In 2012, the Fed initiated a gap and opportunity analysis to study improving the speed and efficiency of the U.S. payment system from end to end, while maintaining a high level of safety and accessibility, with "end to end" meaning the point of payment origination to the point of receipt, including payment reconciliation and notification. This was a significant shift from the way the Fed previously examined the payment system, which was usually limited to the interbank processing space. This analysis resulted in the "Payment System Improvement – Public Consultation Paper," which was released on Sept. 10, 2013.
Following the paper's release, the Fed gathered reactions to its content. The Fed received more than 200 responses to the paper and a general consensus that the desired outcomes captured in the paper were indeed the right ones to receive attention.
It's not news that check writing has been declining for many years. However, despite seemingly falling out of favor, more than 18 billion checks were still written in the United States in 2012.1 Checks remain a preferred—or at least regular—option for many individuals and businesses. Part of this stems from checks having the important attributes of ubiquity (as they are accepted as a form of payment in many, if not most, cases) and convenience.
There is currently no ubiquitous, convenient and cost-effective way for U.S. consumers and businesses to make real-time or even near-real-time payments from one bank account to another. While payment system speed has become faster as a result of private-sector innovation, the U.S. still lags behind many other countries in terms of real-time payments.
In addition, payment security challenges—such as data breaches, phishing attacks, spoofed websites, payment card skimming, fraudulent ATM withdrawals, computer malware and infiltration of retail point-of-sale systems—are becoming more prevalent and costly. An estimated 31.1 million fraudulent transactions occurred in 2012, with a value of $6.1 billion.2
In the past several years, new payment methods have been introduced that offer promising improvements, such as faster transaction speeds. However, these are mostly still private systems that require the transacting parties to both be part of the system. With a few exceptions, nonmembers receive no benefit and are unable to take part.
On the other hand, legacy systems—such as check writing or ACH—are more ubiquitous, but lack the features of new systems that customers are increasingly demanding: real-time validation, timely notifications, assurance of payments going through and masked account details.
Typically, cross-border consumer and business payments involve much higher transaction fees and longer processing times than domestic payments. Several innovators have emerged recently with products and services that partially address these challenges, but not in a comprehensive way.
The 2013 paper "Payment System Improvement – Public Consultation Paper" summed up the gaps and opportunities in the U.S. payment system this way:
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