U.S. Federal Reserve Plans for Real Time Payment Settlement

The U.S. Federal Reserve has completed an in-depth study of the U.S. payments system and in September 2017 announced its next steps for payment processing improvement. The Federal Reserve’s initiative seeks to provide for real-time transaction settlement of payments and would require significant upgrades to the current market payments infrastructure.

Faster Payments Task Force

To begin the modernization of transaction settlement for payments, the U.S. Federal Reserve established the Faster Payments Task Force in 2015 and published “Strategies for Improving the U.S. Payment System” which laid the groundwork for the research to be conducted by the Task Force. The Task Force assembled included over 300 members from financial institutions, consumer groups, payment service providers, financial technology firms, merchants and government agencies. Over the course of two years, the Task Force engaged with a diverse array of stakeholders to research and document insights and proposals that could support real-time transaction settlement for payments in the U.S.

The Task Force produced several documents outlining their work. Their two primary publications included “The U.S. Path to Faster Payments, Final Report Part One: The Faster Payments Task Force Approach” which they released in January 2017 and then their second feature publication, “The U.S. Path to Faster Payments, Final Report Part Two: A Call to Action” which was released in July 2017.

In the Task Force’s report, they outline 16 proposed solutions assessed using task force-defined effectiveness criteria, a discussion of challenges, and 10 recommendations for ongoing research and action – several of which call for action from the Federal Reserve. The final “Call to Action” report also calls for payment system stakeholders to invest in payment system initiatives that will modernize payment systems technology and processes for real-time transaction settlement.

Current Developments in Payments Transaction Settlement

The U.S. Federal Reserve initiated the efforts of the Task Force as part of its authority and oversight for payments. It is also a payments provider for financial institutions and the U.S. Treasury. In comments regarding the release of the Task Force’s “Call to Action” report, Jerome Powell, Federal Reserve board governor and co-chair of the payments improvement initiative oversight committee said, “We are committed to advancing payment system improvements and look forward to communicating our next steps in the coming weeks.”

In September, the Federal Reserve released its most recent comments on the payments initiative. In the Federal Reserve’s September publication, “Strategies for Improving the U.S. Payment System, Federal Reserve Next Steps in the Payments Improvement Journey,” it outlines five desired outcomes with nine tactics for achieving its desired results.

The Federal Reserve’s five focus areas will include speed, security, efficiency, international and collaboration.

Tactics involved in achieving these outcomes will include:

1. a faster payments governance-focused interim collaboration workgroup,
2. the pursuit of Federal Reserve settlement services that address the future needs of a ubiquitous real-time retail payments environment,
3. exploring and assessing the need for more engagement from the Federal Reserve,
4. analyzing and seeking to mitigate payment security vulnerabilities,
5. establishing and engaging in collective industry workgroups for security vulnerabilities,
6. supporting industry efforts to develop and promote adoption of standards that enable faster end to end electronic processing,
7. engaging stakeholders to understand and assess the challenges and opportunities for cross-border payments,
8. facilitating ongoing stakeholder engagement in payments improvement efforts through a highly interactive and flexible payments improvement community,
9. furthering outreach and education efforts to create awareness and encourage adoption of identified improvements and initiatives.

The Vision for Real Time Transaction Settlement

The real time transaction settlement for payments initiative would align the U.S. market with other modern global markets that have already initiated and implemented real time payment systems. Around the globe this includes approximately 20 countries with many more exploring, planning and building the infrastructure to support real time transaction processing.

Currently, the Fed has identified five desired outcomes with nine tactics involved in achieving its goal of real-time payment transaction settlement across the U.S. The Federal Reserve’s efforts will primarily be focused around speed, security, efficiency, international and collaboration. These five focus areas will be guiding the near-term actions for the implementation of a new payments system. The Federal Reserve has reported it is targeting 2020 for full implementation of real-time payment transaction settlement in the U.S.