The Federal Reserve pulled back the curtains Thursday on its plans to improve the U.S. payment system, suggesting that a new infrastructure could be the best way to facilitate near-real-time payments.
The central bank also announced plans to create several industry task forces that will provide input on the process of speeding up transactions.
"We're not looking at replacing the entire payment system with a new payment channel or rail," Dan Gonzalez, vice president of industry engagement at Federal Reserve Bank of Chicago, said at an industry conference in New York.
His comments came ahead of the Fed's highly anticipated road map for speeding up the payments system, which is expected to be published by the end of the year.
The Fed will focus on building a faster payments option for a subset of transactions that could benefit substantially from real-time processing — approximately 10-12% of all U.S. payments, according to Gonzalez.
"After going over the options with the industry, we think probably the easiest way to do it is to build something new," Gonzalez said.
A new infrastructure would give the industry greater flexibility to meet unanticipated future needs, Gonzalez said, although he noted that implementing such a system would be a fairly lengthy and costly process.
The effort to improve the speed of consumer and business transactions is a new area of focus for the central bank, which has historically concentrated on interbank payments. Gonzalez emphasized that the road map will not mandate changes to the current payment system but will work to achieve them through "collaborative industry engagement."
To that end, the Fed's road map will call for the creation of a faster payments council, a payments security council and a U.S. payment strategy advisory council. The Fed will select council members from pools of industry candidates who submit their names during an open application process, Gonzalez said.
These groups will lead a "high-level strategic discussion" about the process of implementing new payment systems and practices, Gonzalez said.
The discussion included several other reveals about possible new Fed initiatives.
The Fed plans to take a closer look at adopting an international payments format called ISO 20022 that is already in use by countries including India, China and Russia.
"We'll be looking at the implications of rolling it out within the U.S." and consider a phased-in approach to adopting the standard, Gonzalez said.
The road map will also encourage the industry to update security standards and practices across different payment channels, from credit and debit cards to newer options including mobile wallets, reloadable cards, money transfer services and virtual currencies.
"We do a lot of things in silos" when it comes to security, Gonzalez said. "There are a lot of lessons to be learned across those channels for best payments practices."
The road map will also discuss the Fed's plans to facilitate cheaper and faster cross-border payments. The agency may expand from providing only domestic wire transfer services to offering those services internationally, according to Gonzalez.
"Anecdotally, we heard that people were getting out of international wire business because it was too complicated and the regulations were too burdensome," Gonzalez said. "We think we can help in that space and make the process more frictionless."
The Fed is also considering expanding the reach of its international ACH service, which it currently provides to 35 countries. The move could benefit people who send and receive remittances, a growing number of whom have been cut off from access to the service as financial institutions sever ties with money transmitters in response to regulatory concerns.
The sneak preview of the Fed's plans comes a day after The Clearing House, a payments company and trade group representing 24 of the largest U.S. banks, announced plans to undertake a multi-year effort to build and implement a ubiquitous, real-time payments system.
"We're pleased with the Clearing House and members' announcement," Gonzalez said. "They're taking on a process that would actually help support some of our desired outcomes."
The industry group Nacha, which sponsored the New York conference and sets the rules for the ACH network, is also in the process of developing a plan to process electronic payments on the same day.
The separate initiatives headed by the Fed, The Clearing House and Nacha are all of a piece with a larger plan to improve the U.S. payment system, Nacha president Jan Estep said Wednesday.
"These are all complementary ways to work on moving payments faster," Estep told American Banker. "Moving to same-day ACH, I don't see that at all as conflicting with changes in the ecosystem that will support real-time payments."