While there are always costs and risks involved in implementing new technology, faster payments solutions with broad reach and strong safety standards in place could lead to many benefits for society as a whole, advocates the Federal Reserve. In fact, the Fed estimates that 29 billion transactions, or 12% of all US payments annually, could benefit from faster authorization, clearing, settlement and/or availability of funds.
According to the regulator, the specific use cases that could benefit most from faster payments include:
- Person-to-person payments;
- Certain types of person-to-business payments, such as emergency bill payments or rent payments;
- Certain types of business-to-person payments, such as wage payments for temporary workers or medical insurance claim payments; and
- Certain types of business-to-business payments, such as just-in-time supplier payments.
On the role of fast, safe, ubiquitous payment system and its benefit to the society in the long run, along with the dive into a remarkable initiative – The Faster Payments Task Force. We had the pleasure of speaking with Sean Rodriguez, the Faster Payments Strategy Leader for the Federal Reserve System.
Image: Sean Rodriguez, the Faster Payments Strategy Leader for the Federal Reserve System
Elena Mesropyan: Sean, for the part of our audience that may not be familiar with your work, tell us about yourself – your background, experience, focus, latest initiatives you took part in, etc. What do you do as Federal Reserve’s faster payments strategy leader?
Sean Rodriguez: Certainly! I have worked within the Federal Reserve System for over 34 years in a variety of areas including operations, product development, sales, marketing, and bank administration. I have worked on payments issues and efforts that focused on industry engagement including serving on the leadership team for the Check 21 initiative, helping to establish the Federal Reserve’s Customer Relations and Support Office and the Fed’s Payments Industry Relations Program.
Currently, I serve as the Faster Payments Strategy Leader for the Federal Reserve System. In this role, I lead activities to identify effective approaches for implementing safe, ubiquitous, faster payments capabilities in the United States and had the pleasure of chairing the Faster Payments Task Force, about which we will be speaking more today.
Elena Mesropyan: What are the mission and objectives of the Faster Payments Task Force?
Sean Rodriguez: From 2015 through 2017, the Federal Reserve System’s Faster Payments Task Force engaged a diverse array of stakeholders in advancing the work outlined in the Federal Reserve’s Strategies for Improving the US Payment System, published in January 2015. The task force was a broad and inclusive group of stakeholders with more than 300 representatives from organizations across the payments community, including financial institutions, nonbank payment providers, businesses, consumer groups, federal and state government agencies, regulators, standard bodies, industry trade organizations, consultants, and academics. The mission of the Faster Payments Task Force was to identify and assess alternative approaches for implementing safe, ubiquitous, faster payments capabilities in the United States.
Important work accomplished by the task force includes, among other things, the publication of Effectiveness Criteria, which describe attributes and expectations of effective faster payment solutions; the solicitation and review of faster payments solution proposals; and the publication of recommendations for ongoing industry collaboration and action to support the development of faster payment capabilities in the US.
Elena Mesropyan: Why are faster payments important to the extent of the Federal Reserve leading such initiative? What are the benefits for every member of the ecosystem – from PSPs to the end-user?
Sean Rodriguez: As commerce increasingly shifts to online and mobile channels, businesses and consumers expect to be able to send payments to anyone, anytime and anywhere. They expect those payments to take place instantly, with transparent status information, faster clearing, and availability of funds to the payee, leading to more predictable account management. Payment security and the protection of personal data also continue to be critically important to the viability and function of any payments system. Modernization offers opportunities for enhancements in all these areas.
The Federal Reserve commissioned a study in 2014 to identify which types of domestic payments had unmet needs for speed. The study found that at least 29 billion transactions, or 12% of all US payments annually, could benefit from faster authorization, clearing, settlement and/or availability of funds. With technology changing many elements that support the payments process, and these shifts in consumer behavior and expectations, the Federal Reserve believes there is an opportunity to bring the industry together to address this improvement initiative.
Our goal is to ensure that anyone anywhere is able to pay and be paid quickly and securely. In real terms, that means people will not have to wait hours or days to deliver and access their money, and businesses will have enhanced cash management and better information associated with their payments. Overall, users stand to benefit from improved efficiency and security.
Elena Mesropyan: The Faster Payments Task Force recently published a report called The US Path to Faster Payments, outlining the US payments landscape and benefits of safe, ubiquitous faster payments, among other things. Could you please expand on the hallmarks of the US payments landscape – current state, opportunities, and challenges?
Sean Rodriguez: The Fed has a long history of successful collaboration with the private sector to achieve payment system improvement, but there are challenges ahead such as keeping up with the shift toward e-commerce and Internet-enabled technologies brought on by the use of laptops, tablets, phones, apps, and others.
The Fed, through its research and industry consultation, believes the US payments industry is in a unique position to improve payments capabilities at this time given technological developments, evolving user interest and demands, and elements of shared vision for improvements across the payments industry.
The task force’s final report highlights foundational issues in four areas that the task force believes require further collaborative efforts by the industry. These areas are broad adoption; safety, integrity, and trust; interoperability; and the development of a supporting ecosystem.
The task force also identifies 10 recommendations for the industry that it believes would result in realizing faster, ubiquitous payments capabilities in the US by 2020. These recommendations fall into three categories: Governance and Regulation, Infrastructure, and Sustainability and Evolution. Our focus is to continue supporting the industry to address these remaining challenges and implement faster payments capabilities that meet the stated vision of the task force and industry at large.
Elena Mesropyan: How are the contributions and the role of the government different from what is being done by the private sector in bringing faster payments systems into masses?
As the central bank of the US, the Fed has an interest in a smoothly functioning payment system and has maintained a long-standing view that the initiative of the private sector would be critical to long-term payment system improvement.
The Fed’s role to date has focused on convening industry stakeholders and catalyzing industry action to improve the speed, safety, and efficiency of the payments system. The Fed is uniquely positioned to facilitate the broad stakeholder collaboration needed to support ubiquitous access and widespread adoption of new payment system capabilities; whereas the private sector through innovation and competition will develop and deliver new solutions to users. The solutions and capabilities you have seen and will see come to market are defined and driven by the private sector.
Elena Mesropyan: Which countries and governments have been at the forefront of faster payments systems and why? What allowed them to set the benchmark in your opinion? (in other words – what are the lessons learned?)
Sean Rodriguez: Globally, a number of countries such as the UK and Australia have addressed the faster payments development through mandates and/or the development of a national faster payments system with a single operator.
In contrast, the United States is taking a market-driven approach to payment system innovation that avoids government mandates. A collaborative approach ensures that change is designed by those whose commitment and expertise are needed to achieve the desired outcome.
This approach relies upon multiple solution operators and other stakeholders voluntarily collaborating to address the opportunities and challenges inherent in large-scale changes to the payments system. While broad collaboration can be difficult to achieve given competing interests, this approach is likely to generate pro-competitive, voluntary collaboration and result in innovative solutions that effectively address user needs.
Elena Mesropyan: One of the many insights professionals can derive from the first part of the report is that in addition to the growing number of national level faster payment systems operating around the world, there is also a movement toward greater cross-border interoperability between systems. Could you expand on this? Why is it important and what do we need to achieve that across nations?
Sean Rodriguez: It’s critically important that US payment systems and stakeholders understand the benefits and embrace the use of messaging standards that will enable our citizens and businesses to transact across borders.
The task force examined issues related to cross-border interoperability both in its published Effectiveness Criteria, where it defined expectations for the enablement of cross-border functions in faster payment solutions, and in its final report, where it recommended that further research and analysis be undertaken to understand requirements for cross-border interoperability with various countries.
Beyond the task force, there are active domestic and international efforts underway to develop and promote the use of standards that will facilitate cross-border interoperability for ACH, wire transfer and faster payment transactions. The ongoing focus in this area will be critical for our payment systems to remain effective and competitive.
Elena Mesropyan: What is your take on Zelle? The solution is continuously making headlines and brings a big promise for convenient real-time payments. How will such massive initiative from the traditional banking sector affect the market?
Sean Rodriguez: We applaud the efforts of organizations like Early Warning Services for their leadership in advancing payment system improvement. We are broadly supportive of efforts to innovate and bring secure, real-time capabilities to US consumers and businesses, as we have a long-standing view that private sector efforts are critical to long-term payment system improvement. As the task force Final Report illustrates, a variety of real-time payment options and technical solutions will be available to businesses and consumers, creating the opportunity for a robust national faster payments infrastructure. The task force recommendations outline where collaboration among stakeholders and solution providers will be needed to realize this promise.
Elena Mesropyan: What are the next steps planned by the Federal Reserve with the Faster Payments Task Force?
Sean Rodriguez: The Faster Payments Task Force has effectively achieved its mission, and was disbanded with the publication of its Final Report. However, there is much work yet to be done. As I’ve mentioned, within its Final Report, the Faster Payments Task Force listed 10 recommendations for the industry to pursue to support its goal for faster, more secure, ubiquitous payments by 2020. With the Fed’s support, the governance framework initiative described in the first recommendation is already underway, with other industry efforts expected to commence in the near future. The Fed is actively evaluating requests the task force made of the Fed in its recommendations, such as supporting 24/7/365 settlement, and in the coming weeks will publish its next steps for advancing payments system improvements in alignment with the desired outcomes described in its Strategies for Improving the US Payment System paper.
To keep up with the latest developments and potentially get involved in upcoming efforts, I’d direct anyone interested to sign up for updates at the Faster Payments Task Force website.