Earlier this month, the Federal Reserve said that it will begin reviewing its current payments infrastructure to identify upgrade to meet the demands of modern life. While this is still in early stages, it telegraphed an emphasis on building a 24/7/365 settlement system as its backbone.
This would be a near universally welcomed change. Not only would it allow those institutions using the Fed system to reduce danger in the system during times of stress brought on by bank IOUs, and hopefully form the foundation of even more aggressive changes throughout the entire financial system, but it also allows the Fed to keep pace with payment apps and other consumer expectations.
But in designing this next evolution of the Fed’s settlement system, it’s important that it consider more than just speed or availability. Recent payment innovations such as push to card payments have demonstrated that consumers demand more than just “real time” as part of a modern transaction.
It’s easy to see the shortfalls and pain points of checks and ACH for consumers as first-generation payment instruments in today’s technology-driven ecosystem. These are slow and inefficient methods that ignore the customer experience. Even next day ACH requires a painful customer setup process and the sharing of sensitive data that is out of step with the ease of more modern apps. Plus, it is still limited to a batch production process that occurs only on business days.
As the Fed reimagines its settlement system, it can look to next generation technologies like push payments for the critical features beyond speed that are required by today’s consumers. This real time disbursement technology for businesses shows the premium placed on convenience, choice and confidence when issuing instant payments to consumers.
Informed by experiences in travel, retail and other industries, consumers expect convenience in transactions. Beyond the speed of disbursement, a defining feature of push payments is the speed and ease of setting up or accepting a payment. Consumers need only direct payment to the cards and accounts they already hold versus having to open a new one or memorize a routing number.
Any enhancement to the Fed system should take this setup and management process into consideration, in order to fulfill the needs of its consumers. Laborious administrative requirements are counter to the purpose of real time settlement. Instead, a focus on portable logins, instant electronic notifications, and speedy transaction management are key.
Consumer experiences in other sectors have also taught them to demand control over their money. With push payments, customers can choose to receive their loan proceeds, insurance payouts, travel reimbursements and more into any account they choose. This includes debit cards, credit cards, online wallets and bank accounts.
A truly modern Fed system should embed this same type of choice. Instead of dictating terms or accounts to consumers, a modern real time settlement system can delight customers by allowing them to choose a preferred card or account. Imagine you are a customer that wants to immediately use their new funds at a specific business. Instead of having to juggle multiple account transfers, a new settlement system would allow them to immediately direct the payment to the desired account with the push of a button or swipe of a finger.
The Fed inherently provides some degree of assurance that funds will arrive in destination accounts. But even for real time payments, there is a certainty that comes from timely and effective communication as well as fully guaranteed funding. With push payments, safe-to-spend funds arrive in real time with clear notification. Once a customer sees the money in their account it can never be clawed back for insufficient funds, unlike with a paper check.
The actual transmission of funds is also critical. Unfortunately, providers and customers alike are used to failed transactions or lost funds for direct deposits, wire transfers and other electronic payments. This same degree of certainty is critical for a real time Fed settlement system. Supported by clear and timely communications, it will help instill confidence in consumers.
Ultimately, speed of funding is only one part of a successful consumer facing payment transaction. For the Federal Reserve to build a truly next generation system, it must take into account the customer experience and design a process that delivers convenience, choice and confidence.