IBS Journal Supplement 2015
‘I think the generation coming up behind us, they look at their balance online and that’s what they think they have in their bank account.’
Dave Sapenaro, Federal Reserve Bank of St Louis
forward proposals to mandate that some of its payments move to a new clearing infrastructure which would facilitate same- day settlement (as opposed to the current infrastructure which processes batch pay- ments overnight). Sapenaro welcomes the changes Nacha is making to this end, and suggests that its efforts can exist in parallel with the work being done by the FRB. ‘We think the two are complementary efforts. There are certain payments on ACH today that would benefit greatly from same-day clearing and settlement, but many of those kind of payments are not the real-time tar- get use cases we were talking about in the 30 billion range,’ he says. Finding a balance between all the stakeholders is a huge challenge in any project, particularly so when it will likely require the banking community to make a significant investment to meet new guidelines. This issue threatened to derail the negotiations between APCA and Swift in Australia, and has regularly been cit- ed as one of the biggest challenges of the UK Faster Payments project. US banks are diverse and have a broad range of approaches to technology, and many of the banks have legacy systems running batch processing, so to meet new real-time standards there will be a significant invest- ment required. ‘I think the generation coming up behind us, they look at their balance online and that’s what they think they have in their bank account, they don’t
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want to wait a day for a payment to clear and be posted,’ says Sapenaro. Rodriguez adds that ‘there are over 10,000 financial institutions in the US, some are more pro- gressive than others, but a lot have very old back office capabilities that will need to be upgraded. This will not happen over- night, and it will take a while to transition to this new world.’ Whatever course the US takes, there
is one element where there is already an almost universal agreement. ‘One of the things that we do have a consensus on is whatever we build it would certainly be done in the ISO 20022 format. It would be silly to not go ahead with that global view in mind,’ remarks Rodriguez. The adoption of ISO 20022 has seen a recent increase in uptake across the globe. Neighbouring Canada, for instance, recently completed a major project to move all of its payments to the format, which could open up the possibility for an inter-regional network. One other potential challenge might
be how to introduce the requirements ubiquitously. Sapenaro says that the FRB will work as closely as possible with the stakeholders to find the most mutually beneficial solution, but adds that only the US Congress can mandate banks to adopt any changes. ‘Our initiation of this work has been done in a proactive way to get the industry together and see what can be for the future, as opposed to having some issue come up and react to it with con-
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gressional mandates,’ says Rodriguez. The introduction of electronic cheque clear- ing, for instance, came about after Con- gress passed legislation in the wake of the confusion caused in cheque clearing after the September 11th attacks in New York in 2001. Any project undertaken is likely to span the best part of a decade (the FRB, incidentally, used a ten year timeframe as part of its business case analysis, albe- it with an emphasis on this being provi- sional), so it will be interesting to see how things progress in the interim. One ques- tion in particular which will be definitive is what approach the US takes: whether to modernise what it has or to take the bold leap to build a new infrastructure. The lat- ter approach throws up further questions, such as whether a model similar to the UK or Singapore with a central hub and opera- tor connecting the banks would be adopt- ed, or whether a virtual network, similar to the solution proposed by Swift in Australia, would be more suitable. Ultimately, how- ever, Rodriguez opines that the one option not available is to do nothing. ‘I think that banks have woken up a little bit to all of the innovation that has happened with the non-bank providers,’ he says. ‘It has caught the attention of the financial institutions, and they are thinking if we don’t do some- thing to keep our share of our consumers wallets, we are going to be disintermedi- ated here.’
analysis: real-time payments
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