Why the Fed needs to lead on payments

By Felix Salmon
August 30, 2011

The US is often so big and lumbering that it lags well behind the rest of the world in terms of adopting new technology. Cellphones were one such; chip-and-pin technology on debit and credit cards is another. And more generally, as a comprehensive new Chicago Fed paper from Bruce Summers and Kirstin Wells shows, the US is and will for the foreseeable future lag most of the rest of the planet when it comes to immediate funds transfer, or IFT.

This is the problem that resulted in the founding of PayPal: the banks were so bad at doing anything about allowing people to send money to each other that they allowed PayPal to rise out of nowhere. And now there are roughly a gazillion startups like Dwolla and Square which also want in on the act. Even though the banks, if they just got their act together and put a basic and universal mechanism together, could put everybody else out of business pretty much overnight.

So, what are the chances of that happening? Slim to none, say Summers and Wells:

Within the last few years, IFT has become a fully functional nationwide means of payment in a number of countries, including four that we have examined in detail in this article. International experience with IFT shows that technology is a necessary but not sufficient condition for innovation in payments and that enabling real-time and universal access to deposit accounts at banks is the key to meeting the public’s needs for more certain, faster, and universal payment services. Perhaps the most critical enabling factor is strong sponsorship by a national body with the responsibility and motivation to stimulate continuous improvement in the national payment system. This body might be a consortium of private banks collaborating through a national payment association, a public authority such as the central bank, or a public–private partnership. It is not clear that such sponsorship can be readily found in the U.S., at least not at the present time, because there is no national body that takes responsibility for the development of the national payment system. As a consequence, IFT and other national payment innovations are likely to progress in a halting and incomplete manner and at a pace that lags innovation that is observable in other countries, such as those examined in this article.

What Summers and Wells don’t say, perhaps because they work for the Federal Reserve, is that it’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.

Still, it’s about time that someone — if not the Chicago Fed, then either the New York Fed or the people in Washington — should take this issue seriously and start dragging America’s thousands of banks into the 21st Century. Because they’re not going to organize themselves. And that just means that the US is going to become more and more behind the times, in a world where everybody else is increasingly capable of transferring money immediately and securely to pretty much anybody they like.


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I guess I’m just a silly luddite because I have no earthly need for this service. Although whatever happens, I’m sure the banks will find a way to charge me for it.

Posted by silliness | Report as abusive

Living in Switzerland where IFT was old hat ten years ago I can’t understand why the US and UK aren’t further ahead on this issue. When you transmit money as cash it’s instant, so why insist on a slower, less efficient system not being replaced with IFT?

Posted by FifthDecade | Report as abusive

Felix, your advocacy reminds me of Chesterton’s fence. The activist says, “I see no need for this fence; I shall tear it down.” The conservative responds, “You see no need for this fence; I shall certainly not let you tear it down.”

Fences exist for reasons; payment systems exist for reasons. Fraud is a big one. Immediate payments cannot be canceled. There is a physical limit to how much cash can be physically transferred; there are no such natural limits to EFT. There are good reasons for the payment infrastructure that exists in the world’s biggest economy; changing it may have all sorts of second-order and third-order effects. Can you see a couple of them?

If all you can do is advocate for IFT because other nations have it (Which? In what context?), I shall certainly oppose it.

Posted by Publius | Report as abusive

I recently arranged for an electronic funds transfer between two different banks. It took three days to complete the transaction, for at least two of which, the money was in limbo between banks. Why? It doesn’t seem like there is a technological barrier; I mean, if credit card payment systems can work as fast as they do, surely interbank transfer should be just as fast. It used to be that banks could make money on the float. I don’t know if this is still true in these zero-interest days, but perhaps. But it pays to remember that financial services are arranged for the benefit of the bank, not the customer. It’s safe to assume that this is the way it is because it is more profitable for the banks to do it that way.

Posted by Moopheus | Report as abusive

“The US is often so big and lumbering that it lags well behind the rest of the world in terms of adopting new technology. Cellphones were one such…”

In other news today: “If you’ve been wondering just when you’ll be able to get Europe’s hottest smartphone from last year, wonder no more…” (Engadget)

Monopoly corporations run amok with a regulatory framework largely dismantled. It wasn’t always this way.

Posted by leoklein | Report as abusive

Công ty Cổ Phần BTK Cơ Điện (BTK ME jsc.,) là đơn vị thành viên của Tập đoàn Phát triển Công nghệ BTK, chuyên phân phối các thiết bị Phòng cháy chữa cháy và Cơ điện.
Hoạt động trong lĩnh vực PCCC, một lĩnh vực đặc biệt quan trọng, do đó phương châm “Chất lượng, sự hài lòng của khách hàng là hàng đầu” đã thấm nhuần trong từng sản phẩm, từng cán bộ, công nhân viên của công ty và trở thành kim chỉ nan cho mọi hành động của chúng tôi.
Hiện nay,công ty là đại lý cho các tập đoàn lớn về thiết bị phòng cháy chữa cháy với sản phẩm nổi bật

+ Bình bột chữa cháy trung quốcABC 4KG MFZL4 có dung lượng 4±0.08, áp suất làm việc 1.2 MPa, phạm vi xả ≥4, thời gian xả ≥1, nhiệt độ làm việc -20~+55˚C
+ Lăng phun Sản xuất trên dây truyền công nghệ Việt, sản phẩm thể hiện rõ tính ưu việt, dễ sử dụng và mang lại hiệu quả tốt.
+ Van chữa cháy là loại van cứu hỏa lắp đặt trong hộp phòng cháy chữa cháy, được sử dụng để cho lính cứu hỏa tháo nước ra ngoài trong suốt quá trình chữa cháy.
+ Vòi chữa cháy D65-10AT: có áp suất hoạt động(MPa): 10MPa, chiều dài (m) là 20m, chất liệu là PVC
+ Bơm chữa cháy dragon DBD Series. Lưu lượng 250(m³/h). Cột áp 220m. Được sử dụng rộng rãi trong phòng cháy chữa cháy
Hãy đến với công ty chúng tôi để chọn được sản phẩm tốt nhất.

Posted by Anonymous | Report as abusive

Felix, it’s not that the American payment system is backward and there is no demand about fixing it. It’s that there is no demand because of the ignorance about the backwardness.

I remember my macro economics professor late from the Bundesbank shaking his head at the notion that they were still sending checks by mail in the US on regular occasions.

I completely agree with the comment about the quasi monopolies running rampant in a framework of bad regulation. The ante for that has just been upped through the coming patent battles which are going to substitute litigation for innovation and competition.

The US is under siege economically by a mercantilistic, breakneck innovative, IP non respecting world power and no one in Washington has even woken up to the fact. (If you’re late, History will punish you. – Gorbatchev)

Posted by Finster | Report as abusive

I think that, as is usual, this is about profit. Time is money. Whoever controls the float gains that interest. Making a tiny amount of money for a very large amount time is a popular new business model; it hits no customer very hard and if there are a lot of customers it makes a great deal of money. Banks have shown their eagerness to adopt this nickel-and-dime approach. Isn’t this just another aspect of the same philosophy?

Posted by bob5525 | Report as abusive

It’s all about the rents, Felix. Why would the banks want to transfer my money immediately, when they can hang on to it and grab a tiny bit of interest? Just another example of the looting classes at work.

Posted by lambertstrether | Report as abusive

Um, guys, have you noticed that float is worthless?

Posted by Publius | Report as abusive

New Technology Eases the Burden and Slashes the Cost of Peer to Peer Money Transfer

CHICAGO, Sept. 28, 2011- With the rise of the tech friendly society, one Chicago based business is changing the way people send money back and forth to each other. Payment Over Mobile Solutions (POMS) has developed a system to not only cut the burden that peer to peer (P2P) money transfer is traditionally accompanied by, but also cuts the cost anywhere from 50-80% for the consumer.

For generations, the staple in peer to peer money transfer has been methods like Western Union and Money Gram. With the shift of Americans to a more on-demand lifestyle, traditional money transferring will soon be taking the back seat with other relics of the pre-mobile tech era.

POMS is a new payment platform being developed in collaboration with key partners of the retail payment ecosystem. POMS will facilitate secure, real-time payments and services via web, mobile, or retail locations, giving consumers the most flexibility of any P2P system to-date.

“The problem with new startup payment companies and merchant solutions is the cost of technology. We have developed POMS utilizing legacy technology already in place at retail establishments across the country. By creating a turn-key software solution for our retail transaction processing partners, we have been able to keep the costs low and cut the financial, logistical, and time delay burden most consumers face with P2P money transfer today,” commented Rahier Rahman, Co-Founder and COO of POMS.

POMS will initially target the immigrant and underbanked demographics, particularly those who lack access to a payment card or are without a traditional banking relationship. There are approximately 80 million underbanked consumers in the U.S. This consumer segment receives approximately $1 trillion in annual income and relies heavily on cash for everyday transactions. POMS convenience store footprint dovetails well with the consumer’s retail activity at the local marketplaces leveling the playing field and serving as an alternative method to send and redeem P2P money transfers.

The POMS pilot program will be accepted at approximately 20,000 retail outlets across the United States including nationally recognized convenience stores which operate under brands like Shell, Chevron, Piggly Wiggly, and BP. “We are excited to receive such a positive reception from our partners who represent some of the leading retail convenience store brands across the nation. Working within their existing systems has been one of the top selling points for our scalable platform. We will be rolling out our test platform later this winter with much anticipation from merchants across the globe,” finished Rahman.

For more information on POMS technology including investor inquires, you can visit http://www.usepoms.com

Posted by ChrisFoltz | Report as abusive