strategies for improving the u.s. payment...

© 2015 Federal Reserve System. Materials are not to be used without Federal Reserve consent.

Strategies for Improving

the U.S. Payment System

Sean Rodriguez, Payments Industry Relations Federal Reserve System

ABA Meeting San Francisco April 18th, 2015

© 2015 Federal Reserve System. Materials are not to be used without consent.

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Refreshed Strategic Direction

In October 2012, the Federal Reserve updated its

strategic direction for financial services, highlighting

the intent to pursue improvements in the end-to-end

speed, safety and efficiency of the payment system.

Security

Speed

Efficiency

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Faster Payments Assessment

Retail Payments Study

Payments Security Landscape Study

The road we’ve traveled

ISO 20022 Business Case Assessment

Research on End-User Demand for Select Payment

Attributes

Consultation Paper

New End-to-End Strategic Focus on Speed, Security & Efficiency

Strategy Paper


Payment System Improvement – Payment System Gaps & Opportunities

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Continued End-User Check Writing

Challenges in Converting Businesses to Electronics

Closed Payment Communities

Lack of Contemporary Features in Traditional Payment Channels

Slowness of U.S. Payments

Mobile Technology Revolution

Obstacles in International Payments

Security Concerns


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Strategies for

Improving the U.S.

Payment System

Communicates desired outcomes

Delineates multi-year strategies

Solicits stakeholder engagement and commitment


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Communicate the 5 Desired Outcomes


Strategy 1: Stakeholder Engagement Actively engage with stakeholders on initiatives designed to

improve the U.S. payment system

Strategy 2: Faster Payments

Identify effective approach(es) for implementing safe, ubiquitous, faster payments

Strategy 3: Payment Security

Reduce fraud risk and advance the safety, security and resiliency of the payment system

Strategy 4: End-to-End Payment Efficiency Achieve greater end-to-end efficiency for domestic and cross-border payments

Strategy 5: Enhanced Federal Reserve Services Enhance Federal Reserve Bank payment, settlement and risk management services to address identified gaps.


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Faster Payments Task Force Mission

Identify and evaluate approach(es) for implementing a safe, ubiquitous, faster payments capability in the United States


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Faster Payments Task Force Objectives

Represent… views on future

needs for a safe, ubiquitous faster payments

solution Address… other issues

deemed important to the

successful development of

effective approaches

Assess… alternative

approach(es) for faster payment

capabilities

Expected Task Force Life Span: Target completion of efforts is expected December 2016


B2P ad-hoc high value NA (e.g., insurance claims, legal settlements)

Faster Payments Assessment Five Use Cases Could Benefit…

Use case

1 Business includes Government 2 Does not include P2P commerce such as paying babysitter/lawn mowing kid; these transaction are distributed across a number of P2B use cases SOURCE: McKinsey expert and industry interviews, public consultation responses; McKinsey Payments Map; Consumer Financial Life Survey

Speed required

B2B1 ad-hoc low value 11.1 billion / 5% (e.g., just-in-time supplier payments)

▪ Real-time authorization/clearing ▪ Intra-day availability of funds ▪ Intra-day interbank settlement

▪ Real-time authorization/clearing ▪ Real-time availability of funds ▪ Late-day interbank settlement

P2P2 transfers 4.3 billion / 2% (e.g., rent repayment to roommates)

▪ Real-time authorization/clearing ▪ Real-time availability of funds ▪ Late-day interbank settlement

B2P ad-hoc low value 3.2 billion / 1% (e.g., temporary employee wages)

▪ Intra-day authorization/clearing ▪ Intra-day availability of funds ▪ Late-day interbank settlement

P2B ad-hoc, remote 10.3 billion / 4% (e.g., emergency bill pay)

▪ Real-time authorization/clearing ▪ Late-day availability of funds ▪ Late-day interbank settlement

Volume / % of total payments


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Secure Payments Task Force Mission

Provide a forum for stakeholders to advise the Fed in its leader/catalyst and operator roles on payment security matters, and identify and promote actions that can be taken by payment system participants collectively or by the Federal Reserve System


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Secure Payments Task Force Objectives

Advise… the Federal Reserve on

payment security matters

Determine… Areas of focus

and priorities for future action to

advance payment system safety, security and resiliency

Coordinate… with the Faster Payments Task Force to identify

solutions

Expected Task Force Life Span: Target completion of efforts is TBD


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Task Force Participation – Four Ways to Engage Payments Community –Stays up-to-date by reviewing task force materials online –Provides input on task force work products online

Task Force –Elects Steering Committee to help guide work effort –Provides input and contributes to task force work products;

develops/endorses task force recommendations/conclusions

Steering Committee –Advises the Federal Reserve chair on meeting agendas and

assists in prioritizing work –Determines scope of task force work groups and determines

when full task force deliberation is needed Work Group(s) –Develops proposals or recommendations related to

approaches, issues or analysis

Community

Task Force

Steering Committee

Work Group

Work Group

Work Group


Complete the online

registration form

Sign and submit the

participation agreement

Receive registration

confirmation

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How to Join

Visit FedPaymentsImprovement.org to register now!

Task Force Registration Deadline: Faster Payments: April 17, 2015 Secure Payments: May 15, 2015

(Deadlines to participate in the inaugural task force meetings)


Faster Payments Task Force • Convene initial task force conference call – April 29th • Elect steering committee and convene f-2-f meeting of same – May 2015 • Convene first face-to-face task force meeting – June 2015

Secure Payments Task Force • Convene initial task force conference call – May 2015 • Elect steering committee and convene f-2-f meeting of same – June 2015 • Convene first face-to-face Task Force meeting – July 2015

High Level Next Steps Beyond Task Force Registration Process

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© 2015 Federal Reserve System. Materials are not to be used without consent. 16

Take Action…

Issue-Specific Task Forces

FedPayments

Improvement Community:

@FedPayImprove

FedPayments Improvement

FedPayments Improvement

Payments Exchange Blog

Connect with us…

FedPaymentsImprovement.org

FRBservices.org


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Questions?

Consumers and Payment Systems

Today’s Payments Systems

Income Volatility & the JIT Consumer

’

Financial Health

Mobile Financial Services

http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201503.pdf

What do consumers want?

• Balance info • Real time &

immediate funds availability

• Reminders • 24/7/365 • P2P • Easy to use • Security

The Potential. . . .

• Paid-as-you-earn wages • JIT benefit payments • P2B small business

payments • Wearables

Join us at EMERGE

EMERGE offers the industry’s leading players a venue to network, develop new ideas, and advance innovations to meet complex consumer needs. Register using discount code: FF15

June 10-12, 2015

Hilton Austin Join us in Austin for our 10th annual conference.

700+ attendees

Thank you!

Jeanne Hogarth

[email protected] 202.888.7586

@jeannehogarth

mailto:[email protected]

The Clearing House Design and Development of a

Real-Time Payments System

April 18, 2015 ABA Spring Meeting

In October 2014 The Clearing House announced a multi-year initiative to build a ubiquitous real time payment system for the US.

“The movement to develop a faster U.S. payment system has a new, influential convert.” Sarah Todd and Kevin Wack, American Banker

“(Same-day ACH and real-time payments) are all complementary ways to work on moving payments faster. Moving to same-day ACH, I don't see that at all as conflicting with changes in the ecosystem that will support real-time payments."

Jan Estep, NACHA President

“We're pleased with the Clearing House and members' announcement. They're taking on a process that would actually help support some of our desired outcomes.”

Dan Gonzalez, Federal Reserve Bank of Chicago

“The effort to bring faster payment settlement to the United States gained momentum this week with an announcement by The Clearing House Payments Co. LLC… .”

John Stewart, DigitalTransactions.net

“The Clearing House is to be commended for moving forward and keeping the pressure on the financial industry to accelerate the speed with which payments are made in the U.S.” Rene Pelegero, Former PayPal, Inc. and Amazon.com Inc. Executive, in American Banker

The Clearing House Real-Time System will be designed to address unmet customer needs across a number of targeted use cases.

Business to Person

• Temporary employee wages

• Emergency payroll

• Urgent B2C (e.g. disaster relief)

Person to Person

• Non-commerce payments (e.g. rent payment to a roommate, emergency funds for a family member)

• Urgent Account-to-Account transfers (e.g. to fund investments or purchases)

• Payment for informal services (e.g. babysitting, lawn care)

Person to Business

• Immediate bill payments with acknowledgment or receipt

• Some e-commerce purchases

Business to Business

• Just in time payments to suppliers

• Immediate bill payments with acknowledgment of receipt

Key Characteristics of The Clearing House Real-Time System

Credit Push Only

“Immediate” Funds Availability for

Receiver

Immediate Notification to

Receiver

Payment Certainty for Receiver

Payment Value Limits to Mitigate Risk

Effective Settlement Risk

Management

Robust, Extensible Messaging

Account Masking / Tokenization

Strong Access Security

Standards

• Electronic Fund Transfer Act (EFTA, 1978)/Regulation E

– Establishes basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer (“EFT”) services and of financial institutions that offer these services.

– Regulation E contains specific provisions relating to error resolution, limiting a consumer’s liability for unauthorized EFTs and requiring banks to provide disclosures.

• Expedited Funds Availability Act (EFAA, 1987)/Regulation CC

– Requires banks to make funds deposited into accounts available for use within certain specified schedules.

– Requires banks to disclose their funds availability policies and imposes timing and content requirements for such disclosures.

Existing Consumer Protection Framework for Electronic Payments

• Truth in Lending Act (TILA, 1968)/Regulation Z

– Regulates certain credit card practices with respect to consumers and provides a means for the fair and timely resolution of credit billing disputes.

– Regulation Z contains specific provisions limiting a consumer’s liability for unauthorized credit card transactions and requiring banks to make disclosures.

• Card Network and ACH Network Rules

– Require participants to provide consumer protections that supplement (enhance) existing legal protections, including liability protections and disclosure requirements.

Existing Consumer Protection Framework for Electronic Payments

• Three key elements to “an electronic funds transfer” under EFTA/ Reg E

– An electronic transfer of funds

– A consumer account holder

– A financial institution that is instructed to credit or debit the consumer’s account

Existing Consumer Protections Will Apply to The Clearing House’s

Real Time Payments System

• The Clearing House’s Real Time Payments

– Will be electronic transfers (credit/push payments) from consumer accounts at financial institutions to accounts at other financial institutions

– Will not fall under the wire transfer system exclusion from EFTA/Reg E as the real time payment system will not be a wire system used primarily for non-consumer transactions.



• In addition to Regulation E, the prohibition on unfair, deceptive and abusive acts or practices under the Dodd-Frank Act applies to consumer financial products or services

– Such products and services are defined to include both (i) “transmitting or exchanging funds” on behalf of a consumer, and (ii) “providing payments or other financial data processing products or services to a consumer by any technological means.”



“The goal should be faster payments, not faster unfixable errors, and certainly not faster unrecoverable theft from people’s accounts.”

– Richard Cordray, Director Consumer Financial Protection Bureau

What about Unauthorized, Fraudulently Induced, or Mistaken

Payments?

• A positive consumer experience is vital to the ultimate success of real time payments. Key to this positive experience will be:

– Strong bank security to prevent account take overs and unauthorized push payments.

– TCH system rules will set a minimum level of security for all system participants.

– Consumer education to ensure that real time payments are used for the right kinds of transactions.

– Well designed user-interfaces and payment execution controls to minimize errors.

What about Unauthorized, Fraudulently Induced, or Mistaken

Payments?

• Unauthorized payments will fall under Reg E’s error resolution requirements.

• Fraudulently induced payments (i.e., payment was authorized but recipient misled payer into sending money)

– Will not be “errors” under Reg E.

• 12 CFR 1005.11 defines error to be an unauthorized EFT (which must be initiated by someone other than the consumer); an incorrect EFT; the omission of an EFT from a periodic statement; a computational error by a financial institution related to an EFT; a request for documentation or information about an EFT.

When problems do arise…

• Mistaken payments (i.e. payment was authorized but was mistakenly sent to wrong recipient or for the wrong amount)

– Also will not be “errors" (at least under traditional interpretation of Reg E).

– System will support bank to bank messaging to request (but not require) return of funds.

When problems do arise…

strategies for improving the u.s. payment...

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