Why The Fed Will Create Its Own Real-Time Payments System

Prediction — The Federal Reserve will announce before Labor Day that it will build a real-time payment system to offer an alternative to the system that has been started by TCH and Mastercard using the Vocalink technology it acquired when it bought the company.

The UK implemented a faster payments system 10 years ago. Admittedly the country has a far simpler banking system with just a handful of major banks. It also has a regulator that takes a far more active role in promoting consumer interests vs. banks than the Fed does.

Major U.S. banks have blocked real-time payments for years, mostly obviously in 2011 when they voted against making the ACH system real-time. See Kevin Wack’s article in The American Banker

The reasons aren’t clear because the banks haven’t tried to justify their anti-consumer stance. However, among the reasons usually discussed are that they don’t want to reduce their income from wires, they make a lot of money from overdraft charges, moving to real-time is an obvious expense with no obvious increase in revenue, and they would cut into their earnings from financing payday lenders.

Why change now? Sheer embarrassment that banking systems around the world — from Australia to Mexico —have achieved real-time payments? Maybe, if you thought that bankers whose behaviors have led to billions in fines and compensation payments were truly capable of embarrassment.

More likely they are aware that the Fed, which has pursued a strategy of consultation and cajoling for years, may eventually run out of patience.

And they’re not exactly leaping to real-time. TCH says that about half the accounts in the country are already connected to real-time payments, but that is more a commentary on the degree of concentration in banking than evidence of a drive to real-time. Fewer that half the TCH members have implemented some level of real-time payments and they have no deadline.

How long will the Fed let this continue?

In response to the Fed’s request for comments, the Congressional Black Caucus wrote that “Delay is costing Americans billions of dollars they do not have and contributing to the growing income inequality that the Fed rightfully agrees is harming our nation. Specifically, research conducted by the Brookings Institution, Pew Charitable Trust, Center for Financial Services Innovation and others has illustrated the prohibitively high costs of our nation’s slow payment system and the sizable benefits for communities of color that would begin to accrue savings from adoption of real time payments. The increased prevalence of overdraft fees, high cost small dollar credit, and check cashing has cost our constituencies tens of billions of dollars that a real time payments system would help ameliorate.”

Estimates of those costs run to about $10 billion a year, or as Brookings noted, the delay has cost Americans $100 billion in fees since the UK went to faster payments more than 10 years ago.

Other than TCH, just about everyone else involved in commerce and payments, from convenience store associations to the NRF to Walmart and Amazon and community banks, wants the Fed to set up a Real Time Gross Settlement System RTGS so they won’t have to depend on a system run by the big banks. NACHA would prefer a bigger role for itself and BAFT thinks it would be fine for the Fed to wait a few years and see how the TCH solution works.

TransferWise noted that in many respects “banks are subsidized by governments and protected from competition and they enjoy exclusive access to the payments system. When firms face excessive barriers to entering a market competition stagnates, prices remain high and innovation remains low.”

And it specifically said access to an RTGS should not be limited only to banks, a position also endorsed, not surprising, by Amazon.

Consumer Reports said that “the payment options available to most Americans are dated and inefficient, due to complexities and lack of competition at a systemic level…non-bank providers like PayPal were early to build a system that met consumers’ need for a way to transact person-to-person over the internet. Only after consumers flocked to these services were traditional providers like major banks motivated to develop similar services. “

One big change over the five years the Fed has been studying (dawdling) is that the House of Representatives now has a Democratic majority and Rep. Maxine Waters is chair of the banking committee. Lower costs for banking services as a campaign platform? Socialist subsidies for big banks? Privatizing the profits, socializing the losses? Edit to see if it fits on a bumper sticker.

The three former Fed payments experts who comments made several arguments for the Fed to develop a RTGS. One is that in a crisis, the Fed is the financial resource the country depends on. If the TCH system freezes and the Fed doesn’t have an alternative, as it has with Fedwire and the Fed ACH, what could it do, and how long would it take to get authorization?

Another, as Bruce Summers noted in a detailed commentary, is that payments are moving to real-time and digital, pushed by the growing use of smartphones for banking. If the Fed doesn’t develop its own RTGS it could be left with check processing and its ACH, not exactly the cutting edge in payments.

““If the Federal Reserve banks don’t develop and take an operational role in faster payments then their competency will further deteriorate. They are at a tipping point…If the Fed doesn’t participate in this it will be really left behind, and then it will be too late for society to rely on the Fed going forward over time…if the big banks had complete control over the digital payment system and we have another crisis we will be in double jeopardy.”

And besides being trusted by community banks, which provide small business and agricultural loans and are core assets in their communities, the Fed is already connected to banks across the country, while TCH is not.

The Fed can do it — it has the technical skills and the connections and trust of banks of all sizes.

Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City and a member of the Federal Reserve Banks’ Technology and Financial Service Policy Committees, said the U.S. needs to upgrade its payment system, starting now.

“We should stop talking about it and start moving forward on it…the Fed with a nearly 100 year history in payments has the infrastructure, knowledge, technical capability and is the more transparent in price, as we learned in check and in ACH.”

The links below go to the Fed comments page, and to the six articles I have written on this, which provide a fairly quick overview of the issues.

The Fed comment pages

Google And Amazon Favor Fed Role In Real Time Payments

The Benefits to consumers

What retired Fed payments experts have to say

How community banks don’t trust TCH and want the Fed to provide RTGS

Merchants of varied sizes want a Fed RTGS

The TCH argument

And take a look at “How the Other Half Banks” by Mehrsa Baradaran, a very impressive book that looks in depth at how many people are left out of banking. She proposes postal banking, which I think is a look backwards — smartphone banking would be a useful alternative. It is a great book, and as perhaps only a university press could, provides pages of detailed footnotes that will be a boon to anyone looking into these issues.

See also Mayra Rodriguez Valladares in her detailed coverage of these banking topics.

Great article about Mehrsa and her sister, Shima, who is also a law professor and leaving Iran at 6 and 8. And if this interests you at all in Iranian culture and learning, at least take a look a “Reading Lolita in Tehran” by Azar Nafisi.

 

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Payments Are Moving To Real-Time Around The World, The U.S. Plays Catch-Up

Payment systems are moving to real-time around the globe, according to a the fifth annual “Flavors of Fast” report from FIS, the financial technology powerhouse. The annual report was begun by Clear2Pay, which FIS acquired in 2014.

FIS found 40 active real-time payment programs around the world, up from 25 in 2017 and nearly three times as many as the company’s inaugural 2014 study. In addition it identified five payments programs under development, plus another 16 expected to be live in the next 12-18 months.

The report rated the faster payments systems around the world, rating India 5, the highest rating, Australia 4+ and Singapore 4+. Somewhat improbably, the United States got a 4 rating even though its system isn’t operational at scale. It launched some small segments at the end of last year but lags well behind other countries, including the UK which celebrated the 10th anniversary of its faster payments system this year.

“We rated the countries at a point in time,” explained Elena Whisler, head of global product management, open payments at FIS, “meaning that we rated the country as is regardless if they were just launched. The main reasons US is currently a 4 is because it hasn’t got ubiquity yet,” she added in a bit of understatement.

The main reason for slower adoption in the U.S. is the lack of a mandate, said Whisler. The Fed when it started work on faster payments, focused on what faster payments would need but it did not require financial institutions to participate. TCH and other closed networks have stepped up to provide infrastructure, she added.

“Now banks have the question, when something isn’t mandated and doesn’t go through a compliance budget cycle, banks need a business case, which is difficult to do with real-time payments. It’s difficult to have a business case when we don’t know where value will come from.”

At a Federal Reserve meeting on faster payments in Chicago last week, the Federal Reserve Board invited public comment on actions the Federal could take to support faster payments in the United States.

In its official announcement, the Fed said:

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Money 2020 USA Hackathon Aimed At Financial Health And Inclusion

The Money 2020 USA Hackathon in Las Vegas this year set a challenge of financial inclusion.

Reshud Dani and Jay Lohokara

“Help Visa create a future where consumers, families, or small businesses are able to reach their financial goals using innovative solutions. Join us to help solve the challenge of financial exclusion. Think about a use case for the following categories: cash free solutions, credit, access to financial education and business skills, identification verification.”

Sponsors included Synchrony, PayPal and Envestnet|Yodlee

Sunday morning at The Venetian’s Marco Polo ballroom looked seriously casual as developers put final touches on their apps or just slept at the tables while colleagues did the work. Many sported the Visa Developer Squad Hoodie and Visa Developer Blankets in blue and gold. Empty Coke cans and pizza box decorated table tops.

Working and napping after a long night

For the second year in a row, one of the top Visa teams that advanced to the Money 2020 hackathon finals won the overall grand prize (out of 80 top teams). In an effort to help send instant payments overseas, ViSync created an app designed to simplify and improve the remittance process to help migrant workers send money back to their home country, including the ability to set controls on how money is spent by the receiver and to enable the receiver to become banked.  The team used Visa Direct and Visa Transaction Controls APIs.

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Nerdwallet Wants To Make Comparison Shopping For Financial Services Simple

“Most people don’t want to learn about personal finance in detail; they just want to know they aren’t screwing up,” said Tim Chen, who is CEO of Nerdwallet, the comparison site for financial products from credit cards to mortgages.

For a self-professed finance nerd, this lack of consumer obsession is something of a disappointment.  But he and the 80-plus researchers and writers have learned to live with it and by listening to their consumers they design advice that meets users’ needs and leaves them alone to enjoy life.

For example, Nerdwallet personal loan product page sorted loans by interest rates.

“All our consumers hated it. They wanted it sorted by monthly payments, which seems odd until you put yourself in their shoes and see what is going on month by month,” Chen said. “We have to meet them where they are. If you start by wagging your finger, that’s a good way to get them to hit the back button on their browser.”

Nerdwallet has three million members and more than 100 million visits each year, Chen said. Onstage at Money 2020 with Angela Strange of Andreesen Horowitz, she said the airline industry is far ahead in comparison shopping and its engines like Kayak and Expedia save consumers $10 billion.

Chen said the comparison engines in financial services are barely scratching the surface.

You could spend six hours reading about 529 college savings programs for your kid and still not know the ins and outs, he added. Nerdwallet users want to be triggered that the 529 exists, but they don’t want to learn all about them, just enough to find the best accounts.

“Education for education’s sake is overly complex. This is one areas where user research has been shocking. I am such a nerd and I love learning the ins and outs of all these things, but that’s not what the average person wants to learn.”

Tim Chen, CEO of Nerdwallet

For individuals, Chen said, Nerdwallet and other comparison sites have made financial products shoppable.

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Shazam! Experts Fell For a Fake Product From A Nonexistent Company In A Fraud Test

Cyber security pros and risk analysts should be better than the average person at detecting fraud, but a little over three percent submitted their personal identification information to sign up for an app described as “Shazam for voice identification.”

Credit Trulioo, a global identity and business verification company, which launched an online fraud experiment to evoke some interest around International Fraud Awareness Week. (It was also National Nurse Practitioner Week and Dear Santa Letter Week and almost overlapped with Intimate Apparel Marketing Week.)

Trulioo said that despite the abundance of online resources and press coverage on fraud and fraud prevention, the Federal Trade Commission (FTC)  received nearly 2.7 million fraud complaints in the United States last year.

So Trulioo set out to learn whether fraudsters, under the guise of a fake company, offering a fake product, could convince internet users to disclose their personal information.

It created a web page for a fictitious company called Agile ID Technologies, offering a fictitious mobile app, “Aurdentity”. Marketed as “Shazam for voice identification”, the fake mobile app claimed to use voice recognition technology to not only identify people when exposed to their voice, but also retrieve background information about them.

Trulioo ran a week-long campaign that delivered ads to compliance professionals, fraud and risk analysts, and other individuals who showed an interest in data privacy, cybersecurity and technology, and may even have had credentials. They were directed to a fake company’s web page where visitors were asked to sign up for Audentity by providing their personal information including name and email addresses. None of the information was recorded or stored, unfortunately eliminating the possibility of followup interviews.

The campaign resulted in a total of 2,139 unique visits to the fictitious company’s website. Of those visitors, 66 people completed the sign-up form.

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Gates Foundation Supports Expansion Of An Open Mobile Banking Platform in Africa

Two of Africa’s largest mobile operators and mobile money providers, Orange Group and MTN Group, have announced they will use open source financial services technology that was sponsored by the Bill and Melinda Gates Foundation.

The two companies call their joint venture Mowali (mobile wallet interoperability), to enable interoperable payments across the continent. Mowali makes it possible to send money between mobile money accounts issued by any mobile money provider, in real time and at low cost. It gets off to a strong start with more than 100 million mobile money accounts between the two providers in 22 of sub-Saharan Africa’s 46 markets. It sees the potential to reach the 338 million existing mobile money accounts in the continent.

It uses Mojaloop, an open sources payment platform that the Gates Foundation launched at the SWIFT Sibos conference in Toronto last year.

Kosta Peric of the Gates Foundation

“Interoperability of digital payments has been the toughest hurdle for the financial services industry to overcome in support of financial inclusion, said Kosta Peric, deputy director of financial services for the poor at the Gates Foundation. “This is a signal that a new wave of innovation, which can help alleviate poverty and drive economic opportunity, is coming.”

At the launch during Sibos last year Peric said that in Kenya it is estimated that M-Pesa helped 194,000 households move out of extreme poverty. Mowali can extend that mobile money reach to more people.

“Systems like M-Pesa are great, but most are a closed loop,” said Peric.

Mowali is a digital payment infrastructure that connects financial service providers and customers. It functions as an industry utility, open to any mobile money provider in Africa, including banks, money transfer operators and other financial service providers.

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Social Security? The Numbers Say To Get In Early As Possible

Take Social Security as soon as you can — at 62 advises Steve Maersch, contradicting just about everyone in the retirement advice business. He even lists some of them: The Wall Street Journal, Forbes, Kiplinger magazine, Consumer Reports, Motley Fool, Vanguard Group, CNNMoney, Suze Orman, AARP and Boston College’s Center for Retirement Research. (Steve has been a personal friend for years, and making these arguments as long as I have known him. Someone said if he knows so much why didn’t be write a book, so he has.)

Maersch, a retired copyeditor at the Milwaukee Journal, earned an average of $24,800 over his 31-year career and is now a millionaire, partly by using borrowed funds — at one time more than $500,000 when he was earning in the mid twenties — to invest in the company’s stock program for employees, — and then selling as fast as he could once the company went public. This is completely at odds with much financial advice which says never invest in the company where you work because that just increases your personal risk, what Maersch calls the Enron warning. But the U.S. has 11,300 companies partly or entirely owned by employees, he notes. Presumably most of them are honestly run.

The math — no, make that the arithmetic since Maersch has no patience for the complications investment professionals often indulge in — requires nothing more than a calculator to see how this works. Maersch’s accountant yelled at him to start taking Social Security when he turned 62, and he did. Between the ages of 62 and 65 Maersch collected $54,700 which invested in Vanguard’s Wellesley Income Fund was worth $67,083.

From 62 through 69, Maersch collected $111,543 in Social Security. Based on actual returns for the Wellesley fund that would have grown to $155,000. His investment returns will more than make up for the higher Social Security payments he would have received by waiting until he was 70 and even after taking those make-up amounts out of the fund, the investment continues to grow.

Another factor to consider is mortality — 10% of us will die between 62 and 69 added Maersch who has been to funerals for several friends who died in their sixties.

David Blanchett, head of retirement research at Morningstar, told me he disagrees with taking Social Security early. Delay taking it as long as possible, he said.
“The bad outcome is you live to be 100 and you have spent all of your wealth. If you delay claiming for eight years Social Security rises 76 percent.”

Maersch crunched the numbers for old age, taking it out to age 110.

“In this scenario, at age 110, wait-till-seventy’s Social Security would be $47,477 a year. Mine would be $34,044, or $13,433 less. My Social Security/Wellesley account — after making up this shortfall and those of the preceding 39 years — would be worth more than $425,000.”

He is not a buy and hold investor but follows the January Barometer. On Jan. 31 if stocks are outperforming bonds, he stresses stocks, If bonds are outperforming, he goes strongly into bonds. He lays out the numbers in his book.

“The January Barometer has its critics. A long article in the Wall Street Journal in 2017 declared the January Barometer to be a myth. The author did everything but run the figures.”

His book, which is easy and often amusing reading, and under 100 pages, offers some other practical advice: buy used cars (after having them checked by a mechanic); buy a freezer; keep your accounts at a credit union rather than a bank; invest only in low-cost funds with fees under 1 percent (he is entirely in a few Vanguard funds), use dollar stores, budget stores and outlet stores and keep your finances on an index card that you update monthly with savings, income, debts, investments and upcoming expenses.

He recommends two books by Jack Bogle, founder of Vanguard, and also Tony Robbins’s MONEY Master the Game and Unshakeable. Robbins is the first finance author he has read who stresses the importance of charity.

When the Milwaukee Journal CEO in 1986 saw an impending change in tax law that would make charitable donations less valuable, he encouraged employees to put $25,000 of their stock into donor-advised funds with the Greater Milwaukee Foundation. Maersch and his wife, Judy, did. The Foundation withdraws 4.75% each year.

“This year (2018) Judy and I will write more than $5,000 in grants, and our total donations will then exceed $100,000…When Judy and I pass on, our fund will continue and a living tombstone, producing grants to help minority students with college expenses.”

It is a thought-provoking book that could inspire you to pull out a calculator and see for yourself.

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