Following the public consultation paper's release in 2013, the Fed conducted additional research on the desired outcomes and potential strategies presented in the paper, including gathering feedback from various stakeholders. The additional research culminated with the January 2015 release of the paper "Strategies for Improving the U.S. Payment System."
The new paper presented refined versions of the five desired outcomes published in the 2013 public consultation paper. The final desired outcomes were: 1
- Speed: A ubiquitous, safe, faster electronic solution(s) for making a broad variety of business and personal payments, supported by a flexible and cost-effective means for payment clearing and settlement groups to settle their positions rapidly and with finality.
- Security: U.S. payment system security that remains very strong, with public confidence that remains high, and protections and incident response that keeps pace with the rapidly evolving and expanding threat environment.
- Efficiency: Greater proportion of payments originated and received electronically to reduce the average end-to-end (societal) costs of payment transactions and enable innovative payment services that deliver improved value to consumers and businesses.
- International: Better choices for U.S. consumers and businesses to send and receive convenient, cost-effective and timely cross-border payments.
- Collaboration: Needed payment system improvements are collectively identified and embraced by a broad array of payment participants, with material progress in implementing them.
This paper outlined five strategies the Fed will pursue with various stakeholders to improve the U.S. payment system. "The strategies will require collaboration and action from a range of payment participants. The primary strategies call for (1) sustaining our recent high level of stakeholder engagement; (2) working with payment stakeholders to identify effective approach(es) for implementing a safe, ubiquitous, faster payments capability that promotes efficient commerce, facilitates innovation, reduces fraud and improves public confidence; and (3) collaborating with stakeholders to reduce fraud risk and advance the safety, security and resiliency of the payment system."
The strategies involve:
- Identifying effective approach(es) for implementing safe, ubiquitous, faster payments
- Reducing fraud risk and advancing the safety, security and resiliency of the payment system
- Achieving greater end-to-end efficiency for domestic and cross-border payments
- Enhancing Fed bank payment, settlement and risk-management services
- Actively engaging with stakeholders on initiatives designed to improve the U.S. payment system
With speed being a central concern of many payment system users, creating a faster system is a significant goal of the payment system improvement project. This was confirmed through a faster payments analysis conducted by the Fed. This analysis found that increased payment speed would initially benefit at least 29 billion transactions per year, or 12 percent of the total for the country. These transactions would be concentrated primarily in four different types:
- Person to person (for example, sending money to a friend or relative)
- Business to business (for example, just-in-time supplier payments)
- Person to business (for example, time-sensitive bill payments)
- Business to person (for example, temporary worker payroll)
One of the most visible ways the need for a faster payment system will be addressed is through the establishment of a faster payments task force, expected to be established in mid-2015. This task force will identify and evaluate alternative approaches for implementing safe, ubiquitous, faster payments capabilities in the United States.
More Secure System
Equally important is improving the security of the payment system. As the January 2015 paper noted: "The payment system faces dynamic, persistent and rapidly escalating threats, and stakeholders are increasingly aware of the need to enhance payment security."
Prior to the release of that paper, the Fed sponsored a payment security landscape study, which identified four weaknesses in U.S. payment system security:
- While technologies already exist that could improve payment system security, they haven't been adopted widely enough, nor are there strong enough standards and protocols, to make the impact they are capable of.
- Continuous use and improper implementation of weaker security technologies leaves the system vulnerable.
- Fraud and payment security data are not robust enough to help with identifying security needs and designing better security measures.
- The complex regulatory environment dissuades coordination and communication among regulators, potentially creating authority or supervision gaps.
Concurrent to the faster payments task force will be a payment security task force, which will advise the Fed on payment security matters and determine areas of focus and priorities for future action to advance payment system safety, security and resiliency. This task force will coordinate with the faster payments task force to ensure that potential solutions are both fast and secure.
More Efficient System
Check writing has been on the decline for years, as the number of checks paid in 2012 was less than half the number in 2003. Still, as noted earlier, more than 18 billion checks were paid in 2012, with many of these checks functioning as business-to-business payments.
In addition, a persistently large number of people do not use bank accounts or traditional financial services, which often leads to using inefficient and/or costly services for payment needs. Likewise, differing standards make cross-border payments slower and less efficient than should be otherwise possible.
Inefficiencies such as these create costs that don't otherwise need to exist. Reducing these inefficiencies could potentially drive costs down, providing a net benefit for all who operate within the payment system. One strategy being pursued involves the adoption and implementation of the ISO 20022 standard by payment and clearing participants. This standard sets forth common "languages" for conducting financial transactions, making them easier to complete between differing systems. Several participants—including The Clearing House Payments Company, NACHA — The Electronic Payments Association, and the Accredited Standards Committee X9—are part of a stakeholder group tasked with studying implementation of this standard, which may help address efficiencies in international payments.
Domestically, the Fed will work with industry stakeholders to develop technologies and rules that foster greater ubiquity and interoperability among payment directories for person-to-person, person-to-business and business-to-business (for small businesses) payments and that address barriers to electronic payment adoption by businesses.
Collaboration from All Stakeholders
Even the best strategies are nothing more than wishes if they're not implemented and implemented well. Given the large number of stakeholders in the payment system, widespread collaboration will be absolutely essential if viable progress is to be made in improving it. The 2015 strategies paper is clear about the need for collaboration: "A real commitment of resources and representation of diverse stakeholder interests will be essential to the success of these initiatives."
Over the past few years, the Fed has demonstrated its commitment to this project through its leadership and the resources it has committed. This level of commitment will continue to exist to see the payment system project through to fruition.2 As the 2015 strategies paper concludes, "The Federal Reserve is committed to working with payment stakeholders to turn this vision for the future into reality. Only through collective efforts can a faster, ubiquitous, safer, more efficient payment system be achieved for the United States."
- "Strategies for Improving the U.S. Payment System," Federal Reserve Financial Services, Jan. 26, 2015. [ back to text ]
- Gordon Werkema has been named payments strategy director overseeing this initiative. Werkema has been serving as the first vice president and chief operating officer of the Federal Reserve Bank of Chicago and product director for the Federal Reserve System's National Customer Relations and Support Office. [ back to text ]