21 February 2014

Faster not always better

Anyone with a mobile phone can send a text message to someone on the other side of the world instantaneously – and in most cases for free. However, when it comes to payments, interaction is slower and costly.

This news was first published on Dialogue Online

Countries that have been making the news with recent moves to near real-time payments include the UK, with its Faster Payments Service, India and Singapore. However, according to Gareth Lodge, senior analyst at consultancy Celent, there are at least 35 countries that have a real-time retail payments system. And the US isn’t one of them – a case the US’ Federal Reserve banks wants to change.

“For a payment to take two days clear is illogical and it doesn’t seem it will support the economy of the future,” Lodge said.

“In the UK, council tax, house insurance, gas,and electricity are all paid by direct debit. In the US, that’s virtually unheard of. The majority of household bills are still paid by cheque.”

Lodge says two thirds of all cheques used globally are written in the US and a move towards a real-time payment system would give the US the opportunity to move ahead of the curve.

Faster, stronger

Last September, the Fed banks released a consultative paper on the US payment system, stating rapid adoption of technology and evolving end-user expectations are driving change.

“The next-generation payment system must accommodate these evolving end-user payment preferences,” the paper said.

“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 purpose of the paper was to articulate key gaps and spark industry feedback. It identified a number of failing including the absence of ubiquitous and convenient cross-border payments.

The Fed banks desired outcomes include having funds debited from the payer to the payee in real-time, and consumers and businesses having better choice in making convenient, cost-effective, cross-border payments.

Among the Fed’s options for a real-time payments system are: creating a separate wire transfer-like system that leverages already existing systems; establishing standards and rules and a centralised directory for routing payments across networks; modifying its current system, Automated Clearing House (ACH), to speed up settlement; or implementing an entirely new payment infrastructure.

Major investment

More than 180 responses to the Fed paper were submitted. Lodge says there was a lack of support for a completely new system, possibly because of the cost of the task. “Why would they want to do something that will cost a lot of money, just to then lose money?”

In its submission, Wells Fargo recognised aspects of the US payment system could be enhanced to better serve the end-user.

“At the same time, Wells Fargo does not believe this requires an extreme overhaul of today’s payment systems nor the creation of a new payment system, but rather an environment that encourages and supports the organic evolution of the payment systems,” it said.

Steve Kenneally, vice-president at the American Bankers Association (ABA), says members embraced the ideas of a more efficient system, but were a bit uncertain on how banks would get there.

He highlights the Fed’s lack of authority to mandate banks to act. “Should this be a top-down mandate-based approach, which we do not favour? Or should it be a market-based approach?”

Kenneally did not support the idea of a new payment system, partially for cost reasons.

“First you would have to decide who would run it and what standards would apply. Then all participants would have to finance the infrastructure.

“Ubiquitous near real-time payments is excellent, but if it’s going to cost you billions of dollars to create the system then you have to check your math and ask, ‘does this really make sense?’"

Kenneally says there needs to be consumer demand for a new system, meaning consumers would have to pay for it.

“Progress will be made. Payments will become faster and more people will start using online bill payments, but with ACH there is no need for real-time settlement. Not everyone needs to drive a Ferrari. It’s nice to have the fastest car, but it may not make sense for everyone.”

The Fed is holding 30 to 40 workshops on the topic, and plans to publish future plans in the second half of 2014.

“The next step remains unclear,” Celent’s Lodge says. “But I do wonder whether they have banks on board.”