Why it matters

Has the U.S. payment system improved? The process has certainly begun, the Federal Reserve System revealed in a report detailing the steps that have been taken to modernize the system and enhance both speed and security. "Progress Report: Strategies for Improving the U.S. Payment System" discussed the efforts made to date, including the establishment of multiple industry task forces that compiled a list of 36 criteria to describe the desired attributes of a faster payment system that can be used to assess the effectiveness of potential solutions. Also accomplished: a plan to implement a new standard for wire transfers and advanced plans to implement widespread same-day automated clearing house settlements. Going forward, the Fed said it intends to provide additional opportunities for stakeholders to engage in strategy efforts with an eye toward publishing an assessment of faster payments solution proposals in early 2017.

Detailed discussion

Calling it "a critical juncture" in the evolution of the U.S. payment system, the Federal Reserve System called on the industry last year to join together and work to improve the speed, efficiency, and security of the system. The Fed published "Strategies for Improving the U.S. Payment System," setting a road map for the agency's plans.

Roughly one year later, the Fed released a Progress Report to detail its efforts and outline the steps remaining.

"More than 1,000 individuals from every corner of the payments world are formally participating in the initiatives," the agency wrote, including the formation of two groups, the Faster Payments Task Force and the Secure Payments Task Force.

The Faster Payments Task Force produced three deliveries over the last year: the Faster Payments Effectiveness Criteria, a "foundational component for assessing faster payment solutions," the Decision-Making Framework, and the Glossary of Terms. The 36 criteria were divided into six categories—ubiquity, efficiency, safety and security, speed, legal, and governance—and will be used by the Task Force to assess the proposed solutions.

Solutions will also be evaluated using the methodology found in the Decision-Making Framework, which "ensures that decisions and work products have broad support of the task force membership, including support within and across the different stakeholder groups represented," the Fed explained. And by creating a Glossary of Terms, the Task Force will be speaking a common language.

With regard to payment security, the Secure Payments Task Force identified its top priorities: payment identity management, data protection, law and regulation coordination, and information-sharing to reduce payment risk and fraud. The group also provided input on security components for the Faster Payments Effectiveness Criteria.

Payment efficiency was also addressed by the Federal Reserve. The Remittance Coalition released the Small Business Payments Toolkit, a set of free education resources for small businesses and the bankers and advisors who service them. In addition, the Coalition began work on a B2B directory, intended to encourage businesses to make more electronic payments to vendors and other payees, and worked with standards development organizations on remittance standards.

Seeking to establish "a single, common 'language' for global financial communications," the Fed advocated for the use of ISO 20022, using the last year to educate stakeholders about the benefits of the wire transfer format, the Progress Report noted, and created the ISO20022 Resource Center.

The focus on payment systems included a look at the Federal Reserve's own services, the agency said, and a number of activities were initiated to improve the agency, from expanding the hours of the National Settlement Service to support for the NACHA Same-Day Automated Clearing House (ACH) initiative.

What to expect in the coming months?

The Fast Payments Task Force will begin assessing potential solutions and hopes to publish its findings in early 2017 along with a report on the issues, opportunities, and barriers that need to be addressed to achieve the goal of a faster payment system. The Secure Payments Task Force intends to spend 2016 focusing on its priorities with the creation of topical work groups. For example, the Payment Identity Management group will address the lack of universally accepted ways to establish and verify the identity of a payment system participant, the Fed said.

2016 will see the Fed's efforts continue to work toward same-day ACH with the release of operational details for FedACH SameDay Service. Last October, a high-level plan and timeline to implement ISO 20022 was announced for the United States and the coming year will flesh out details of the implementation.

"We have seen many of the strategies and tactics included in the plan come to life through broad, unprecedented stakeholder support," Esther George, president and chief executive officer of the Federal Reserve Bank of Kansas City, who is leading the initiative, said in a statement. "When implemented, the strategies will contribute to public confidence and the global competitiveness of the U.S. payment system."

To read "Strategies for Improving the U.S. Payment System," click here.

To read the Federal Reserve's Progress Report, click here.