Insights

About Three Years and Counting

About Three Years and Counting

Aug 25, 2017

During the next several years, experts project a significant change in the United States payment structure. Regulatory changes as well as a host of other risk areas falling under the scope of enterprise risk management will be in the spotlight due to the massive change. In addition, it will be important to address financial institution payment system connectivity along with that of nonfinancial institutions, including FinTech companies. And for the record, the United States is not alone in the push to expedite payments.

The Fed’s Challenge for 2020

Just imagine for a moment trying to convert primary payment systems in the United States into an extremely fast, ubiquitous, broadly inclusive, safe, highly secure, and efficient process by 2020. That’s exactly what is on the table, per the Federal Reserve System’s challenge outlined in its Strategies for Improving the U.S. Payment System report.[i] Given the magnitude of this endeavor, the Federal Reserve called upon stakeholders to form two separate subfocus groups, the Faster Payments Task Force and the Secure Payments Task Force. Within the desired outcomes, more specific objectives included:

  • Industry collaboration.
  • Improvements in processing speed.
  • Enhanced cross-border processing of payments.
  • Reduced costs.

A number of stakeholders in this project were identified from the onset, including financial institutions, nonbank service providers, businesses, retailers, consumer groups, standards setting entities, and other impacted organizations involved with receiving or processing payments. 

Although the Federal Reserve served to support the task force in its progress in meeting the challenges, via facilitating task force meetings, providing resources to assist in task force work efforts, and soliciting participation from volunteers across the payment industry, the work and reports represent the views and recommendations of the task force and do not represent the official views or positions of the Federal Reserve. (Note: Upon the Faster Payments Task Force’s issuance of its final report in July 2017, the Federal Reserve concluded this particular task force.) Consider the primary U.S. payment systems and the sheer transaction volume, velocity, and dollar amount per the following table[ii].

Type

A Few Examples

Processing Model

Volume/Value Statistics

Wires
(credit-push)

High-value transactions take place between financial institutions and businesses including:

  • Corporate payments.
  • Interbank transfers.
  • Fed funds purchased and sold.

Individual payments are processed in real time through two main systems: Fedwire and CHIPs.

 

In 2015, there were approximately
253 million wire payments in the U.S. with a total value of approximately
$1.2 trillion.

Automated Clearing House (ACH)

(credit-push and debit-pull)

Examples include:

  • Direct deposit of payroll (B2P).
  • Insurance claim payments (B2P).
  • Check conversions, e.g., point of sale (P2B, B2B).

ACH operates on a batch, store-and-forward model; individual payment requests are stored and grouped into batches throughout the day. Most ACH payments are settled on the next day. Same day ACH payments have three settlement windows every 24 hours.

Approximately
23.5 billion ACH payments with a total value of approximately
$143.5 billion were processed in 2015.

Cards
(debit-pull)

Cards are utilized for many types of payments including:

  • Business payments using company credit or debit card.
  • Consumer payments for goods or services at the point of purchase (in store or online/mobile).
  • Prepaid cards (typically used for P2B purchases and bill payments).

Credit card payments are authorized and approved in real time with a batch clearing taking place later on (usually end of day); all credit transactions are processed through dual message.

Card payments are netted against each other during the day, and settlement typically happens within two days after a payment is initiated.


Debit or prepaid card payments are authorized, approved, and cleared in real time when transactions are processed through a single message.

Payments are authorized and approved in real time, with batch clearing taking place later on (typically end of day) when transactions are processed through dual message.

Approximately
103.3 billion card payments with a total value of approx. $5.72 trillion were processed in 2015.

Check (debit-pull)

Examples include:

  • P2P payments to another person.
  • Business supplied payments.
  • Consumer bill payments.

Check images are cleared in batches between financial institutions, processors, clearing houses, and the Federal Reserve. Checks are generally settled by the next business day.

In 2015, there were approximately
17.3 billion check payments with a total value of approximately
$26.83 trillion.

Cash (credit-push)

Examples include:

  • P2P payments to another person.
  • Consumer payments for goods or services in stores.
  • Business payments for out-of-pocket expenses.

Settlement happens immediately at the time of the transfer of payment.

Although cash transactions are much more difficult to measure than other payments, the Federal Reserve’s 2015 Diary of a Consumer Payment Choice shows that consumers still use cash more frequently than any other payment type, particularly for low-value transactions.

Abbreviations: P2P = person to person; P2B = person to business; B2P = business to person; B2B = business to business.

Additional insight: Credit-push payments reference payments made when the payer sends the payment instruction to the payer’s account to transfer the payer’s funds to the payee.

Debit-pull payments represent payments made after prior authorization by the payer. The payee sends the payment instruction to the payee’s account to draw on funds from the payer.

The Faster Payments Task Force has 320 participants[iii] as of December 31, 2016, representing the following segments of commerce:

Focus Area

Percent

Focus Area

Percent

Consumer Interest Organizations

3%

Medium Financial Institutions

14%

Business End Users

4%

Large Financial Institutions

8%

Government End Users

2%

Non-Bank Providers

31%

Small Financial Institutions

9%

Other Industry Segments*

29%

* Other Industry Segments include representatives of industry organizations, regulators, rules and standards organizations, consultants, and academic institutions.

While other countries switched to online payments years ago, the United States is still focused on writing checks. For example, the Netherlands abolished paper checks in 2002, Denmark officially ended paper checks the beginning of 2017, and other countries such as Germany, Belgium, and Switzerland are pushing hard to eliminate them. Cost is one primary consideration. The 2015 Association of Financial Professionals pegged the median cost of processing a paper check at $3.00 compared with less than 30 cents for an electronic transaction. And that cost does not even include the cost of replacement checks. Nevertheless, U.S. citizens pay the costs for paper checks and the related processing. Moving to online payment systems is a major first step as noted by these countries’[iv] efforts cited below:

Country

Faster Payment System

Implementation Year

Japan

Zengin System

1973

Switzerland

Swiss Interbank Clearing – SIC

1987

Iceland

Greiosluveitan

2000

South Korea

Interbank Home/Firm Banking Network--HOFINET

2001

Brazil

Funds Transfer System—SITRAF

2002

Mexico

Sistema de Pagos Electronicos Interbancarios—SPEI

2004

South Africa

Real-time Clearing—RTC

2006

Chile

Transferencias en Linea—TEF

2008

United Kingdom

UK Faster Payments

2008

China

Internet Banking Payment System—IBPS

2010

India

Immediate Payment Service—IMPS

2010

Nigeria

NIBSS Instat Payments—NIP

2011

Poland

Express ELIXIR

2012

Sweden

Payments in Real-Time—BIR

2012

Turkey

Retail Payment System—RPS

2012

Sri Lanka

Lanka Pay

2013

Denmark

NETS Real-Time 24/7

2014

Singapore

Faster and Secure Transfers—FAST

2014

Bahrain

Fawri

2015

Australia

New Payments Platform—NPP

Expected 2017

Note that you do not see the United States on this list. Therein lies part of the concern—already 20 countries are implementing/utilizing faster online payment systems. Of these countries, some are abolishing paper checks. To stay financially relevant and interactive with the world’s global economy, the United States is on a path to adopt, implement, and utilize the faster payment system processes.

Where Does That Leave Us?

The July 1, 2017, report, Final Report Part Two: A Call to Action, was issued by the Faster Payments Task Force with its collective vision, citation of foundational issues that require ongoing collaboration, goals and recommendations, and detailed guidance or recommendations for next steps. The 63-page report will be the subject of a future article. However, the purpose of this article is to create a focused awareness of coming change.

For regulatory compliance risk management, these initiatives pose changes in laws and regulations, monitoring techniques, disclosures, documentation, and recordkeeping requirements, to name just a few focus points. Furthermore, for enterprise risk management, these new initiatives will bring about significant changes in operational risk, liquidity and funds management risk, strategic risk, reputational risk, and other risks to be identified as changes occur. These changes will impact a major core business area of financial services—payments and the related financial transactions integrated with each activity. 

For Now

Start the learning curve on what is happening in the payment system. Be aware that whatever you learn today is subject to change in this Internet movement of things, including payments. Our next article will further detail the proposed recommendations and observations of the Faster Payments Task Force. And inquiring minds might ask what about the Secure Payments Task Force? It has issued a request for public comment on its segment of this initiative.

There is much more information to come, but in the interim, if you have questions, do not hesitate to reach out to your Wipfli representative. We are all in this together and seeking insights, guidance, and potential solutions. 


[i] Federal Reserve System, Strategies for Improving the U.S. Payment System, (Washington: Board of Governors and Federal Reserve System, January 2015)
[ii] Faster Payments Task Force, The U.S. Path to Faster Payments, Final Report Part One: The Faster Payments Task Force Approach, January 2017
[iii] Ibid.
[iv] Ibid.

Author(s)

Karen Mitchell
Karen A. Mitchell
Manager
View Profile