Compared with countries that have already implemented faster payments, the U.S. market contains a far larger and more diverse array of financial institutions that would have to implement the system in order for ubiquity to be achieved.
For purposes of direct comparison, the U.K. provides a compelling illustration of a country that has successfully achieved ubiquity or interoperability within its market. The six banks that are members of the U.K. faster payments initiative control 91% to 97% of the total share of deposits, depending on the reporting source. Even at the lower range it is fair to say that interoperability was achieved on day one.
A similar examination of the U.S. market, however, reveals a very different scenario.
For the top 200 banks and thrifts to achieve the 91% share of deposits, 67 banks would need to be members; to reach 97% share of deposits, 143 banks would need to be members. As a result, the faster payments initiative in the U.S. will require a far greater level of collaboration and participation.
So, what does this all mean and, more important, can the U.S. faster payments initiative realistically reach ubiquity? The answer lies in the key determining factors of overall time frame and cost that U.S. banks will have to incur to achieve target goals.
First, let's tackle the time-frame component. The U.K. initiative took just over three years from initial announcement to implementation. At the time of implementation, all 12 of the major bank members were connected. The U.K. implementation was surprisingly quick and effective given that interoperability was achieved on day one based on the percentage share of deposits mentioned earlier.
It is difficult at the current time to state whether the U.S. can implement a faster payment scheme as quickly as the U.K., or whether it will require a considerably longer time frame. One consideration that can be stated with relative certainty is that the U.S. initiative will not be able to reach interoperability on day one. While it is possible that some of the largest banks in the U.S. will be connected on day one, it is likely that other banks will join over a potentially extended period of time, keeping the percentage share of deposits represented well below U.K. levels. What the overall time frame will look like will be directly tied to the costs that banks will need to invest in order to be able to connect to the faster payments network.
Undoubtedly, cost will be the most important factor as to whether or not U.S. banks will join the faster payment network. At present, there are two cost components that need to be examined. The first cost consideration is what the charge will be for a member bank to join the faster payments network. This cost will depend on the type of network implemented and pricing scheme employed, i.e., one-time, term-period, per transaction or a combination of these.
The second cost consideration relates to the internal expense that a bank may face in order to connect to the faster payment network. Although unconfirmed, a realistic assumption as to the communication standard that will be used for the U.S. faster payments network is the ISO 20022. Under this scenario, the internal costs for banks could vary widely based on where they are in their current technology platform, i.e., legacy, modernized or a combination of both; the number of channels that they may want to support via the initiative and, finally, the FTE (resource) costs needed to make this happen. Some banks will need smaller modifications or will use translation layers to communicate with the network, while others will need major modifications or may ultimately decide to overhaul their entire payment, accounting and operations processes.
It will be possible for the U.S. faster payments initiative to reach ubiquity, but the time frame for achieving this target will not be as fast as the one achieved in other countries. Additionally, if the faster payments solution that is finally proposed and accepted in the U.S. does not contain an appropriate balance between cost and benefits, then the ultimate achievement of ubiquity could be in jeopardy. In order for the U.S. faster payments initiative to qualify as an overall success in the same manner as the U.K. system, it will have to take into account a low-cost approach for banks of all sizes to enable implementation and connection to the network in a timely, accessible manner.
Douglas Green is a director at Volante Tecnologies and a member of the Fed's faster payments task force.