Payments will become faster, more efficient and will offer consumers more options as the industry evolves, Sandra Pianalto, president and CEO of the Federal Reserve Bank of Cleveland, told an audience at the Federal Reserve Bank of Chicago’s payments conference Monday.
Despite all of the advancements in various payments systems, cash is still the fasted method, Pianalto said. “That might surprise you, but consider this: When cash is tendered for a purchase at retail point-of-sale, it is immediate and certain. The merchant has the money. The customer has the merchandise. The transaction is complete. While cash as an instrument of commerce is declining as a share of payments, it nonetheless provides a standard for all other payment instruments in terms of speed of clearing, settlement and reliability.”
All other instruments take longer, particularly check and ACH transactions. But there is evidence that even those methods can be settled more quickly.
Britain’s Faster Payments went live four years ago and it demonstrates that it is possible to accelerate end-to-end delivery of individual payments from the next day to no more than an hour or two on the same day, according to Pinalto. The system was a collaborative enterprise of banks, technology vendors and regulators. The Faster Payments Service and Britain’s ACH system operate independently. The Faster Payments Service now carries payments traffic that is equivalent to 13 percent of all ACH volume in that country.
In the U.S., NACHA has been working toward a same-day solution for several years now, Pianalto said.
“As we plan for the payments industry of the future, a second core principle is a lower-cost and more efficient payment system,” Pianalto said. The cost of the U.S. payments system, measured on a cost-per-payment basis, is undoubtedly lower than it was 10 or 15 years ago. Some of the improvement is the result of paper instruments being replaced by electronic instruments.”
Mobile is one of those methods, Pianalto said. “Consumers often choose payment instruments on the basis of qualitative attributes, such as convenience, certainty, security, and privacy. Consumers are less conscious of the speed and cost of an individual payment. For instance, in the future, consumers will increasingly want to use their mobile phones and tablet computers to execute payment transactions, just as they already use those devices to make phone calls, surf the internet, and send text messages. Consumer payment preferences are shaped by qualitative factors that are difficult to foresee.
Though mobile payments have yet to gain traction in the United States, Pianalto said. But evidence from such countries as Kenya, South Africa, South Korea, and Singapore shows that the right combination of standards, teamwork, and marketing can yield strong demand for mobile and contactless payments.
“In the future, in the United States, you will be able to replace your leather wallet with a mobile wallet containing bank account data, linked to the ACH, check and card networks,” Pianalto said. “Your mobile wallet may also include personal identification documents such as your driver’s license, insurance cards, and health records. The Federal Reserve has been working with mobile industry stakeholders in the United States to help collect information on the direction of mobile payments, and to understand the potential barriers and risks.”