Fed aims for real-time interbank settlement of faster payments

The US Federal Reserve is seeking public comment on measures to develop an around-the-clock, real-time interbank settlement system for faster payments.

The central bank is open to views on two actions to develop more efficient and secure instant payments. One is extending the capabilities of its real-time gross settlement system to offer a constantly-operating service, 365 days a year. It is also looking for comments on creating a liquidity management tool to support the settlement services provided by both the Fed and the private sector.

The mismatch between mobile payments applications and the underlying interbank settlement infrastructure in the US has become ever more apparent to regulators. “There is a growing gap between the transaction capabilities we need and expect in the digital economy – fast, convenient and accessible to all – and the underlying settlement capabilities,” Fed governor Lael Brainard said in a speech in Chicago on October 3.

Despite recent innovations in payments technologies, “there has been very little relative change to the back-end processes that actually move value throughout the financial system,” says a report published by the US Treasury in July 2018. “The user experience, products and innovative solutions that have been introduced in recent years with the advent of mobile technology, in essence, layer on top of the existing core payment systems.”

For instance, although online purchases can already be completed by uploading personal information on the vendor’s website, the seller may not have immediate access to the transferred money.

A better settlement system would not only facilitate payments but also provide enhanced transparency and security to a key financial infrastructure. In 2016, interbank payment systems in the US processed transactions worth over $1 quadrillion, according to the US Treasury report. Payment systems involving nonbank entities reached almost $190 trillion of that transaction value, the same report says.

“The capability to finalise interbank settlement before funds are made available to the recipient would avoid an undesirable buildup of risk in the system,” said Brainard. “The more banks that have access to real-time as opposed to deferred settlement mechanisms, the lower the risk would be from deferring settlement to the payment system as a whole.” 

Over the past year, the Fed has assessed the steps it can take to address these risks. After the evaluation, it concluded a 24/7 payment-by-payment interbank settlement service in real-time offers clear benefits, said Brainard.

“This common infrastructure would support connections across banks, and faster payment service providers acting as their agents, with the potential to weave together the current patchwork of systems,” she added. “As a result, we would also expect the overall safety of faster payments to increase.”

Brainard also argued that a better interbank settlement system could contribute to higher competition and better services. Its availability could allow new private-sector faster payments providers to lower costs, increase quality and open new options to consumers, she said.

The Fed’s board is not committed to any specific action yet, and it will be open to receive public comments on these actions until December 14, 2018.