1. What is the payment improvement paper, and how will it be used going forward?
Strategies for Improving the U.S. Payment System communicates desired outcomes for the payment system and outlines the strategies and tactics the Federal Reserve will pursue, in collaboration with stakeholders, to help the country achieve these outcomes. The paper outlines the Federal Reserve’s intent to establish a task force to identify effective approaches for implementing safe, ubiquitous, faster payment capabilities. The paper also calls for a task force to advise the Federal Reserve on reducing payment fraud and advancing the safety, security and resiliency of the payment system. Additionally, the Federal Reserve will pursue efforts to enhance payment system efficiency through work on standards, directories and business-to-business payment improvements, alongside efforts to enhance Fed-provided services for same-day ACH, risk management and settlement.
2. Why does the Fed believe that the current payment system in the U.S. can be improved?
The U.S. payment system effectively supports the largest economy in the world, and has a long history of evolving to meet changing needs. There are many examples of innovation in today’s U.S. payment landscape, although much of the infrastructure could better leverage modern technologies and practices. Where participants have innovated around legacy payment systems, some market solutions are fragmented in their approach and sometimes lack interoperability with others in the payment ecosystem. The persistent use of checks and the evolving threat environment suggest that the U.S. payment system needs to evolve further and faster to support the changing nature of commerce, keep pace with the global economy, meet the changing needs of end users, and address threats to the safety and security of the payment system.
Feedback from numerous and diverse industry stakeholders through the Federal Reserve’s Public Consultation Paper and other forums suggested strong industry agreement on the need to address the gaps that were outlined in that document. In addition, several other countries have adopted or announced plans for a faster payments system to support more efficient commerce in those nations. Through collaboration with industry stakeholders, we will work to improve the speed, security and efficiency of the payment system in this country from end to end. A more efficient and effective payment system will contribute to public confidence, economic growth and global competitiveness.
3. What does the Federal Reserve hope to achieve with this paper?
Our goal is for all payment stakeholders to join together in a collective effort to achieve the following desired outcomes:
- 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.
4. How did you settle on the five desired outcomes?
The Federal Reserve conducted extensive research on end-user preferences and needs for payments capabilities related to end-to-end speed, safety and efficiency of payments that revealed specific gaps and opportunities for improvement. From this research, the Fed proposed and solicited feedback on five desired outcomes to address key gaps and opportunities in its Public Consultation Paper, released in September 2013. The desired outcomes presented in Strategies for Improving the U.S. Payment System reflect modifications based on the stakeholder feedback gathered through that process.
5. Now that the Fed has communicated its plan for improving the U.S. payment system, what’s next?
The Federal Reserve now seeks payment stakeholder action in support of these strategies. The Fed will establish two task forces in 2015, and interested stakeholders are encouraged to consider these opportunities, as well as other Fed- and industry-sponsored groups working in support of our desired outcomes. Subscribe to our email alerts to stay informed on these groups as they are established.
In addition to task forces for specific work efforts, the Federal Reserve will continue to seek input and communicate progress on initiatives from all payment participants through live and virtual forums, surveys, industry- and Fed-sponsored groups and events, and online feedback mechanisms. To receive communications and invitations, join the FedPayments Improvement Community.
6. How can I stay engaged with your efforts?
The Federal Reserve will continue to seek input from all payment participants and communicate progress on initiatives via several channels. Following are some ways you can join the conversation.
- FedPaymentsImprovement.org: Join the FedPayments Improvement Community to receive communications and invitations to live and virtual forums, surveys, industry- and Fed-sponsored groups and events, and online feedback mechanisms. You are also invited to engage with Federal Reserve Bank leaders at a number of Fed and industry events.
- Payments Exchange Blog: Share your thoughts on our blog.
- Twitter: Follow us @FedPayImprove
7. What is the demand for faster payments from customers/users?
An analysis we commissioned estimated that there are at least 29 billion payments each year in the United States for which real-time or near real-time clearing and settlement would be desirable to end users. That’s 12 percent of all payments in the United States. Another study that we commissioned last year showed that consumers and businesses prefer faster payments and that one-third of consumers and three-fourths of businesses want real-time payments enough to pay for them.
8. How will increasing speed affect the overall safety of the payment system?
Faster clearing and settlement of payments can enhance the safety of the payment system by leveraging strong technical and process controls to ensure the authenticity of transactions. Experience in other countries suggests that controls such as strong authentication, real-time monitoring, transaction dollar limits, credit-only payments and same day/intraday interbank settlement can mitigate risks and help ensure overall payment system safety is maintained or enhanced.
9. Consultation paper feedback suggested that serving the unbanked and underbanked should be a priority. How do the improvement strategies help better meet the needs of the unbanked and underbanked?
Several of the Fed’s strategies could help to make banking services more responsive to the needs of the unbanked and underbanked population. For example, our desire for a safe, ubiquitous real-time payment option would help people who closely manage their money by aligning account balances to available funds. Our focus on enhancing cross-border payments will also benefit this population, a portion of which has greater need for sending cross-border remittances to both banked and unbanked recipients abroad.
10. How do you see the Fed’s role changing as it relates to payment security?
The payment improvement strategies represent our intent to work actively with stakeholders to enhance payment system security. The Fed will continue to be a leader and catalyst to facilitate collaboration on payment security issues. This will be accomplished by establishing a payment security task force, focusing on driving development and adoption of appropriate security standards, and sharing fraud data and payment security research to inform policymakers and practitioners. As an operator, the Federal Reserve will explore additional anti-fraud and risk-management services and will continue to enhance its own payment networks to support the safety, security and resiliency of the U.S. payment system.
11. How can security research and fraud data collection help in advancing the safety and security of the payment system?
Data on payment fraud allows payment system participants and government agencies to make informed decisions on payment security approaches and policies. Payment fraud statistics in the United States are limited, and several contributors to the Payments Security Landscape Study expressed the desire for more frequent reporting of aggregate-level information on losses, security incidents and factors that contribute to payment fraud. Lack of a consistent methodology across existing studies creates challenges in comparing fraud measures across payment systems and over time.
There have been notable improvements in fraud reporting in recent years. Since the U.S. Congress passed the Durbin Amendment in 2010, the Federal Reserve has collected data on fraudulent debit card transactions through its biennial Debit Card Issuer Survey. In addition, the Fed Payments Study was expanded to include information on unauthorized ACH, check and payment card transactions. Fraud data improvements in the United States will likely be limited without involvement and coordination by a trusted party.
12. The ISO 20022 assessment suggested a weak business case for implementing the standard in the U.S. Why are you still moving forward?
There are several strategic reasons that make a strong case for considering adoption of ISO 20022 in the U.S. market:
- Global Momentum: Large U.S. corporates and banks are actively adopting ISO 20022, and that is expected to continue.
- Global Competition: Compatibility enables the U.S. to maintain parity with other global markets and U.S. dollar clearing systems in other jurisdictions that are adopting ISO 20022 messaging, which may help preserve the attractiveness of the U.S. dollar as a global currency.
- Cost Savings and Processing Efficiency: Standardizing message formats allows for consolidation of payment platforms at banks and corporations, which could promote straight-through processing and drive down costs.
- Consistent and Rich Data: The ISO 20022 format enables all parties to leverage a common set of data dictionary elements and expands capacity to carry rich data in the payment message.
- Interoperability: A common format promotes ease of transacting domestically and globally by using a single, open standard rather than multiple proprietary standards.
- Agility to Meet Evolving Regulatory Needs: The ISO 20022 format provides for full originator and receiver information (third-party or ultimate beneficiary) allowing for improved regulatory reporting and monitoring.
- New, Innovative Products: A common format across systems reduces the amount of change required to bring innovative new products and services to market.
We need to collaborate with stakeholders to identify a feasible, reasonable approach to migrating to the standard over time. Our first step will be to work with stakeholders to explore possible approaches.
13. How does the Federal Reserve plan to support further adoption of electronic B2B payments?
The Federal Reserve intends to work with stakeholders to address barriers to electronic payment adoption by businesses. As appropriate, we will:
- Collaborate with stakeholders to develop and implement a directory to support B2B electronic payments;
- Work with banks, other service providers and small-business experts in 2015 to develop and implement education, including toolkits targeted for use by financial institutions and large businesses to enable counterpart small businesses to adopt electronic alternatives for payments and related information;
- Develop and promote simplified, common guidelines to make it easier to implement and use B2B standards for electronic payments and related information; and
- Explore the possibility of developing and implementing a standard, ubiquitous B2B electronic invoice and processing platform similar to ones that have been developed in other countries.
14. How does the Federal Reserve plan to support development and implementation of directories?
The Federal Reserve will work with industry stakeholders to develop technologies and rules that foster greater ubiquity and interoperability among payment directories for P2P, P2B and small business B2B payments. This effort supports the desire to achieve ubiquitous credit-push payments that can be made on new or legacy electronic payment platforms. Through service enhancements, the Federal Reserve can contribute significantly to the directory ubiquity envisioned in “Strategy 4” by providing Federal Reserve Financial Services customers with secure access to interoperable directory tools that support legacy and future payment types.
15. Will the Federal Reserve continue to enhance legacy systems and services as part of its strategies?
As outlined in strategy 5 in the paper, the Federal Reserve plans to pursue enhancements to its payment, settlement and risk-management services in alignment with the desired outcomes. Enhancements under consideration or development include accelerated settlement for check and ACH transactions, expanded hours for the National Settlement Service, enhanced cross-border payment services, expanded risk management offerings and directory services.
16. What is the National Settlement Service and who uses it?
The National Settlement Service is a multilateral settlement service owned and operated by the Federal Reserve and offered to financial institutions that settle for participants in clearinghouses, financial exchanges and other clearing and settlement groups. Settlement agents, acting on behalf of financial institutions in a settlement arrangement, electronically submit settlement files to the Federal Reserve, which are processed on receipt. Entries are automatically posted finally and irrevocably to the financial institutions’ Federal Reserve accounts (i.e., there is no risk of return for insufficient funds).
17. How will an enhanced National Settlement Service support your desired outcomes? When are you planning to implement the enhancements?
Enhanced service can make the National Settlement Service more attractive as a settlement vehicle for private sector arrangements. An improved service has the potential to empower private-sector innovation around solutions for making payments faster, safer and more efficient.
Actions to improve the service will proceed in three phases:
- Phase 1 (January 12, 2015)
- Accelerate opening of the service by one hour to 7:30 a.m. ET and extend closing by thirty minutes to 5:30 p.m. ET
- Educate the marketplace on the advantages of the service
- Phase 2 (by year-end 2015)
- Accelerate the opening time to coincide with the 9:00 p.m. ET opening of the Fedwire® Funds Service (on the prior calendar date)
- Seek input on potential enhancements to the service including streamlined onboarding, additional data transmission capacity, etc.
- Phase 3 (2016 or beyond)
- Explore the technology, infrastructure, operational and resource changes required to support weekend and/or 24×7 operating hours
- Implement product enhancements to the service identified in Phase 2, if appropriate
18. As a provider of payment services, what does the Federal Reserve plan to do to advance the safety and security of the payment system?
The Federal Reserve will explore additional anti-fraud and risk-management services and continue to enhance its own payment networks to support the safety, security and resiliency of the U.S. payment system.