In an effort to bring faster payments to the United States the Federal Reserve is considering adding additional infrastructure to offer banks the option to provide Real Time Gross Settlements (RTGS) as a way to keep pace with today’s economy.
Real Time Gross Settlement is the continuous process of settling payments on an individual basis, in real time. Rather than submit files at the end of the day or at predetermined intervals throughout the day—known as Deferred Net Settlement—banks offering Real Time Gross Settlement will complete each payment one at a time.
Deferred Net Settlement acts somewhat like a paper letter which doesn’t begin its journey to its recipient the moment it is put in a mailbox but has to wait until the mail carrier picks it up. Real Time Gross Settlement would behave like email which sends a message to the recipient instantly.
To hear comments about the proposal, representatives from the Federal Reserve hosted a town hall event on November 7 in Cedar Rapids, Iowa, at the US Cellular Center. During a brief presentation before the town hall Q&A, representatives from the Federal Reserve said traditional payment methods and time frames aren’t keeping pace with the economy in 2018. As a result, the Federal Reserve is exploring ways to make payments faster, while maintaining the resiliency and security services offered to the public.
The idea was well received by the ballroom of community bankers and executives.
Since announcing in October its intentions to support faster payments in the United States, two potential actions have been proposed:
- The development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year.
- The creation of a liquidity management tool that would enable transfers between Federal Reserve Accounts on a 24/7/365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks.
Expectations for 2019
A common question from those in attendance at the Federal Reserve Town Hall was how quickly these proposals could be implemented. The Federal Reserve representatives were hesitant to commit to a firm date.
Two members of Dwolla’s team—Brian Damman, legal counsel for Dwolla and Adam Steenhard, Dwolla’s Director of Professional Services—attended the town hall and left with realistic expectations regarding timeline.
“The representatives from the Federal Reserve seemed surprised by how quickly the attending bankers hoped the [faster payments] system would be in place,” Damman says. “The representatives did well to temper expectations, and clarified that a determination had not yet been made whether such a system would be adopted, or how the system would operate.”
Steenhard was asked his opinion on what would happen if a Real Time Gross Settlement system wasn’t made available in the next 18-24 months.
“They may forego a lot of early adopters based on time to market,” Steenhard said. “Ultimately if it is the right solution long-term, companies will leverage the solution.”
P2P & B2B Transactions
A majority of the conversation at the Cedar Rapids town hall focused on consumer facing products (peer-to-peer transactions) and how community banks are struggling to offer what their customers are asking for.
“With digital wallets, you may receive funds in real time but there is still a delay to get funds from your wallet into your bank account,” Steenhard explains. “The debit rails are an expedited option, but often are not a cost-effective option for customers. The Federal Reserve is taking a refreshing approach to rethink how to provide individuals and businesses a scalable and economical alternative.”
Damman appreciates the Federal Reserve holding multiple town halls across the country, seeking input about Real Time Gross Settlement.
“These town halls demonstrate that there is clearly an appetite for accessible real-time settlement domestically,” Damman says. “Other robust markets abroad already function with expedited settlement processes, and it seems necessary for the U.S. to join that tier.”
Participating in the Faster Payments Task Force
Dwolla has a keen interest in speeding up payments and has long been involved in these conversations.
In January 2015, the Federal Reserve convened more than 300 businesses, banks and technology providers to form the Faster Payments Task Force. In May of that year, Dwolla was elected to its steering committee by its fellow task force participants.
Part of the group’s charter was to identify and evaluate—collectively—faster payments systems.
Months later, the task force drafted a set of Effectiveness Criteria.
In April 2016, Dwolla submitted its proposal to the Faster Payments Task Force.
Faster payments are coming. The question is how long will we have to wait.