CHICAGO—A system for faster payments is on the horizon for the U.S. But there are obstacles, including how consumers and merchants continue to cling to older payments methods due to concerns over security with new payment methods, and worries over the new methods’ interoperability with traditional payment products and infrastructure.
Those are key points from a report this month in the latest Chicago Fed Letter by Anna Neumann, payments policy analyst at the Chicago Federal Reserve Bank.
Basing her analysis on discussions during the Chicago Fed’s September Payments Symposium, Neumann pointed out that while the payments landscape has seen rapid transformation in recent years, including mobile payments and virtual currency, most U.S. consumers and businesses, still rely on “legacy payment methods that do not fully meet their needs.”
Neumann said this is due partly to hesitancy to embrace new payment methods that have yet to be broadly adopted.
“Those bringing new payment methods to the marketplace face concerns from consumers and merchants about these products’ security, as well as interoperability with traditional payment products and infrastructure,” she wrote. “Such concerns prevent new payment methods from gaining broad customer adoption. Payments regulators also struggle to adjust laws and standards to allow for technological innovation while maintaining protections for consumers.”
Not only do business and consumers’ mindsets need to change, but a system for faster payments in the U.S. needs to be developed. Neumann noted that during the Fed’s symposium Philip Bruno, head of payments in North America at McKinsey & Company, described four potential alternative paths for improving the speed of the U.S. payment system as outlined in the Fed’s analysis on the subject: upgrading certain debit card clearing infrastructure to leverage existing real-time functionality; permitting direct clearing between financial institutions over public IP networks; building a new single-message clearing infrastructure that leverages legacy systems for settlement; or building a new platform for small-dollar payments.
Neumann explained there will be upfront costs to the financial industry for developing faster payment capability. She also stated that symposium participants generally supported the idea of forming a U.S. council for faster payments as a starting point for better coordination among stakeholders.
“(Symposium) panelists also agreed that enabling faster payments must go hand in hand with improving payments security,” said Neumann. “A system for immediate payments increases the level of risk by making it more difficult to detect and stop fraudulent transactions before the transactions clear. As new and faster payment methods are developed, they will require security enhancements.”
Neumann concluded that as the pace of payments innovation accelerates around the globe, private and public sectors must work together to establish standards for faster, safer, and more flexible payment systems, as exemplified by recent developments in Australia and Singapore.
“Many participants agreed that a positive business case for faster payments in the U.S. will emerge in the long run, based on rising consumer demand for immediate payments in an increasingly digital world,” wrote Neumann. “There was also agreement among the participants that the shift to faster payments should be coupled with improvements in payments security. Many solutions, such as data tokenization, are already being implemented to address security concerns. However, the U.S. payments industry lacks common standards for interoperability to implement these technologies in a way that will allow for efficient payments. To deliver greater payments speed, security, and interoperability, industry players and regulators must come together to develop a framework for payments innovation.”
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