Governance Framework Formation Team. That team is now defining an initial charter for faster payments governance, a "representative and inclusive" structure for voting, membership, and leadership; and specific responsibilities and working committees. Last year, American Banker reported that the new governance framework "might be run by a new private-sector entity that resembles Nacha, the banking industry group that sets the rules for the automated clearing house network."8

The Fed's governance team will release its plan for public comment during Spring 2018, and revise and finalize it later this year. According to its chair, Sean Rodriguez, it will also be addressing issues of "advocacy, education, emerging technologies, cross-border payments, fraud detections, and reporting."9 Meanwhile, the Fed's governors will need to determine what (if any) operational roles the Fed should play in settlement, directory services, transaction processing, network access, security, and cross-border payments.10

If all goes as planned, potential creators of faster payments systems will have clear guidance for building and operating them, and potential customers will have some clarity on what to expect from them. Once the processes and leaders of governance are in place, they will be tasked to execute on several challenging tasks. These include planning for fraud detection and information sharing; education and advocacy; researching and analyzing gaps in cross-border functionality and interoperability, as well as the risks and opportunities associated with emerging technologies.

At least two crucial issues will likely remain. The first: sending limits. Non-U.S. systems such as the U.K.'s Faster Payments have often launched with lower limits, gradually raising those limits as the systems were proven safe and reliable. But some corporations have suggested that limits may interfere with their usage, at least in the short term.11

The second large outstanding issue is pricing. Diverse pricing models are feasible, including interchange-based and sender/receiver pay. So, too, pricing levels may be influenced by the number of players that ultimately enter the marketplace.12

Unsurprisingly, outside the U.S., fee structures have sometimes affected usage. As a European Central Bank paper recently noted, Polish banks' decision to "charge relatively high fees, positioning instant retail payments as a premium service" have seemingly contributed to low usage. So, too, high fees have been viewed as a deterrent to small business usage of Singapore's FAST system.13

A 2015 Federal Reserve study found that faster payments would initially benefit at least 29 billion transactions annually, representing 12 percent of all payments. These transactions were concentrated among person-to-person payments, just-in-time supplier payments, time-sensitive person-to-business bill payments, and business-to-person use cases such as temporary worker payroll.14 In each area, the business case will obviously be shaped by cost, especially since same-day ACH has emerged as an alternative.15

Faster Payments Service Providers Move Forward

As already mentioned, immediate payments services already do exist in the U.S. The most prominent are the RTP system from The Clearing House, a bank-owned company and association; and Zelle (formerly clearXchange), owned by Early Warning Services, which is itself owned by a group of U.S. banks. Each has gained support from a sizable stable of banks, and some banks appear to be mixing and matching both, with help from third-party technologies and consultants.16

There are other prominent solutions. One is PayPal's Venmo, which has gained significant traction as a person-to-person payment solution. Another is Ripple, which is building partnerships with banks, payment processors, and fintechs around its blockchain distributed ledger and XRP cryptocurrency, especially for cross-border transactions.

While all market participants will have work to do in order to meet the Fed's eventual guidelines for operations and interoperability, they have paid close attention to its work to date. Some submitted proposals that influenced the Fed's Faster Payments Task Force. Early Warning Systems did not, but calibrated Zelle to meet the Task Force's criteria.17