Fed outlines its vision for payments

The U.S. Federal Reserve believes that the U.S. payments infrastructure can be faster and more efficient, with the help of the Federal Reserve. The central bank of the United States said in a Sept. 10, 2013, report that "gaps" in the payments system limit payment services for some consumers and that opportunities around new technologies like mobile wallets can fill those gaps. The Fed acknowledged itself as the entity that can provide the necessary coordination to bring stakeholders together and improve the system.

In Payment System Improvement – Public Consultation Paper, the Fed recognized that the success of the payments industry has been largely driven by private industry market forces, with little government direction necessary. However, new technologies and processes impacting payments today could use the guiding hand of government, according to the Fed.

"[H]istory shows that it is sometimes beneficial for a central coordinating body to take steps to facilitate cooperation to address network or coordination challenges that otherwise impede innovation, efficiency and other public benefits," the Fed said.

The Fed identified eight weaknesses in the payments infrastructure, as follows:

1. Lack of payment mode options for receivers of physical checks
2. Lack of near-real-time payment capabilities
3. Limited consumer participation in innovative payment schemes such as mobile wallets
4. Lack of consumer-directed features provided by legacy systems
5. General slowness and inconvenience of cross-border payments
6. Lack of payment instrument choice and visibility after consumers register for digital wallets
7. Slow and complex payment and accounting systems used by mostly large businesses
8. Payment security fears that inhibit consumer adoption of electronic payments

Desired outcomes

Along with documenting payment infrastructure flaws, the Fed offered "desired outcomes" to be achieved by the industry in the next 10 years. First, it expects the industry to engage in a "collective and collaborative approach to improve" the system.

Next, the banking authority seeks changes in the person-to-person money transfer process, such as the improvement in near-real-time payment capabilities and confirmation of good funds when transfers are initiated. To achieve improvements in this area, the Fed believes an overhaul of the payments infrastructure may be necessary.

Furthermore, the Fed wants to see overall "societal" transaction costs to be reduced by industry improvements, as well as more choices for consumers and business when conducting cross-border payments. The Fed also expects its involvement in the industry will result in high public confidence in the security of financial services, despite a rapidly evolving and destructive cyber fraud landscape.

Bridging the legacy/innovation divide

The Fed's research focused on the stratifications caused by the rapidly evolving ecosystem. Traditional legacy systems provide a "solid foundations for payment services," the Fed said. But the arrival of innovative payment solutions have exposed the limitations of legacy platforms. And, yet, the Fed is aware that the newer systems suffer from a lack of interoperability. For example, a consumer who has enrolled in a mobile wallet is unable to send money via that wallet to an individual who has not also subscribed to that wallet, the Fed stated.

"The challenge for the industry is to provide a payment system for the future that combines the valued attributes of legacy payment methods – convenience, safety and universal reach at low cost to the end user – with new technology that enables faster processing, enhanced convenience, and the extraction and use of valuable information that accompanies payments," the Fed said.

Until Dec. 13, 2013, industry participants can comment on the Fed's proposals at www.fedpaymentsimprovement.org .

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