The Fed’s got some big decisions to make on faster payments

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Now that a Federal Reserve-convened panel has finished its work on modernizing the U.S. payment system, the Fed itself has some important choices to make.

The central bank has long performed key jobs in the nation’s payments ecosystem, providing services related to paper checks and operating one of two U.S. automated clearing house networks. But the Fed’s responsibilities in a world of faster payments are still up in the air.

A report released Friday by the Faster Payments Task Force — a group representing various stakeholders, including banks, corporations and consumer advocacy groups — established an ambitious timeline. It said that by 2020, everyone in the U.S. should be able to receive fast, secure payments.

The report noted that several private-sector firms have already developed fast payment systems, and more are in the pipeline. But it also highlighted the challenges in making those competing systems interoperable, which will be crucial to ensuring widespread adoption.

The Fed — as the only institution that links every U.S. bank and credit union — sits in a unique position when it comes to stitching together a cohesive system.

Recognizing the central bank’s indispensable role, the task force asked the Fed to design and implement a service that would enable thousands of banks to settle up with each other 24 hours a day, 365 days a year.

But on other issues, the report is less clear about what the Fed’s job should be.

For example, the report recommends that the Federal Reserve assess whether it should take a larger operational role. Such duties might include providing a look-up directory that would smooth the path for payments moving between competing systems; assisting with cross-border payments; and ensuring the security of payments.

“These recommendations will be considered, and have to be considered, in a policy context,” Sean Rodriguez, the Federal Reserve System’s faster payments strategy leader, said in an interview.

He said that the Fed will publish its latest thinking about faster payments in the early fall.

The Fed faces a tricky balance as it seeks to encourage the development of a cohesive system without stepping on toes in the private sector. Unlike most other countries that have adopted real-time payment systems, the U.S. is trying to do so without imposing any mandates on banks.

Cary Whaley, vice president of payments and technology policy at the Independent Community Bankers of America, encouraged the Fed to take steps aimed at ensuring that every U.S. bank has the ability to access a modernized system. “Their role is essential,” he said.

“If I’m going to receive a payment, I don’t necessarily know when I’m going to be able to use that money. And that can lead to a reliance on short-term credit.”

At the same time, a trade group representing Google, Apple, Amazon, Intuit and PayPal encouraged Congress to hold the Federal Reserve’s feet to the fire.

The tech giants are asking lawmakers to mandate that the Fed ensure the availability of real-time payment networks to all Americans within three years, essentially turning what is currently a goal into a requirement for the Fed.

“We’d like to have a little more assurance that there’s oversight to make sure that that happens,” said Brian Peters, executive director of the trade group Financial Innovation Now.

In an effort to build momentum for faster payments, the Fed hosted a 30-minute webcast Friday during which task force members outlined their recommendations and discussed what steps come next.

Christina Tetreault, a staff attorney at Consumers Union, said that the upgrades being contemplated will resolve uncertainty in today’s payment system about when consumers can access their funds.

“If I’m going to receive a payment, I don’t necessarily know when I’m going to be able to use that money,” she said. “And that can lead to a reliance on short-term credit or other expensive payments.”

Banking industry representatives were just as enthusiastic about a faster system.

“Not long from now, everybody will be using it, and nobody will think about it, because it’s just the way you do things,” said Steve Ledford, a senior vice president at The Clearing House, a payments company owned by large U.S. banks that plans to launch a real-time system this year.

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Faster payments Real-time payments ACH Policymaking Federal Reserve