The Federal Reserve’s Faster Payments Task Force sets schedule for quicker payment system by 2020.
Treasury executives at multinationals no doubt wonder occasionally, as they wait a day or more for debits or credits to appear in their corporate bank accounts, why payments in the US take so long to settle compared to virtually every other developed economy – many developing ones. By 2020 they should wonder about this no more.
At least that’s the schedule set out in the Faster Payment Task Force’s (FPTF) second and final report on developing a faster payment system in the US. Published in July, the report provides insights from the 19 faster-payment proposals analyzed by the FPTF, its vision for a faster payments system—fast, ubiquitous and broadly inclusive, safe and secure, and efficient—as well goals and recommendations.
“A lot of people participated in the effort, and as a result the [Federal Reserve] ended up with 300 fully invested advocates that are going to make it happen,” said Steve Ledford, senior vice president of product and strategy at The Clearing House (TCH), which submitted one of the proposals and is building a real-time payment and settlement system, which is scheduled to launch later this year.
The Fed essentially played a key role in organizing and promoting the FPTF and it is anticipated to continue to facilitate the industry effort, which will start with establishing the Interim Collaboration Working Group (ICWG). It will develop and seek public comment on a framework proposal, and anticipates holding its first meeting in September. Nevertheless, the FPTF has set a highly ambitious schedule, without providing a clear solution.
“What the [FPTF] has done is create a methodology and way forward to establish healthy competition, providing a level of clarity on what a faster payment is and what it will take to succeed. So if people were looking for a faster-payment solution, this didn’t satisfy,” said Rick Burke, TD Bank’s head of corporate products and services and a former member of the FPTF. “Here are the steps, and if the many solutions and potential solutions follow these steps, we could have a very effective system that is well managed from a risk standpoint and provides greater efficiency.”
Faster payment systems in other countries were largely developed and promoted by a central bank or government. The US, however, is unusual because it has thousands of banks as well as other financial services firms, whereas as other countries tend to have a relatively small number of national financial institutions. In addition, the US typically eschews such top-down approaches in favor of solutions spawning from competition.
What can corporates expect to happen over the next two years? The FPTF’s report poses more questions than answers, particularly in the area of business-to-business (B2B) solutions. However, TCH has worked closely with its owner banks to design its real-time payment (RTP) platform with a particular focus on B2B and has been working closely with technology providers and banks of all sizes to optimize that potential.
TCH has an advantage over many other proposal submitters because it already operates the private sector payment rails for check image, ACH and the Clearing House Interbank Payment System (CHIPS). The ubiquity sought by the FPTF should also include nonbank financial institutions, and ultimately the faster-payment system will encompass all use cases, including bill payments, business-to-consumer payments as well as consumer-to-consumer payments. The latter has gained significant ground through services such as Zelle, which is run by a consortium comprising large and regional banks, credit unions, processors, and the Mastercard and Visa networks. It began rolling its payment service in June—permitting payments between bank accounts using the payee’s mobile phone number or email address.
TCH’s service will enable a significant amount of data to be sent contemporaneously with the payment, a key element for corporates who must know precisely where to send payments and where received payments should go within the company.
“Businesses have to include additional data about their payments, and that’s one of the components we’ve built into our RTP system that we think will allow us to address B to B activity in a better fashion than many of the solutions in the marketplace today,” said James Colassano, SVP, product and strategy at TCH. “Existing electronic payments can move the money efficiently, but companies may not know what to do with it in a business context, and that can create more problems than it solves.”
Linda Coven, a senior analyst at Aite Group, said TCH is likely to be one of two poles in a faster payment system, supporting all credits B to B, B to C, C to B and even some P to P payments, while a second pole currently draws consumer payers and payees. Zelle appears to have a lead on that front, but does have plans to add other options.
“The other solutions may play on the fringes, by I don’t see them as being the ubiquitous winner,” Ms. Coven said. “So over the next few years we’ll see a weeding out of solutions that don’t service enough of the community.”
What should corporates watch out for to signify progress toward a broadly adopted faster payment system? The success of services offered by TCH and potentially other players will be an obvious sign. The report notes several other areas critical to developing a truly ubiquitous faster payment system in which corporates and consumers can be assured their payments will be settled in near real-time.
A “critical first step,” according to the report, will be the ICWG developing a governance “framework for collaboration, decision-making, and rule setting, as well as regulations that support the faster payment ecosystem.” Part of the framework will also be establishing faster payment rules, standards and baseline requirements that support broad adoption; safety, integrity and trust; and interoperability. Such standards would allow market participants to make payments on one system and settle on another, and they perhaps could foster more competition among providers of faster payment providers.
The report also recommends that the Fed and other relevant regulators evaluate current laws and regulations to ensure they are suited to the unique characteristics of faster payments, as well as prioritize regulatory concerns.
The second recommendation is potentially more complicated. Establishing a directory designed for solutions to interoperate in the faster payment system may benefit from several directory services already in existence. However, the report also recommends enhancing the Fed’s role in a faster payment system, and that could be problematic.
“In addition to providing for settlement capability, such roles might include provision of directory services, transaction processing, network access, security, and/or cross-border payments,” the report says.
Those recommendations would likely require the Fed to make significant changes to its National Settlement Service technology and infrastructure.
“The Fed operationalizes what the legislature approves,” Burke said, noting that the current US Congress is more supportive of reducing regulation than instituting new rules. Absent a legislative mandate it will be up to the private sector to deliver on the FPTF vision for payments. These changes, intended to support more rapid settlement between processing entities, should provide further support for new and innovative payment capabilities in the future.
Only a handful of corporates, including Walmart, Lift and Starbucks, participated in the FPTF, and the faster-payments initiative has been mainly driven by financial institutions, along with technology vendors. Nevertheless, with a deadline set to reach a faster-payments solution quickly approaching, corporates will soon have their own issues to wrestle with. In a report released in August, Ms. Coven notes companies’ use of bank services to help with liquidity management, such as zero-balance or sweep accounts, that at the end of each business day move money automatically between accounts to consolidate funds, cover shortfalls, invest excess cash, or draw on a line of credit.
“How will these services operate when there is no “end of day”? Ms. Coven’s report asks, and more importantly for corporates: “How will the clients’ treasury operations manage their liquidity and set cash positions with funds flowing 24/7? How will the receivables department apply cash received in nonbusiness hours to accounts?”