Inside the Effort to Build a Faster Payments System
In a new detailed report, the Federal Reserve laid out four options for upgrading the creaky U.S. payment system. The study raised questions about how far the Fed can, and should, go to bring about change.January 26
The payments company and big-bank trade group plans to create a ubiquitous, real-time payment system over the coming years, supplementing the push for same-day settlement of ACH transactions.October 22
In most countries where money can be sent to just about anyone instantaneously, modernization was the result of an edict from on high. From the U.K. to Australia, governments mandated that their countries' banks build a real-time payment system, and the banks fell in line.
The U.S., by contrast, is taking an approach that is far more collaborative but also incredibly unwieldy. And that is how a group of close to 200 people — from financial institutions, tech companies, retailers, government agencies, consumer organizations and elsewhere — could be found hard at work this week inside a hotel near Chicago's O'Hare airport.
The faster payments task force, which was convened by the Federal Reserve in the spring, has a gargantuan job: figuring out how to bring the U.S. payment system, which relies heavily on decades-old architecture, into the 21st century.
In recent interviews, key members of the task force spoke out about issues on which a consensus has emerged and others where disagreements persist. The interviews pulled back the curtain on an unusual collaboration between the public and private sectors, which has made remarkable progress in a short period of time, but whose ultimate success remains very much in question.
One important decision was made early on. The task force set aside a big part of the framework established by a Fed paper published in January, according to interviews with participants, and approached its duties from a different vantage point.
The Fed's 58-page paper laid out four options for achieving a faster payment system. One of the choices was to evolve the country's existing PIN debit card infrastructure; another was to use common protocols and standards to facilitate the clearing of transactions over the Internet.
But instead of focusing on the architecture for a faster payment system, the task force is instead establishing detailed criteria that its members believe should be characteristics of the future system.
Those criteria remain a work in progress. But a draft document released in June laid out six main criteria — including safety, efficiency, speed and ubiquity, meaning that the system should be widely available — as well as dozens of more detailed standards.
The goal is that sometime next year, private-sector firms will submit their own plans for building a faster U.S. payment system, and those proposals will be evaluated based on how well they satisfy the task force's criteria. Participants also envision that certain firms will team up with each other to collaborate on proposals that are broader than each company's own technology would allow.
"Anybody that wants to put their proposal on their payment system through the shark tank can," said Cary Whaley, vice president of payments and technology policy for the Independent Community Bankers of America.
Members of the task force said this week that their work over the last few months has been intense.
In addition to refining the criteria that will be used to judge submissions, the group has developed a glossary of terms to provide a common lexicon for participants from different industries. Seemingly no detail is too small for discussion. During this week's session, participants were said to have been debating the meaning of "appropriate."
The 300-plus-member task force is being led by a 19-member steering committee, which represents a fine-grained effort by the Fed to balance the interests of various stakeholders in the U.S. payment system.
Wells Fargo and U.S. Bancorp each have a seat. Smaller banks and credit unions hold three additional spots. Walmart is represented. The Consumer Financial Protection Bureau has a seat, as do the financial technology firms Ripple Labs and Dwolla.
There are lots of potential friction points. For example, small banks have long worried that a faster payment system will be built and controlled by the nation's largest banks, leaving them at a disadvantage.
Numerous firms represented on the steering committee will almost certainly submit proposals for a faster payment system. So they are collaborators for now, but they are also likely to be future competitors.
"It's remarkable to me that at this point we're still all friends," mused Bob Steen, a steering committee member who is chief executive officer of Bridge Community Bank in Mechanicsville, Iowa.
Still, in the task force's early deliberations, a consensus has emerged about certain aspects of a faster payment system.
Participants said that most people at the table seem to be on board with the idea that the updated system should enable senders to "push" money to recipients, rather than allowing recipients to "pull" cash from the accounts of senders. The latter option is thought to expand possibilities for fraud.
And in another sign that payment security is a priority, there has been no resistance to the idea that payments should be encrypted from end to end, according to Stephen Lange Ranzini, a task force member who is also president of University Bancorp in Ann Arbor, Mich.
But lots of important questions remain unanswered. Some of them involve the process for judging the private-sector proposals. For example, will the plans be graded on a quantitative scale, or will they be evaluated on a more qualitative basis? And will there be a single recommendation at the end of the process?
Other unresolved questions involve the specifications against which private-sector proposals will be evaluated. For instance, consumer advocates have yet to convince the task force as a whole that the new system should only allow so-called good funds in a consumer bank account to be transferred, so that customers cannot be charged overdraft fees.
"We don't want to replicate the problems that have happened with checking accounts in this new environment," said Susan Weinstock, who directs the consumer banking initiative at the Pew Charitable Trusts and also sits on the faster payment task force's steering committee.
Also still up in the air is whether an entirely new payment system will be built, or whether existing systems can be updated in order to accommodate payments that can be finalized in a matter of seconds.
The Fed's process is unfolding at the same time that The Clearing House, a trade group and payments company owned by the nation's largest banks, has vowed to build a real-time payment system.
In a recently published article, Clearing House President and CEO James Aramanda wrote that the specifications for the system were developed in five months, and the goal is to start work on the platform early next year.
Steve Ledford, a senior vice president at The Clearing House who also sits on the steering committee of the faster payments task force, said that the collaborative process set up by the Fed has helped The Clearing House as it works on its own system.
"I would say that it's also been a great source of market insights for us," he said.
Other companies that are interested in submitting proposals next year also said that the task force's efforts to establish detailed criteria have been beneficial.
"From a service provider's perspective, this is enormously helpful," said Ryan Zagone, a member of the task force's steering committee and director of regulatory relations at Ripple Labs.
Several members of the task force said that some participants have raised concerns that they will lose control of their own intellectual property if they submit proposals to the task force next year. Talks about those legal issues are said to be ongoing.
For his part, Ledford said that The Clearing House will want to submit its system as part of the Fed's process, but he added that he is not a lawyer.
A spokesman for The Clearing House said later that the organization cannot say for sure that it will participate in the submission process, because the process has not been finalized, but the group is optimistic that it will take part.
For the Fed, which in 2013 established a 10-year vision for building a faster payment system, the task force represents the latest step in a delicate balancing act.
The central bank is trying to lead in an area where the private sector has so far failed to build a ubiquitous real-time system, despite the fact that the technology needed for such a system is well-established. At the same time, the Fed is taking pains to avoid the appearance that it is dictating the outcome of the process it set up.
The Fed did not make Sean Rodriguez, its faster payments strategy leader, available for an interview. Nor did the Fed respond to written questions about the task force's work.
Task force members are well aware that if the collaborative process fails, the Fed could eventually seek a mandate to require the construction of a faster payments system.
"I think the outcome of what this will result in is not entirely clear to everybody in the process," said Peter Gordon, a senior vice president at financial technology provider FIS who also sits on the steering committee.
For now, though, task force participants sound optimistic about the progress they have made in a short period of time.
"Everyone is committed to finding a market-driven solution or consensus," said Jordan Lampe, a steering committee member who is also an executive at the financial technology firm Dwolla.
"The criteria that people are working through are ambitious," Ranzini said. "It really would be a quantum leap forward from where we are today."