US Payments Innovation: Here Come the Feds!
Whether we like it or not, the US business-to-business payments system is poised for a sweeping transformation. Today’s US payments landscape can be best described as an amalgam of anachronisms made up of paper checks, a heavy dose of aging technologies, and a new hodgepodge of disparate payments innovations.
Consider the following dysfunctions:
- US companies spend $40 billion every year tracking down payment information just so they can post payments to their accounts, according to the Federal Reserve.
- The majority of companies are not paid what they’re owed within 45 days or more, according to a study conducted by Aite Group.
Rest assured we’re not the only country that has struggled with B2B payments. But others have taken action -- such as Europe’s SEPA requirements -- that have resulted in progress. Brazil and other emerging markets are undertaking similar initiatives to modernize their payments infrastructure.
What are we doing in the States to catch up? Seeing that progress is possible, the Federal Reserve has begun to take action, starting with a whitepaper issued last fall calling for a new real-time payments network and the recent adoption of the new ISO 20022 remittance standard, formulated with its leadership.
Has the Federal Reserve become the new catalyst for payments change? At the same time, has the private sector lost its zeal for creating meaningful innovation and cooperation?
In my last article I detailed the new ISO 20022 standard and the seemingly long road ahead for adoption. Banks do not want to make changes until customers request them. Software providers do not want to make investments until there is a buyer for the enhancements. The cycle continues and progress is begrudgingly made over many years, if at all.
Today’s treasury services landscape: a $100 billion chopped salad
This busy landscape is a hefty one. The US treasury services industry is estimated at approximately $100 billion-plus per year. It’s a primary revenue driver for most banks, and its growth has resulted in some of the most creative innovation to support corporate customers’ needs for managing their financial ecosystems in the last three decades.
Has the consolidation in the treasury services industry in the last seven years made it almost impossible for effective innovation? The current tangled network of participants, sponsors, benefactors, and pettiness has made the process of uniform improvement almost impossible to accomplish.
The Fed as change agent
Seeing the lack of progress in the private sector, the federal government is now taking a more active role. In the month of June, the Federal Reserve held a series of town hall meetings to unveil a new payments strategy. The strategy has four desired outcomes:
- Ubiquitous, faster electronic options
- Greater electrification of payments
- Better choices for businesses and consumers
- Stronger security
With this new strategy comes a fundamental shift in the scope of the new payments vision. While the Fed has historically focused on interbank payments and the safety and security of the network, its new vision has a broader reach into P2P and B2B payments. After evaluating a series of alternatives and reviewing comments to their whitepaper issued in late 2013, they have concluded that building a new infrastructure through 2025 is the optimal solution. Their final decision and direction is expected in September.
Have industry cooperation and vested interest come to the point that the Federal Reserve Banks concluded that they must become the market catalysts for change through regulated adoption of new payment features versus the open market?
In the Payment Security Roundtable, with a broad representation of industry participants hosted by the Fed, the answer to the question of Fed leadership became apparent. There was no disagreement by the participants that maintaining and securing the payments network was in the national interest. Use of existing standards organizations to formulate and seek industry consensus on necessary changes was the preferred approach. Surprisingly, given the disjointed nature of the adoption of new standards, the Fed was deemed to be in the best position to effect adoption through its compliance responsibilities. In this case, the severity of the risk to the payments network trumped old concerns.
What does the future have in store?
The reality is that today’s payments system requires major overhaul. If American companies are to continue to remain competitive, both domestically and globally, the US payments system must evolve to 21st century standards in order to drive efficiency and effectiveness.
In the last 30 years, we’ve seen the introduction of some of the most innovative approaches for treasury services. During the next 10 years, new players and products will emerge. In the process, the opportunity will exist for banks and their corporate treasury counterparts to identify the next wave of treasury services.
Now is the time for treasury service professionals to come together and agree on what the industry truly needs to revolutionize its approach to payments. The Fed is actively soliciting industry input and ideas. Now is the opportunity for each of us to help shape that future. Visit here for up-to-date information from the Federal Reserve.
Lawrence F. Buettner is a senior vice president at Wausau Financial Systems, which provides receivables technology for financial institutions. He has 30 years of experience in financial treasury management and was a senior vice president at First Chicago. View Full Bio
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