The initial discussions around Faster Payments date back to 2013. However, there is still much work to be done and there are several major challenges to be overcome.
If you take the example of countries like the U.K., Australia, and Mexico, you’ll see they’ve applied a more prescriptive approach to the process of faster payments development. Standards and roles are established by regulators or central banks with the purpose of helping private-industry players act in harmony.
The Fed and the Faster Payments Task Force (FPTF) set “effectiveness criteria” and not standards. This enabled the existing players to have the time and space to develop their own proprietary solutions, in the wake of which 2 dominant players, Zelle and RPS, were created.
However, these solutions aren’t interoperable. Moreover, they only work with their member financial institutions (FIs). These 2 large, bank-dominated entities establish and keep under control all the rules, pricing, message formats, etc. It feels like these are going to be the new versions of Visa and Mastercard.
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Standards and a framework aren’t the only issues playing a major with regard to faster payments. 6 other criteria are required for the creation of a new payment method. The progress registered in the industry so far can be found below:
- A clearing and settlement mechanism (CSM) accomplished through RPS.
- Real-time posting at financial institutions accomplished at all financial-institution members of RPS and Zelle.
- Credentials: Zelle requires social credentials (e.g. email addresses and phone numbers) as payment credentials, TCH still requires American Bankers Association routing-and-transit/account numbers. There are still steps to be taken in terms of credential standardization so they can be carried on mobile phones and presented like today’s payment cards. What is more, social credentials don’t operate well with corporate accounts.
- Risk Management: there are still things to be clarified in terms of how social credentials can be made secure and tamper-proof without resulting in unnecessary friction.
- Business/Economic/Legal Model: the merits of different pricing methods (e.g. interchange, sender/receiver pay, etc.) haven’t been deliberated. Also, how market dominance of a new duopoly is going to be prevented?
- Branding/Market Education: the thing that key stakeholders and consumer groups should receive information about upcoming changes with plenty of lead time is crucial.
According to BI Intelligence, as time passes, the number of transactions affected by faster payments will grow. P2P, B2B, C2B, and B2C payments, which comprised 12% of US payments volume in 2014, will get the most from such a system. Rapidly growing over time, these areas will increase the impact of the system. The implementation of faster payments will be a “mixed bag” for banks, because of additional costs associated with the implementation.