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US payments system failing to meet the needs of the digital economy

April 4 2012 - The Federal Reserve and US Congress urgently need to plug a public policy vacuum if the national payment infrastructure is to keep up with changes in the digital economy, according to a former senior Fed executive.

In a paper delivered late last week to a payments summit hosted by the Kansas City Fed, Bruce Summers - a career official with the Federal Reserve until his retirement in 2007 - lamented the lack of public interest governance in the US payments industry.

Taking the failure of the US to develop a mechanism for immediate funds transfer (IFT), such as the UK's Faster Payments scheme, as a key theme, Summers pointed out that neither the Federal Reserve Board nor prominent private sector organisations have either "the interest or the ability" to lead payment system development into the digital age.

"The idea that money in transit is digital information which can be processed immediately has not been readily accepted by the banking industry," he says. "Most bank-sponsored payment schemes depend on clearing and settlement systems that are designed around batch processing and delayed settlement, and these clearing and settlement arrangements are being nurtured as opposed to being re-designed around continuous, real-time processing."

With no impetus from the private sector and the Federal Reserve effectively standing on the sidelines, it may be up to Congress lead the way, as it did 35 years ago when it established the National Commission on Electronic Fund Transfers, which has guided US payments systems developments over the past decades.

At the moment, Congress appears more interested in monitoring security issues around mobile payment schemes, whereas it might be better served by adopting a back-to-basics unpicking of the entire national payments infrastructure.

In conclusion, Summers recommends a four-stage action plan, including the clarification of the Fed's role in payments system development; the creation of a new national commission on payment system innovation; the undertaking of a benchmark assessment of implementing national clearing and settlement processes and infrastructure to support immediate completion of digital payments; and the development of a special-purpose bank charter for non-bank providers of specialised payment services.

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