The US dilemma: To be 'SWIFT' or 'FASTER'
- by Varun Narang and Sweenie Dabas
The payments universe is evolving rapidly. Companies and consumers are constantly trying to stay ahead of the curve to comprehend the future. In such a scenario, real-time payments may be the crystal ball. 'Real-time payments', or 'Immediate payments' allows consumers and businesses to transfer money in real-time between bank accounts at a very low cost.
Globally, about 30 countries have either implemented or are in the process of reviewing and implementing an immediate payments infrastructure. The US, however, despite being the largest economy and a technologically advanced country, has made noticeably slower progress in this regard.
The US has been in a quandary for some time now. The Electronic Payments Association (NACHA), the Federal Reserve System (Fed), banks and other players have been talking about real-time payments for the last 20 years but only recently did the Fed take concrete steps towards its implementation.
In 2015, the Fed established 'The Faster Payments Task Force' with 331 members dedicated to improve the payments system across the US. It is tasked with identifying new and effective approaches for implementing faster payments capabilities in the US and is supported by McKinsey in the effort. Instead of following the beaten track of mandatory and controlled approach, the Fed has taken a conducive approach and is encouraging various industry parties to develop solutions and letting the market discover and decide the best solutions, governed by the broader guidelines called 'Faster Payments Effectiveness Criteria'.
The central bank's move has encouraged several initiatives to enable immediate payments -
- In October 2014, the Clearing House (operator of CHIPS and EPN ACH network) announced a multi-year endeavor to build a real-time payment system. It is currently working with FIS and is set to launch a pilot in Q1 2017
- In May 2015, NACHA adopted a rule that will enable same day processing of Automated Clearing House (ACH) payments and its phased implementation will begin in Sep 2016
- clearXchange (a P2P payment network owned by member banks) has already reached more than 170 million digital customers
- Payment solution providers such as Fiserv and FIS have launched proprietary real-time payment services - Popmoney and PayNet, respectively
- Fintech startup Dwolla runs a real-time, streaming payments protocol FiSync and has already submitted a real-time payments proposal to the Fed task force. Another startup, Ripple Labs, settles transactions in real-time using distributed ledger technology
This huge and heterogeneous ecosystem will lead to rapid strides in developing real-time payments and will give banks a bouquet of options to choose from. In fact, some of the largest banks - Wells Fargo, Chase, BofA - have started offering real-time P2P payments this year.
A real-time payments system will benefit multiple stakeholders in the U.S., including retail consumers, banks, and government agencies. However, it will not be without challenges. It will require significant overhaul of the legacy systems which currently support batch transactions, streamlining of operations to provide 24/7 support, and enhanced fraud and risk management.
The vast number of US banks, 6799 to be precise, and the number of parties involved, makes this project more challenging and unique. It was relatively easier to implement 'Faster Payments Scheme' in the UK, 'SIC' in Switzerland or 'FAST' in Singapore, given the small number of institutions in these regions. But the large and dynamic ecosystem of the US underscores the need and role of technology consultants to enable the transformation and represents a huge opportunity for IT service providers. They can enable banks to make their payments infrastructures more robust by assisting in:
- Easy product related customization
- Infrastructure designing to make it highly scalable and resilient
- Infrastructure implementation and server hosting
- System integration with periphery systems
- L2, L3 infrastructure support
- Regulatory compliance Singapore's
The Faster Payments Task Force will publish its assessment of the solution proposals in early 2017. But the Fed has not made it mandatory for banks to contribute and there is no deadline attached. US banks, however, can't afford to just sit back as this represents a huge opportunity - mobile P2P is estimated to grow to USD174 billion by 2020, up from USD5.6 billion in 2014 - and savvy fintech startups are already way ahead in the race. With their global peers having reached the destination already, it is imperative for US banks and regulators to come to a consensus on establishing real-time payments system in the country, and soon.