The Fed’s Faster Payments Task Force has reached a critical juncture, but more corporate participation needed.
Imagine a business world where making payments is faster, more efficient and more secure even if that world includes new versions of conventional ACH, wire, check or card payments. Or maybe a world with different payment forms altogether.
That’s what the Faster Payments Task Force is exploring although no one anticipates any major changes for a few years. And what could slow it down even more is the lack of significant corporate involvement. Given the central role of payments for corporates—whether between businesses or businesses and consumers—there are only a handful of companies within the core membership of the 336-member task force.
“Corporates are probably the largest segment that would be using a new payment system, but so far we have very few relative to the size of the task force,” said Thomas Hunt, director of treasury services at the Association of Financial Professionals and member of the Task Force, which has been up and running since January 2015.
Payment and treasury executives from corporates including Walmart, Costco Wholesale and Hard Rock Café are participating, but the vast major of members are financial institutions, non-bank service providers, fintech firms, academics and consumer-interest organizations.
“We have strong merchant representation on the Task Force, but we would benefit from more corporate treasury participation,” said Connie Theien, director of payments industry relations at the Federal Reserve who is leading the effort to engage payments stakeholders in advancing strategies for payment system improvements.
In fact, the Task Force is soon entering a project stage where corporate expertise can play an important role, Ms. Theien said.
Proposals from current Task Force members for faster payment solutions in the US were due April 30 and anticipated to range from enhancements of existing payment systems to entirely new payment processes. McKinsey & Co. was recently hired to assess the proposals in the context of 36 criteria developed by Task Force members that fall under six categories: ubiquity, efficiency, safety and security, speed, legal and governance.
The criteria reflect attributes of a new payment system that stakeholders view as important. McKinsey’s third-party analysis is intended to weed out potential conflicts of interests that could arise. By fall, it should be ready to share its findings with members of the Task Force.
“There is still the opportunity for corporates to join the task force and participate in the review of solution proposals,” Ms. Theien said. She added that Task Force members will also consider the challenges and opportunities inherent in implementing faster payments in the United States, including issues such as interoperability, governance and standards. “This is a great opportunity for corporate treasurers to influence what comes to market, rather than end up simply choosing from solutions that were developed without their influence at the front end,” Ms. Theien said.
The Task Force is a part of a multi-pronged initiative organized by the Fed to modernize the US payment system. Along with speed the effort also includes security and efficiency of domestic and cross-border payments. Collaboration between stakeholders in the payment system is a key element of the initiative and the objective of the process is not to select a specific solution. “Our philosophy is the private sector will innovate, and there are lots of solutions already coming to market and more to come,” Ms. Theien said.
Rather, the process has been designed to enhance solutions coming to market, by putting forth the 36 criteria and publicly airing what end-users want in the system and so influencing innovations. The assessment and proposal review by McKinsey and the Task Force will provide feedback to parties who submitted proposals, giving them the opportunity to enhance their solutions further.
“This whole process is meant to be in parallel with what’s happening in the market, to accelerate and improve the solutions coming to market,” Ms. Theien said. A faster payments system isn’t expected to replace today’s systems, at least not right away. And while to some degree it may cannibalize the existing payment systems, those systems will likely remain the preferred method in specific situations for the foreseeable future, she added.
The AFP’s Mr. Hunt, who has focused his efforts on the safety and security category of criteria, said the Fed is interested in creating a standalone system that is more aligned with other payment systems globally and that essentially mixes the best of current systems with new innovations. Real-time settlement and lower costs will be key elements, as well as a “fresh approach describing what a potential system could look like, how it would run, and how it could be implemented,” Mr. Hunt said, adding that it could run “congruently for a time with existing systems.”
The Task Force is scheduled to publish a report next March that summarizes the work done to further develop the criteria and assess the proposals, as well as discuss strategic issues, gaps, and potential industry actions.
“The expectation is they’ll draw some conclusions about the work that needs to be done and the industry actions necessary to further successful implementation of faster payments,” Ms. Theien said.
In terms of the Task Force review of the proposals, Hunt said, corporate end users will likely want to focus their efforts on issues such as what remittances will look like, when are the cut offs to make payments, and how might that impact cash forecasting.
“Everything corporates think about when it comes to current time windows for ACH and other payment forms,” Hunt said, adding the issue of pricing will likely be addressed later, between corporates and their financial institutions.
The Fed’s initiative could ultimately change the way corporate treasury departments do cash settlement, forecasting and positioning.
“A lot of the pillars around how we do cash management in the U.S. could be impacted,” Mr. Hunt said, adding that innovations such as digital currencies and distributed ledger technology may end up being a part of the mix. “We’re fully expecting to see some solutions with distributed ledger technology wired into it.”