Dive Brief:

• The U.S. and other countries might experience increased fraud, money-laundering and other negative consequences if they tie together faster payments systems, Federal Reserve Governor Christopher Waller warned in a speech in India Wednesday. He suggested a cautious approach to any such efforts, with a mindfulness of potential “trade-offs.”
• Waller also noted that the U.S. might reconsider a new faster payment connection with Europe and Canada, but would carefully assess the “costs and benefits,” according to the text of his speech at the Global Fintech Fest in Mumbai, India.
• While the Fed will continue to be “heavily engaged” on cross-border linkage possibilities, the central bank’s “chief focus in the near- to mid-term” is on increasing U.S. bank participation in its new FedNow real-time payments system, Waller emphasized.

Dive Insight:

The Fed’s launch of FedNow last year has been a work in progress this year, as the central bank continues to try to entice more U.S. banks to connect to the new instant payments system. It’s the biggest change to U.S. payments in decades and has the potential to accelerate the settlement of payments significantly, allowing them to clear in seconds as opposed to days.

Waller said that the Fed has signed up “close to 1,000 depository institutions” for the network. While the U.S. has nearly 10,000 banks and credit unions, FedNow officials said earlier this year that the realistic goal, at least for now, is attracting about 8,000 of them to the system.

The U.S. has been relatively slow to follow a worldwide trend toward faster payments, with India and Brazil leading the way on such systems, albeit with more of a government mandate. Some companies, including The Clearing House and Swift, have already begun to experiment with faster cross-border systems too.

Even before the launch of FedNow, the central bank’s officials discussed the possibility of using the new faster system to link with other countries for cross-border accelerated payments. While Waller acknowledged the world’s citizens generally want faster and cheaper payments services, he was cautious in his remarks about the possibility of tying together nations’ systems. “I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals,” he said. “There is no silver bullet that increases speed and efficiency without tradeoffs.”

Interlocking national payment systems would require creating technological connections between countries’ domestic payments systems and agreeing on certain standards.

“Variation around the world in domestic fast payment network adoption means that the value of globally interlinked systems is not yet clear,” Waller said.

More importantly, he noted that “friction,” or essentially the slowing of payments by way of technology or policy hurdles, may be a good thing when it comes to cross-border payments, even though it’s often considered a negative in commercial transactions.

“Not all frictions that slow payments down are bad,” Waller said. “Certain frictions are purposely built into the global payment system for compliance and risk-management reasons. Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments.”

For commercial transactions, sellers might have a vested interest in speeding up payments, but that’s not necessarily the case for sellers, as a result the senders in such cross-border situations need “to be properly incentivized,” Waller noted. 

The G20 group of nations have agreed on goals for speeding up global payments generally, particularly for the benefit of the many migrant workers who send money home to family from other countries. For such workers’ remittances, the objective has also been to reduce the cost of sending such payments. But Waller noted that remittances are a “small percentage of the value of cross-border payments.”

The Fed governor seemed to be open to the idea of reviving a faster link between the U.S. and Europe and Canada, noting that an ACH system had been shut down because of disuse, but might still be relevant if it relied on faster transmission.

“After more than 20 years, the banks were not using it, and we stopped the service,” Waller said of the former three-nation network. “It is possible that a fast payment interlinking arrangement adopted by the Federal Reserve would be more effective for our bank customers than the former ACH service, but we would proceed cautiously to carefully consider the costs and benefits.”