US payments system failing to meet the needs of the digital economy

US payments system failing to meet the needs of the digital economy

The Federal Reserve and US Congress urgently need to plug a public policy vacuum if the national payment infrastructure is to keep up with changes in the digital economy, according to a former senior Fed executive.

In a paper delivered late last week to a payments summit hosted by the Kansas City Fed, Bruce Summers - a career official with the Federal Reserve until his retirement in 2007 - lamented the lack of public interest governance in the US payments industry.

Taking the failure of the US to develop a mechanism for immediate funds transfer (IFT), such as the UK's Faster Payments scheme, as a key theme, Summers pointed out that neither the Federal Reserve Board nor prominent private sector organisations have either "the interest or the ability" to lead payment system development into the digital age.

"The idea that money in transit is digital information which can be processed immediately has not been readily accepted by the banking industry," he says. "Most bank-sponsored payment schemes depend on clearing and settlement systems that are designed around batch processing and delayed settlement, and these clearing and settlement arrangements are being nurtured as opposed to being re-designed around continuous, real-time processing."

With no impetus from the private sector and the Federal Reserve effectively standing on the sidelines, it may be up to Congress lead the way, as it did 35 years ago when it established the National Commission on Electronic Fund Transfers, which has guided US payments systems developments over the past decades.

At the moment, Congress appears more interested in monitoring security issues around mobile payment schemes, whereas it might be better served by adopting a back-to-basics unpicking of the entire national payments infrastructure.

In conclusion, Summers recommends a four-stage action plan, including the clarification of the Fed's role in payments system development; the creation of a new national commission on payment system innovation; the undertaking of a benchmark assessment of implementing national clearing and settlement processes and infrastructure to support immediate completion of digital payments; and the development of a special-purpose bank charter for non-bank providers of specialised payment services.

Read the full paper:

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Comments: (3)

A Finextra member
A Finextra member 04 April, 2012, 13:231 like 1 like

The UK Faster Payments system required a push from the Britsh Treasury, plus senior execs within the member banks who faced up to a promise to deliver the promised solution. This was driven to an agressive timetable through their membership of the  UK Payments Council.

Some execs created a positive business case; others saw the opportunity for payment hubs and a general rationalisation of systems; while a third group were doubters to the last but pulled along by the Payments Council commitment. 

The fulfilling of the promise co-incided with the start of the banking industry upheaval, but those execs remained committed and ended up delivering a market leading solution.  

Because of the major costs involved in both the central hub and, more importantly, the changes to member bank systems to get them out of the batch mindset, I cannot see how the challenge in other countries will be taken up without the direction of central government.

Funadmentally , there will be banks who will not see the business benefit of yet another payment system and only see it as another cost of being regulated.

A Finextra member
A Finextra member 05 April, 2012, 12:36Be the first to give this comment the thumbs up 0 likes

Very interesting paper .Just goes to show that we always think the grass is geaner on the other side.I would refer those interested in the UK experience which is held up as a paragon of future thinking to have another read of John Kays article from 2009 " The slow drip of the ‘faster’ payments system".

We all wait and see if the industry succeeds for the second time in gaming the system with the Finance Services Bill going through the Lords next month.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 April, 2012, 19:26Be the first to give this comment the thumbs up 0 likes

While the UK experience might not be a paragon of futuristic thinking, as we approach the fourth anniversary of the launch of FPS, no one can deny that "it's been there and done that". Whereas we've been hearing about half-measures like Expedited Payments and Same Day ACH in the USA for a long time without any mainstream adoption to show even 3-4 years later. That regulation is necessary to bring about any change to status quo is clear. But, whether it will happen in a lobbying-driven nation like USA is not. 

For registration-wary readers, here's the Google Search result link for the FT article cited by Robin B.

BTW, written in 2009, why does this article, which is full of innuendoes including its title itself, fail to make any mention that FPS was launched a year before its publication?