Revamping the U.S. Payments System

Security, Faster Payments Key to Fed's 5-Year Plan
Over the next five years, the U.S. payments infrastructure is slated to undergo a major overhaul, with the Federal Reserve leading the charge. Two Fed leaders share insights on the impact on U.S. banking institutions.

Since 2012, the Federal Reserve's Financial Services branch has been focused on identifying payment system improvements that could enhance the end-user payment experience. Over the last 12 months, the Fed has been reviewing how the role it plays in payments might expand, says Sean Rodriguez, senior vice president of industry relations at the Federal Reserve's financial services branch.

The Fed is now focusing its efforts on creating a plan for a new infrastructure for faster payments, rather than adding to existing networks, such as those that facilitate ACH and PIN debit payments, Rodriguez, who is based out of the Federal Reserve Bank of Chicago, told a group of bankers this week in New York.

"I think what we have seen throughout the world is an evolution toward faster payments options," Rodriguez said during a payments meeting hosted June 16 by the Federal Reserve Bank of New York. "We've been observing non-bank providers in our marketplace that have been, in essence, simulating or creating these real-time payment capabilities within some of their closed-loop networks. We're seeing a lot of information that's telling us that faster payments - a real-time payment capability - is likely something that would benefit the U.S. economy as a whole."

Industry Collaboration Key

But Rodriguez says banks and credit unions have will have to agree on how and when they'd like to see the infrastructure changed. Faster payments, for instance, sounds great in theory. But without industry collaboration, real-time payments will never become a reality.

"The first challenge is the security challenge, to make sure we have absolutely bullet-proof security," says Terry Roth, senior vice president of the Fed's Financial Services Policy Committee, who works in the Federal Reserve Bank of Cleveland.

Like the card brands, the Fed is focused on transaction validation, authentication and removing or devaluing card data that is used to process payments through point-of-sale networks and systems, Rodriguez and Roth say.

In an exclusive interview conducted at the New York meeting with Information Security Media Group, Rodriguez and Roth also discuss:

  • The role non-financial entities, such as Google, are playing in the future of U.S. payments, and how the Fed expects to encourage more collaboration between these types of entities and banks;
  • How the Fed is expected to play a more prominent role in ensuring the future of payments security; and
  • Why the Fed is pushing for the formation of a new U.S. payments council that includes participation from C-level executives at banking institutions and other payments providers.

Between June 16 and June 23, the Federal Reserve's financial services branch, comprised of representatives from various Federal Reserve banks throughout the country, has slated a series of town hall meetings detected to exploring the future of U.S. payments. The Fed is reviewing how the speed, security and efficiency of the payments infrastructure can be improved, impacting both domestic and international commerce.

During the kickoff town hall meeting held June 16 at the Federal Reserve Bank of New York, Rodriguez and Roth opened the floor for dialogue with the 75 or so banking institution and industry representatives who were present.

Another town hall meeting took place in Chicago on June 17, and one is set for June 18 in Atlanta. Other town halls will take place in San Francisco, Dallas and St. Louis.

Rodriguez is responsible for coordinating engagement with payment industry stakeholders, ensuring key industry insights are fully vetted with Chicago district and Federal Reserve System financial services leadership, as well as marshaling resources to influence payments industry direction that is consistent with the Federal Reserve's refreshed 2012-2016 strategic direction. Prior to this assignment, Rodriguez had responsibility for sales and marketing for the Federal Reserve System. He also has served on numerous Federal Reserve System and industry work groups throughout his 30-year career with the Fed.

Roth has been with the Federal Reserve Banks' Financial Services Policy Committee, which works out of the Federal Reserve Bank of Cleveland, since September 2012. He has 39 years of experience with the Fed, including three years in the Financial Services Policy Committee Support Office and nine years in the Federal Reserve System's Retail Payments Office, with the balance of his career spent in the Federal Reserve Bank of Cleveland's marketing, quality, check and data systems support departments. Roth was named assistant vice president in 1989 and vice president in 1997. He was instrumental in designing the Federal Reserve Bank of Cleveland's payments products and pricing strategies and in developing the Federal Reserve System's Check 21 product portfolio.

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