Wednesday, 13 August 2014

Are real-time payments in the US a realistic prospect?

There has been a lot of coverage of real-time payments projects around the globe in the IBS Journal over the last few months, and it was certainly one of the key themes of the EBA Day conference in Helsinki in June. Europe looks like it is getting its act together in this respect, especially with SEPA now in the rear-view mirror and ISO 20022 gaining prominence, whilst the likes of the UK and Sweden have been ahead of the curve.

The elephant in the room then is the US. For such an economically developed country, there is a puzzling lack of sophistication in the national payments infrastructure. It is well documented that EMV standards have yet to be implemented, with consumers still subjected to the risks of magnetic strip card technology dating back to the 1960s. Cash and cheques are still king. Payments rely on the automated clearing house (ACH) system, under the umbrella of NACHA, with settlement time often taking days (NACHA, incidentally, is proposing that the ACH network should be upgraded to real-time).

Steps are being taken to address this now, however, with the Federal Reserve’s consultation last year inviting suggestions from a wide range of participants in the payments ecosystem for the make-up of a real-time payments system (the responses can be seen here).

The conclusions from the consultation have recently been published and also make for interesting reading (these can be viewed here). There is definitely an appetite for faster payments, with 69 per cent of consumers and 75 per cent of businesses stating they would prefer a settlement time of one hour. 75 per cent of businesses also said they would be willing to pay to receive such a service (with 33 per cent of consumers also agreeing). There was also consensus that the system should be ubiquitous, and that any new platform should be built from scratch as opposed to leveraging legacy infrastructure.

It’s also worth noting that there is a recommendation that any new platform built should be interoperable with other national schemes, opening up the prospect of a globalised faster payments network.

All sounds good in theory, but there remain some significant hurdles. Perhaps the greatest is the lack of strong central government in the US, making mandating real-time payments almost impossible. Its fate relies heavily on the business case being attractive enough for the banks to make the investment. The report hints as much, with the suggestion that business cases should be on an individual basis as opposed to a societal one. How willing will the big banks be to invest in a platform which its regional and national competitors can also use?

Time is also an issue, with the suggestion that any new system would be available by 2025 (the UK, incidentally, went from consultation to a live state in three years). Is it a case that the effort, resources and time required to implement such a service outweigh the potential benefits? There is the question of how dated a ‘new’ system would be by that point as well. After all, whilst US consumers and businesses have the appetite for better efficiency for their payments and have suffered with the legacy issues, these problems are not new. The system still works, so perhaps it’s just a classic case of familiarity breeds contempt.

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