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Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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Stakeholder engagement will help the Fed improve the U.S. payments system

By: Jackson Mueller
March 17, 2015
   
   

In late January, the Federal Reserve released its Strategies for Improving the U.S. Payments System. At more than 50 pages, the report provides a broad overview of the Fed’s work towards improving the payment system and identifies a number of desired outcomes based on industry feedback to the Fed’s 2013 Consultation Paper. Those goals include a ubiquitous and cost effective way for businesses and consumers to make (nearly) real time payments, attempts to sustain confidence in the payment system via security enhancements, a system that’s capable of handling electronic transactions while allowing innovative payment services to improve the consumer and business experience, better options for sending and receiving cross-border payments, and a collective approach to payment system improvements from all players in the payments space. 

In the report the Fed recognizes that the payments infrastructure in the U.S. is decades old and in need of a remodel that avoids further fragmentation between traditional and innovative payment services. It hopes to remain competitive with other countries around the world that are in the midst of updating or already have updated their payment systems. The Fed noted in its report that the emergence of multiple standards to address a perceived weakness in the payment system creates greater confusion and complexity in the system: “it is unclear whether these evolving standards will be complementary or competing substitutes.”

Notably, two key themes emerged from the report that reflect on a few of the regulatory approaches outlined in our white paper, “FinTech: Building a 21st Century Regulators Toolkit,” by Institute Adjunct Fellow Daniel Gorfine and Senior Fellow Chris Brummer.

Engagement. The Fed repeatedly stated throughout the report that cooperation between it and industry stakeholders would ultimately drive how successful it is in achieving its strategic aims. In particular, “Payment stakeholders will ultimately determine through their individual and collective actions the extent to which these strategies are achieved.” The devil is in the details, as the Fed laid out next steps summarizing what it plans to focus on the near future, without including significant details on how it will achieve the desired outcomes.

To fill in the details, the Fed will commission two working groups that will define and drive its approach to updating the payment system. These two working groups – the Faster Payments Task Force and Payment Security Task Force – will develop with the Fed a blueprint for the work. It is the Fed’s intention that the two groups coordinate with each other as both faster payments and security – never more important –go hand in hand. Additional opportunities for stakeholder and public input that could influence Fed decisions in this area would come from requested feedback and submitted comments.

Playing the Role of Observer. While the Fed will play a leading role when it needs to, improvements to the U.S. payment system will ultimately depend on the agreed-upon suggestions from industry stakeholders, not the Fed, and more specifically from the two commissioned working groups. In its report, the Fed acknowledged that it would not consider expanding its “service provider role” unless it was determined that doing so would lead to further improvements to the payment system or that the private sector could not achieve the desired outcomes in a timely manner. The Fed also stated that it could adjust the various strategies listed in the report based on feedback from the working group discussions and public comment.

Industry engagement from a broad spectrum of stakeholders – coupled with a Fed eager to receive feedback in order to appropriately tailor its strategic objectives – could very well propel the U.S. payment system into the 21st century. Our Toolkit white paper includes industry participation and engagement as one of the many approaches regulators can use to effectively build a regulatory framework fit for the 21st century. In this instance, frequent engagement with industry could help the Fed keep abreast of the dynamic changes occurring in the payments space, and provide valuable information to the Fed that could help inform its efforts to modernize the payment infrastructure. Along similar lines, frequent opportunity for comment and public input throughout the modernization process, as the Fed has indicated it intends to provide, will provide comfort to industry stakeholders in that a better educated Fed will not try to apply a one-size-fits-all solution to the problem, instead taking a more holistic approach to upgrading the system while seeking to protect consumers and encourage innovation.

Improving the U.S. payments system is no easy task, but the Fed is willing to commit substantial resources and engage meaningfully with industry and outside stakeholders. In fact, the Fed just announced the opportunity for interested participants to register for its Faster Payments Task Force and Secure Payments Task Force. Assuming the Fed is able to complete its work on time, other U.S. regulators may want to incorporate lessons from the Fed’s experience as they modernize their regulatory structures.