Should Faster Payments Be, Well, Slower?
The Clearing House, Dwolla and Ripple Labs are among more than 20 companies that are vying to play a lead role in modernizing the U.S. payment system.May 9
The central bank originally established a 10-year time horizon for completing upgrades to the nation's aging electronic payment system. But a task force convened by the Fed thinks that's not ambitious enough.October 6
Banks are offering the ability to manage card accounts by mobile device, providing a glide path to the digital wallet.April 8
Lots of industry attention has been focused on the speed of faster payment transactions. Is a transaction completed in less than 15 seconds sufficient? Should we set the ceiling at 10 seconds or five seconds? According to the Federal Reserve Board's Faster Payments Task Force, it's even faster. In the task force's Effectiveness Criteria document, we defined a "very effective" payment approval as taking no more than two seconds.
But perhaps we, as an industry, should ask a second question as well: How fast is too fast for irrevocable payments?
Reflexively, we might say we seek to transact as fast as possible. That may be appropriate from a technology perspective. But what about from a societal perspective?
There is an old adage that "nothing good ever happens after 2 a.m.," and we can refer to our imaginations as to determine why. People, by human nature, get themselves into situations that are sometimes unsavory or even dangerous – perhaps involving drinking, gambling, compulsive shopping or other self-destructive behavior – and there's often a payment associated with that behavior.
When someone uses cash, the time needed to find an ATM and perform the steps required to withdraw money can provide a few minutes to reconsider "next steps." There is a similar time cushion with card transactions; the process of card retrieval and the initial steps to engage in a point-of-sale terminal transaction provides a moment during which one can reconsider a purchase.
But immediate payments, according to task force plans, are designed to be not only fast, but irrevocable payments as well. They are likely to be available on mobile phones at the touch of a fingerprint. The barrier to an impulse purchase provided by a last moment of reflection is eliminated.
This notion raises troubling questions that deserve thoughtful consideration: Will instant payments exacerbate existing societal problems? Will they place already vulnerable people in harm's way? And if so, whose problem is this to address: the bank, the regulator, the operator of a scheme? Or perhaps the onus falls squarely on the consumer alone?
As our industry collectively works on the development of an immediate payments network, it may need to consider the societal consequences.
The Consumer Financial Protection Bureau has been an active participant on the Fed's Faster Payments Task Force and a vocal proponent of consumer protections. In July 2015, the CFPB published its nine "protection principles," which deal with issues of efficiency, transactional costs, accessibility and risk. While the principles cover transactions harmed by "fraud" and "error," they do not consider the prospect of consumer "regret." Should the CFPB explore protections around payment speed and irrevocability?
Regardless of whether or not the regulators provide for specific protections, there are technological means to slow down faster payments just enough to address these societal concerns.
It's not impossible to add latency to a payments transaction. It can be done through technology limitations or through transactional rules. When facing pivotal purchase decisions, a moment of pause often provides sufficient time to reflect and to potentially reconsider buying something. Should we consider processing rules that – much like fraud rules that are based on behavior and geolocation – identify high-risk payment requests even when they are not fraudulent?
We have seen the introduction of customer-driven payment card spending controls. They enable or disable the card from being used for a variety of opt-in, pre-determined merchant categories, locations, purchase amounts as well as other user-selected criteria. Perhaps there is a place for "high-risk" payments, too.
Is "as fast as possible" always the right answer? If it isn't, how do we add the appropriate payment confirmation steps – or, if you will, "payment reconsideration" steps? How do we make such steps optional and unobtrusive? Should vulnerable users have the opportunity for appropriate reflection before confirming a payment at 2 a.m. that they may end up regretting?
I am not an advocate for overprotection, and I support an individual's freedoms and choices even if those choices are poor. But as The Clearing House continues to develop its real-time payments scheme, and the Fed evaluates proposals for other faster payments platforms, it's an appropriate time to ask these questions.
Ian Rubin is director and practice lead of retail banking and consumer payments at ACI Worldwide, and a member of the Federal Reserve's Faster Payments Task Force.