By Monica C. Meinert
The U.S.’ journey toward a faster payments system will look different than those of its global counterparts, observes Dave Sapenaro, COO and payments strategy director at the Federal Reserve Bank of St. Louis. In most foreign countries, he explains, there’s a top-down mandate from the government that establishes a clear path for private industry to follow. That’s different in the U.S., where there’s no central payments authority to direct the effort.
“We do payments system evolution very differently than other most countries. We’re uniquely American—we have a large and diverse payments system; it’s getting larger and [more diverse] as we go along. It’s a chaotic way of evolving,” Sapenaro adds, “but it does allow the best and brightest ideas to compete in the marketplace and see what works.”
For the U.S. payments system to achieve the task force’s goal of faster payments ubiquity by 2020, three key things need to happen, he says. First and foremost, there needs to be broad adoption by the banking system to enable the receipt of faster payments. Then you need interoperability between systems and providers, so that payments can be sent and received seamlessly. Finally, you want a strong governance framework that will allow different parties to collaborate to solve problems and ensure responsible safety and security practices and consumer protections.
To that end, the Fed established a Governance Framework Formation Team as an offshoot of the Faster Payments Task Force. This group of 27 payment industry stakeholders has been charged with developing a governance framework that will help guide regulators and innovators as the faster payments system comes to life in the U.S. The Fed has also put together an industry-led working group to identify gaps and determine how a faster payments system can use a directory structure to reach ubiquity, as well as a rules and standards working group.
While the U.S. payments system is a competitive landscape, he adds that at the heart of all these efforts must be collaboration—between regulators, banks, industry innovators and other stakeholders—to solve common challenges. “Evolution has always resulted in competition and collaboration. It will take [both] to get us where we want to go.”
Defining the Fed’s role in faster payments
As the U.S. continues the evolution of its payments system, a big lingering question is what role, if any, the Federal Reserve will have to play.
The Fed views its primary role as promoting “integrity, efficiency and accessibility” in the payments system, Sapanero notes. It has previously used its role as a service provider to help the payments system evolve in the past and is currently doing so as the U.S. moves toward faster payments. He cites a few examples: “We extended our net settlement service; we strongly supported NACHA’s work to implement same day ACH. We offered a joint account to the Clearing House to help real-time settlement RTP systems.”
At the request of the Faster Payments Task Force, the Fed is undertaking an assessment to determine if any of its settlement services could be enhanced to support the market evolution of the faster payments system. The task force also asked the Fed to consider whether there is a role for it to play as an operator within the faster payments system. Most recently, the Fed has initiated a public feedback process on whether the regional Federal Reserve Banks should develop a 24/7/365 real-time settlement service and a liquidity management tool to support this service. The suggestion was made in the 2017 final report of the Faster Payments Task Force.
As the Fed undertakes these evaluations, it will do so using a set of high-level criteria, taking a methodical approach and soliciting public input along the way, Sapanero says. The Fed will specifically consider “one, will the new service yield clear public benefit; two, is the service one that the private sector, if left to its own devices can’t get to a good place; and third, can we recover our costs in the long run?”
He adds that he doesn’t envision a scenario emerging in which a single agency becomes in charge of directing the faster payments effort. “There just hasn’t been that appetite in this country. [The Fed’s] job is to help the payments system evolve without being too intrusive.”