The Fed Drives Forward on the Payments Innovation Road

The legitimation of digital money accelerated with a push on the gas pedal by the U.S. Federal Reserve. The Fed’s highly anticipated paper paper Strategies for Improving the U.S. Payment System, provides a surprise and more of the same for business people interested in the development of a faster and more efficient system in the United States for making domestic and international payments.

Without using the “B” (bitcoin) or “C” (cryptocurrency) words, the Fed presented an option to “facilitate direct clearing between financial institutions on public IP networks using common protocols and standards for sending and receiving payments.” That refers to the use of cryptocurrency protocols to clear payments over the internet, a surprise seized upon by American Banker in its report, “The Fed’s Unexpectedly Bold Payments Idea.”

Before its release, the report often was tagged as the Fed’s “faster payments” paper, in reference to systems in other countries that provide realtime payments clearance. NACHA, the electronic payments association in the U.S., recently proposed its second version  of same-day ACH, which the Fed suggests in its comments  is only one part of a “broader initiative to modernize and improve the U.S. payment system broader payments.”

What’s the same, as reported by in “The Fed’s Slow March to Maybe Faster Payments,” is the pace at which payments innovation, whatever form it takes, will come to the U.S. payments system. The article notes that the Fed’s main immediate action is more planning and suggests that it’s “even a bit ironic that a move to deploy faster payments seems to be moving along so slowly.”

The Fed report, released Jan. 26, lays out five major areas of need within the industry: speed, security, efficiency, international, collaboration. These aims are mostly in keeping with their September 2013 Public Consultation Paper, but have now been fleshed out after hearing industry responses to that paper.


The report is quick to note that while the Fed sees itself as taking a necessary leadership role in the changing U.S. payments landscape, collaboration and engagement across payments stakeholders is essential for broad acceptance and innovation. While not all feedback was consistent, at least 75% of respondents agreed that participation should be ubiquitous, that the payment sender does not need to know the bank account number of the recipient, that confirmation of good funds should be made immediately, that timely notification is necessary at the time of payment for both sender and receiver, and that the transfer should happen in near-real time.

Increased payment speed would initially benefit at least 29 billion transactions per year, which is 12% of non-POS transactions nationally, the faster payments analysis projects. The report further suggests that the building out of infrastructure will create more demand for faster payments once the systems are in place and the technology is easily available.

The Fed did not take responsibility within the scope of payment improvement initiative for protecting against cyber attacks in general. The Fed will continue to work with public and private entities on generalized cyber security issues, but limited their focus within the initiative to thwarting data breaches within payment transactions and deploying networks of data security protections within the Federal Reserve itself. Security weaknesses identified include weak congregation of data on security issues and fraud, the lack of a complex regulatory environment, and adoption of new security technologies and standards not keeping pace with threats.

Although some 85% of non-cash general-purpose payments were made electronically in 2012, the need to reduce paper to keep efficiency up and costs down is a major area of concern.

In noting that various innovations have emerged within the States for making safe and efficient cross-border payments, the Fed urged that a collective approach to innovation will be necessary to bring the nation to a fully competitive place in terms of international payments. The report does not explicitly call for the adoption of the ISO 20022 standard as the sole solution. But the Fed plans to develop an implementation strategy for the standard for possible use this year and moving forward.

One of the biggest strategies rolled out in the report was the proposed establishment of two industry task forces: a faster payments task force and a payment security task force. Both will feature diverse stakeholder representation, and will invite feedback from others in the industry in order that stakeholders not involved in the process and the public at large may stay informed as to the course of the payment system improvement plan moving forward.

In a clarification webcast presentation 29 January, Jay Powell, governor of the Federal Reserve Board, stressed that these changes were “too ambitious to be achieved by the Fed alone” and represented a move toward a “proactive and nimble payments ecosystem” with a strong focus on and commitment to collaboration through every stage of the process.