Chicago Fed examines road map to improved payments system

January 2, 2015

CHICAGO (1/5/15)--Older payment methods are still commonplace with American consumers and businesses, due to concerns over new methods that have yet to be adopted on a widespread level. This is according to Anna Neumann, a payments policy analyst at the Chicago Fed, writing on payments innovations in this month's Chicago Fed Letter.

The article builds off discussions at the Chicago Fed's Payments Symposium, which took place last September.

Those bringing new payment methods to the marketplace face concerns from consumers and merchants about these products' security, as well as interoperability with traditional payment products and infrastructure," Neumann writes. "Such concerns prevent new payment methods from gaining broad customer adoption. Payments regulators also struggle to adjust laws and standards to allow for technological innovation while maintaining protections for consumers."

One of the main advances used around the world is payment systems that allow for immediate processing. The Federal Reserve Banks have assessed these faster payment options and released initial findings, and are expected to release a more detailed roadmap for U.S. payment system improvements. The highest potential groups that would benefit from increase payment speeds include person-to-person, business-to-supplier, insurance claims, legal settlements and wage payments to temporary workers.

Philip Bruno, head of payments in North America at McKinsey & Co., laid out four paths at the panel to improving payment speed in the United States: upgrading certain debit card clearing infrastructure to leverage existing real-time functionality; permitting direct clearing between financial institutions over public (Internet protocol) networks; building a new single-message clearing infrastructure that leverages legacy systems for settlement; or building a new platform for small-dollar payments.

"Bruno's fellow panelists agreed that while there will be upfront costs to the financial industry for developing faster payment capability, rising end-user demand for immediate payments could in the long run make for a compelling business case to develop this capability," Neumann writes.

Ultimately, large scale coordination among the thousands of financial institutions and payment service providers would be needed to speed up payments, much like various European nations did to form the Single Euro Payments Area.

"The panelists also agreed that enabling faster payments must go hand in hand with improving payments security. A system for immediate payments increases the level of risk by making it more difficult to detect and stop fraudulent transactions before the transactions clear," Neumann adds.

Neumann concludes by saying, in order to "deliver greater payments speed, security, and interoperability, industry players and regulators must come together to develop a framework for payments innovation."

The Credit Union National Association's payments subcommittee continues to meet and discuss "faster payments" and same-day ACH issues with the Federal Reserve, NACHA--the Electronic Payments Association, financial trade associations (including the Clearing House Association) and other key stakeholders.

CUNA is currently seeking feedback from credit unions regarding NACHA's same-day ACH proposed rule that would require all financial institutions to be able to receive same-day ACH payments. The comment call is open through Jan. 23.