Thursday, June 19, 2014

A new payments system for the US

In a weird twist of fate, I was at the Federal Reserve's Payment System Improvement Town Hall in San Francisco today morning, just as Simple vastly improved the speed of our external transfers. Of course, we didn't magically make ACH any faster, just improved the end to end process to eliminate all bottle-necks. Further improvements from here are limited by the ACH system itself. If you don't know how ACH works, I wrote a blog post about it a while back. Unfortunately, at best ACH is a next day payments system for pushing funds. The US does not have a national real time retail payments system today. ACH is so outdated that the new Check clearing infrastructure that was built to implement Check21 is frequently faster.

Now there are lots of improvements that could be made to ACH, but historically they have been blocked by the large banks who make so much money from charging customers fees for pricier wire transfers. It would be almost funny if it weren't heartbreaking - less than a year after Occupy Wall Street was broken up, the big banks voted in secret to stop straightforward payment systems improvements which would have improved the lives of hundreds of millions of people.

One good thing that did come out of that was that it seems to have galvanized the Federal Reserve to launch a payments system improvement program. The Fed started a consultation process with the public, invited comments, conducted research and came up with a set of options to evaluate.




Amazingly, the option they have chosen to explore is to build a whole new payments system from the ground up!! I've been tracking this process for a while now, and I definitely didn't see this coming. Its a ballsy move by the Fed, and if they manage to pull it off, it will catapult the US back to where it was in the 1970s - a global leader in electronic payment systems ubiquity and efficiency.

Whether they pull it off is a big IF. The fundamental problem the Fed faces with most of the retail electronic payment systems (ACH, Check and Cards) is that it doesn't control them. Even with ACH and Checks where its a major operator, the Fed doesn't get to set the rules. Congress never gave them that power. So the rules are made by industry associations like NACHA, which run the systems to maximize profit for their members, not to maximize welfare for end users. To try and get around this problem, the Fed is inviting comments from all stakeholders, and trying to build consensus around this new direction. They also have a lot of soft power they can bring to bear on recalcitrant banks. But it will be a long road, and even defining the roadmap will take another year, with any form of implementation unlikely to begin before 2017.

That doesn't mean nothing will happen in the short term. Incremental improvements to the existing payment systems will happen - the Fed previewed some improvements to the NSS, and mentioned changes coming to the Check21 architecture as well. Who knows, we may even see same-day ACH become a reality the next time NACHA gets around to voting on it.


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