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Walk Before You Run: The Fed’s Slow Crawl to Faster Payments

  • By Andrew Deichler
  • Published: 4/4/2016

COPENHAGEN, Denmark -- It should come as no surprise Dollar Paymentthat real-time payments were a major topic of conversation at Money 20/20 Europe. While real-time systems have been put in place in multiple nations like the UK, there are still questions about how and when such a system might be implemented in the United States. Although the Federal Reserve has assembled a task force to move the needle on real-time, it’s anyone’s guess as to when a system could actually be put in place.

Mark Ranta, CTP, head of digital banking solutions for banking and payments services provider ACI, told AFP that’s while he’s generally positive about the Fed’s progress on real-time, he wishes it was moving faster. “But we’re such a different banking economy than the rest of the world,” he told AFP. “We have a massive number of FDIC-insured financial institutions and then you look at a place like the Netherlands and there’s three banks. So with the complexity of the system and the number of individuals that get to have a say, it’s hard to get things moving.”

Other insiders are more optimistic. The Fed has actually made significant progress, according to Ben Milne, CEO and founder of real-time payment processer Dwolla and a member of the steering committee of the Federal Reserve’s Faster Payments Task Force. However, he doesn’t believe the Fed actually wants to build out a real-time system. “It wants the constituents who are going to build a system to come together,” he told AFP. “The Fed is shepherding a conversation about interoperability, and they’re doing that very well.”

Milne explained that a number of different companies, Dwolla included, have drafted proposals. As that process has moved along, many of those companies have started talking to one another about their relative strengths and weaknesses. “Where our weaknesses are—it’s much cheaper for everybody to partner. And where our strengths are—it’s advantageous for us to find out where to put those strengths in other people’s proposals,” he said. “So I think there will be a lot of focus on interoperability—many systems built by many different companies, focusing on how they talk to one another. And the Fed’s doing a really nice job with that.”

Asked whether he thinks this new, real-time system will run on traditional payment rails or if it will be an entirely new infrastructure, Milne said he sees merits in both approaches and believes that what will ultimately come about will be some type of hybrid system. “It will probably be both,” he said. “Wherever we can, we’ll use brand new stuff, and wherever we have to, we’ll leverage legacy architecture.”

Do treasurers want real-time?

Of course, there remain questions about how much interest there is in a real-time system from one group of significant end-users—corporate treasurers. In fact, some of the corporate treasurer members of the Fed’s task force have actively been encouraging other practitioners to get involved .

Milne sees clear advantages for treasurers in implementing a real-time system, noting that it would allow for money to be where it is supposed to be at all times. In fact, in contrast to nations like the UK where real-time payments were initially implemented to primarily benefit consumers, he sees the push for real-time in the U.S. being driven by the need to improve B2B transactions.

“We’re probably talking more about replacing wire transfers than we are talking about general P2P transactions initially,” he said. “Most people that are getting interested are thinking first and foremost about how they’re going to make money on this, and it’s easy to understand how you’re going to make money if there’s a lot of volume.”

Nevertheless, Ranta noted that treasurers have already figured out their business models, and many of them simply don’t see a major need for real-time at the moment. “It depends on your bank relationship,” he said. “You can, in theory, send your batch file to the bank and they can move it along quicker than normal. They can give you access to the funds because they know you’re good for it and they know what your balance is.”

The need is greater for small and medium-sized enterprises (SMEs) that need treasury-like functionality, Ranta added. These smaller companies typically don’t have a treasurer who knows what to ask their banking partners; therefore a simple, real-time system could benefit them immensely.
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