Fed Suggests Realtime Payments Settlement Scenarios

As commerce accelerates and consumers and small businesses increasingly expect continuous sale, purchase, and delivery of products, the Federal Reserve announced today that it is seeking comments on a realtime payments settlement system. Fed governor Lael Brainard, who chairs the board’s Payments, Clearing, and Settlements committee, made the announcement in a speech to the Fed’s Payments Improvement Community Forum in Chicago.

The nationwide interbank settlement system would promote “broad access and resilience” and ensure that banks of all sized have access to realtime payments over the long term, she said. Initial Fed study of the development of faster payments in the United States show “gaps that pose challenges in safety and accessibility,” she said.

Called a realtime gross settlement system (RTGS), the systems mean that banks and the Fed are settling their accounts continuously, in realtime, 24 hours a day, seven days a week, 365 days a year. Realtime gross settlement systems are not new to central banks worldwide, nor are faster payments new to consumers internationally.

The notice for comment published in the Federal Register is designed to collect comments on the concerns and proposed remedies.

In addition to the RTGS, the Fed is seeking comment on the need for a liquidity management tool. In essence, this would provide a means for banks to ensure that their Fed accounts could cover consumer payments during times when they previously have not had to settle payments, primarily on weekends, when many consumers make more payments.

The IT development, system processing, and accounting demands of realtime processing are high and will take time to develop for the Fed and financial institutions. “We are trying not to think about today but the future,” said Susan Foley, senior associate director at the Fed Board of Governors.

Given the acceleration of commerce and technology, the future almost certainly will mean increasingly growing volumes of faster payments, even if initial adoption is slow. Trends in countries that have adopted faster-payment schemes show generally consumer increasing uptake, and there is no reason to think that U.S. consumers would react any differently.

Banks naturally are concerned about accelerating fraud with accelerating payments, as one bank CEO pointed out. Realtime systems means realtime fraud monitoring and detection, as well as stronger controls for consumer and business payments access.

The cost of access to realtime payments systems by community banks is an ongoing concern, and the Fed believes this initiative would address those concerns. The Independent Community Bankers Assn., while commending the effort, is not so sure, according to the statement it released during the speech.

One questioner cautioned that private sector groups have been spending hundreds of millions on system development for the nascent realtime payment systems operating in the United States, which include same-day ACH and the RTP system.

I happened to be sitting at the table with a banker who, as part of his introduction, mentioned that he was working on a realtime payments system. When I asked if this announcement would affect his plans, he replied, “Oh yeah. Turns it upside down.”

I’m a big fan of major forward-looking announcements in technology, especially from organizations that have the means and the muscle to move them forward. The Fed’s proposal for a U.S. RTGS to enable realtime banking for all businesses and consumers in a realtime economy is one of those announcements.

Rebundling a Fragmented Payments Field

In citing market fragmentation as one justification for a U.S. RTGS, the Fed provided another instance of a theme throughout discussions at the Federal Reserve Bank of Chicago’s 18th annual Payments Symposium, held Oct. 2-3. A number of speakers showed slides plastered with FinTech logos, categorized according to the segments of the payments market the app fell in.

Millennial consumers use multiple apps to make and receive payments, often selecting the app in accord with the amount and importance of the payments transaction, along with the knowledge of whether the person receiving the payment also uses the app. It’s led to an explosion of FinTechs and a “great unbundling” of banking services across a now-fragmented landscape.

The equal and opposite reaction is beginning. “We believe that we are at the early rebundling where stand-alone services created friction for consumers,” said Mitch Siegel, national financial services and transformation leader at KPMG.

Transferwise, which provides a low-cost remittance transfer service, provides a case in point. Low prices and stated foreign-exchange rates and fees are value proposition. At the same time, the firm works with traditional financial institutions on cross-border payments, launched last year a “borderless” payments account for small businesses and freelancers, and offers a debit card–all hallmarks of rebundling.

The other scenario for “rebundling” that Siegel noted is the all-purpose app. He showed a New York Times video on The Power of WeChat, the ubiquitous application used as a continuous life management app in China. Another take on how ubiquitous mobile payments are in China is payments in China and how much more developed mobile pay is in China shows in this video of a little girl paying for candy.

This shows above all that consumers will chose what consumers find most convenient. Providing multiple choices for multiple consumer preferences is imperative. Matthias Schmudde, who heads the payment and securities and settlement divion at the Deutsche Bundesbank in Frankfort, summed up this sentiment in talking about lessons learned in creating the Single Euro Payments Area, which they are applying in developing a European faster payments network.

“You can’t prescribe the usage of instruments. You shouldn’t forbid the use of cash. You have to provide good convincing alternatives with added value. That’s where we found the success, and that’s where it’s acceptable to say goodbye to instruments. When people like something better, they will go to better.”