Second of two parts.
In a little-noticed paper released in September, the nation's Federal Reserve banks signaled their intention to take a more active role in improving the U.S. payments system.
One of the Fed's new "desired outcomes": within 10 years, the United States should have a ubiquitous electronic retail payments network that moves money much more quickly than banks do today.
In particular, the Fed said that it wants funds to be available in something close to real time, and the enhanced system should work even without the sender knowing the recipient's bank account number. Under this vision, which is already a reality in some countries, one could split the check at a restaurant by sending cash almost instantaneously, via mobile phone, to a dining companion's cellphone number.
"Today, U.S. consumers can't make a near-real-time payment in a convenient and cost effective way from any bank account to any other bank account," the 13-page paper noted.
The Fed paper came in the wake of the demise last year of a banking industry plan to marginally speed up the nation's glacially slow system of electronic payments between different banks.
The proposal had the support of a majority of the members of Nacha, the industry-owned group that sets the rules for the electronic payments network. But it fell short of the 75% margin necessary for passage.
That episode, which was examined in the the first part of this series, illustrated the shortcomings of a private-sector-only approach. Different banks have diverging interests with respect to the payments system; in particular, there's a gulf between the views of many large and small banks. But any industry-led change requires an extraordinarily high level of consensus.
By law, the Fed is responsible for promoting an efficient nationwide payments system. But it has traditionally taken a back seat to the private sector.
"I think historically the Federal Reserve banks are really hesitant to step in the way of markets," says Kirstin Wells, a business economist at the Federal Reserve Bank of Chicago, emphasizing these are her own views. "That's the Fed's MO."
Today, as the Fed paper illustrates, the central bank appears poised to take a more assertive role, with an eye toward a faster payments network that would be open to all banks and could compete against a new crop of proprietary networks, such as clearXchange, a person-to-person payments network being developed by JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America (BAC).
But key questions remain: How forcefully must the Fed act to spark the change it seeks? How aggressive are Fed officials prepared to be? How broad is the Fed's legal authority? And how will the banking industry react if the Fed does take the reins?
At the moment, the Fed is engaging in a careful tiptoe act - signaling that it plans to be more proactive than it was in the past, but also trying not to come off as heavy-handed.
In a recent speech, Federal Reserve Bank of Cleveland President Sandra Pianalto praised the "entrepreneurial activity of banks, vendors, processors, and nonbank service providers," saying free-market competition has led to lower costs and a diverse range of services.
But she added: "There have been times when individual action on the part of banks, vendors, and nonbank service providers was not sufficient to move the payments system forward."
A Failed Experiment
Pianalto didn't mention it in her speech, but one recent payments initiative by the Fed illustrates the collective-action problem she was describing.
The Federal Reserve banks run one of two nationwide Automated Clearing House networks. (The Clearing House, which is owned by many of the nation's largest banks, runs the other.) These are the pipes that enable U.S. consumers to pay bills online and allow businesses to send direct deposit payments to employees.
In 2010, the Fed began offering banks the option of settling such electronic transactions on the same day they're initiated, rather than a day or two later. Individual banks could choose to opt in to the new service, but none were required to participate.
From the start, payments experts predicted that the voluntary program would flop.
Bob Meara, a senior analyst at the research firm Celent, said in 2010 that the "opt-in nature" of the service would be "its Achilles' heel." That warning proved prescient.
In three years, only about 50 banks and credit unions have signed up, out of a total of around 14,000 nationwide, for an opt-in rate of well under 1%. Most of the banks and credit unions that have enrolled are tiny institutions that process few payments.
"Enrollment is still low," acknowledges Steven Cordray, project director at the Federal Reserve Bank of Atlanta's Retail Payments Office. "So we have a long way to go."
The opt-in same-day service has something of a chicken-and-egg problem, according to Cordray. Banks don't want to commit until the program gains critical mass. But that won't happen unless more banks enroll. And the Fed has elected not to force banks to participate.