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Federal Reserve Financial Services Strategic Direction: 2012-2016
New York Cash Exchange May 30, 2013
Ken Isaacson Federal Reserve Banks
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Agenda
• Payments Environment • Federal Reserve Financial Services (FRFS)
Strategic Direction and Areas of Focus • Collaborating for Success • Research Underway • Initial Research Findings • Efforts Underway
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State of the Payments Environment
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Change/ Innovation
Technology • Technology will
continue to drive industry change
Financial Institutions • Financial institutions are
challenged to invest in enhanced payment solutions to meet end-user demands in the midst of lost fee revenues and escalating security costs
Laws, Rules, Regulations
• Healthcare regulation, the Dodd-Frank Act, technology (e.g., mobile) and other laws, rules and regulations will continue to cause uncertainty and change in the payments system
End-Users • Payments industry change
and innovation driven largely by end-user demand and new industry participants
Threat Environment • Security threats are likely
to grow in frequency and severity during a time when public confidence will be key to continued development of an effective payments system
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FRFS Continues its Commitment
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•To foster integrity, efficiency and accessibility of the U.S. payments system Mission
•Payments are safe and efficient •End users can select payment options with attributes (e.g.,
speed, convenience, cost, security) that meet their needs •Incentives promote efficient selection and use of these options
Vision
•Act as a major service provider to the interbank market •Collaborate with industry and emphasize innovations in
electronic payments systems Role
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FRFS Broadens its Strategic Focus toward End-to-End
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• Maintain and enhance FRB network security • Enhance understanding of end-to-end security • Collaborate and promote industry best practices
Safety and Security
• Develop solutions to enhance payment speed • Understand market demand for faster payments • Continue migration of paper to electronic
Speed
• Develop solutions to promote efficiency • Understand needs and barriers • Promote standards adoption to improve efficiency
Efficiency
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FRFS Roles in Payments
Service Provider
Fiscal Agent
Leader/ Catalyst
• Leader/catalyst – Act as advocate, educator, or change
agent, and seek to influence payments system policy through a variety of means
• Service provider – Operate the Fedwire® Funds, FedACH®,
FedCash®, Check Services and FedLine® access solutions
– Seek to enhance existing and develop new services that improve the payments system and better meet end user needs
• Fiscal agent – Provide a broad set of services to the
U.S. Treasury, government agencies, and other fiscal principals in our capacity as fiscal agent and depository
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Payments Industry
Stakeholders
Federal Reserve Banks
Payments Users
Collaboration with the Industry is Important to Achieve Strategic Goals
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Develop innovative, reliable and cost-effective solutions.
Develop services responsive to strategic focus and industry needs.
Select payment method based on needs.
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Understanding Payments System and Stakeholder Needs
Payments Research • Gather intelligence via secondary and primary research to help define initiatives
that support achievement of strategic goals • Conduct triennial payments study to determine current aggregate volume and
composition of payments in the U.S.
Industry Relations • Build upon existing and develop new relationships to ensure industry input into
FRFS plans and direction and to secure industry stakeholder collaboration and commitment on strategic initiatives
Fed Forums • Engage with industry stakeholders in smaller group forums to allow for more
interactive dialogue on the future of the payments industry (e.g., Electronic Payment Order Forum, Payments Strategy Roundtable, Chicago Payments Symposium, etc.)
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Future Payment Team
• Created in the Fall of 2012 to gather intelligence in support of the Federal Reserve’s refreshed strategic direction in payments
– Improve the safety, speed, and efficiency of
payments from end to end
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Research Phases
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Secondary Research
(“The Research Sprint”)
Primary Research
(Exploratory phase)
Primary Research
(Validation phase)
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Research Approach
• Research Priorities – Needs Assessment
• Broken down by use case and attribute
– Gap Assessment – Barrier Identification – Barrier Resolution – Informed by Case Studies – With insights applied to current categories of
emerging payment areas
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Use Cases Studied
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P2P
P2Biller
POS B2P
B2B
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Research Sprint Process Overview • Gathered available secondary research sources that
relate to payment attributes – Consulted close to 300 sources
• 30% Fed sources • 51% high quality payment researcher/consultant sources • 19% opportunistic sources (study sponsors with a possible vested interest)
• Organized the research into “stories” – Stories explain the needs of end users for speed and efficiency of
payments in different circumstances (use cases)
13 Future Payments Team – Research Sprint
Needs Gaps Barriers Solutions
Stories
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14 Future Payments Team – Research Sprint
The Research Matrix Layout
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Fed Process to Digest Secondary Research Findings
• Fed payment executives have been evaluating the results of the research sprint
• Dedicated sessions are being held each week to discuss a different use
case: – POS, P2P, B2B, P2biller, B2P
• What are the gaps in each use case?
• What are the opportunities (not recommendations yet) for the Fed to take action as service provider or leader / catalyst? – In support of the Fed’s strategic direction – Consistent with the industry’s vision for the future of payments
• What additional research do we need to do before acting?
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Pain Points / Gaps*
16 Future Payments Team – Research Sprint
*In Ken Isaacson’s opinion. Not necessarily the opinion of the Federal Reserve Banks
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End-User Check Writing
• While tremendous progress has been made electronifying interbank clearing and settlement of checks – End users are still writing paper checks by the billions
• Across many different use cases, especially B2B, bill payment, business to person, and P2P
– Checks continue to provide features that are not replicated by
electronic alternatives • Ubiquity – Where senders and receivers can reach nearly everyone without signing
up for multiple services • Convenience - where payer doesn’t have to know the payee’s account information • Other attributes – Proof that you paid, speed (in some cases, checks are faster than
ACH), integration with accounting systems (for small businesses), etc.
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Closed Payment Communities • Many recent payment innovations involve closed
communities where both the sender and receiver must join
• This phenomenon exists across several use cases
– P2P systems (Paypal, Dwolla, etc.) – B2B (Paymode X, Xign, PayNetExchange, etc.) – Bill payment (Online resources, FIS, Fiserv, RPPS, etc.) – Mobile payments (LevelUp, Square Wallet, etc.)
• A more efficient mechanism would facilitate payments from any sender to any receiver
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ACH and Wire lack Real Time End User Features
• In today’s world, end users increasingly expect certain features in near real time, such as:
• For credit transactions – Notification to receiver of scheduled delivery of good funds – Transaction confirmation to sender and receiver – Masked bank account details
• For debit transactions
– Authentication of payor account – Balance checking of payor’s account / Authorization confirming good funds – Transaction confirmation to payor and payee – Masked bank account details
• These features are generally lacking with ACH and wire, but are typically available with cards and certain non-bank innovator products
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International Payments • In general, international payments are slow,
inconvenient, and inefficient
• This is especially true for bank account-centric international payments sent or received on behalf of consumers or businesses
• Closed networks such as Western Union and
Paypal have made advances in this space, but their networks are not as ubiquitous as open banking networks.
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The Second Internet Revolution • Payment service proivders are struggling to
atake out ground in the mobile technology revolution that is: – The blurring of online and offline worlds – The blurring of commerce and payments
• Loyalty, coupons, location-based offers, targeted offers based on prior purchasing patterns, etc.
• What are the roles of banks vs. non-banks?
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Faster Payments • In a world where many other countries are moving to
near real-time retail payment systems…
– UK, Australia, Mexico, Switzerland, Singapore, etc.
• …that support near real-time transfers (from the end user perspective) from any bank account sender to any bank account receiver…
• …the U.S. payment systems remain slow by comparison
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Converting Businesses to Electronics
• Businesses (especially large ones) have complex intertwined payment & accounting systems that typically must be changed to achieve end-to-end automation surrounding the payment – Legacy systems built surrounding the check are relatively inexpensive at the
margin; new systems require capital outlay – Legacy standards (like EDI) are entrenched among large businesses and may
inhibit adoption of more modern standards that are attractive to large and small businesses alike
– Difficult to drive adoption of new processes for transmitting remittance information
– Coordination and business case challenges are daunting
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Exploring and Advancing Payments System Improvements
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Modernize Collaborate and Explore Advance
FRFS Technology
Modernization • FedACH • Fedwire • Check • FedLine • Account
Services
End-to-End Safety and
Security • Risk
Management • Cyber
security
Advance the Vision
• Initiatives that meet end user demands/needs
• Improvements to payment speed, safety and efficiency
• With industry commitment
End-to-End Speed
• Accelerated
Check Clearing
• Accelerated ACH Clearing
• Payment Notification
End-to-End Efficiency
• Ubiquitous
P2P options • All electronic
B2B • Standards
advances (e.g., ISO 20022)
• Improved international payments
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Questions
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The Financial Services logo, “Fedwire,” “FedACH,” “FedCash” and “FedLine,” are trademarks or service marks of the Federal Reserve Banks. A complete list of marks owned by the Federal Reserve Banks is available at FRBservices.org.