Federal Reserve Financial Services Strategic Direction...

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Federal Reserve Financial Services Strategic Direction: 2012-2016

New York Cash Exchange May 30, 2013

Ken Isaacson Federal Reserve Banks


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


FRFS Continues its Commitment

4

•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


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


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

6


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.


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)


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


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



The Research Matrix Layout


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*


*In Ken Isaacson’s opinion. Not necessarily the opinion of the Federal Reserve Banks


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


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.

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