It’s election time here in the United States and potentially big changes are ahead. Elections define the beginning and end of political eras. Walter Dean Burnham, the distinguished professor of American Politics, elaborated a theory of party change and realignment. Burnham’s theory noted that critical issues bubble up from time to time and their impact is significant enough that business as usual in politics is changed.
Relax, everyone, I’ve not turned into a political blogger nor am I proposing a theory of payment system change in the U.S. or elsewhere. But I would like to offer some thoughts on two key trends that are bubbling up that may indeed affect payments as usual:
Payment System Visioning & Coordination
More and more countries and regions are devoting time and resources to defining an ideal state for their payment systems. This is not new. Countries which have higher levels of central bank planning and payment system involvement have traditionally elaborated 3-5 years plans. The Reserve Bank of India, for example, develops a payments vision document every three years. Now others are getting on board:
- The Canadian Payments Association is spearheading a national conversation on payments system modernization in the hopes of reaching consensus on changes to existing systems and what additional systems or functionality are needed
- The Federal Reserve’s Faster Payments Task Force is a forum for industry dialogue on how to achieve faster payments, more secure payments, increasingly electronic payments, better cross-border payment options, through participatory input to payment system development
- Launched in 2002, the European Payments Council is an elaborate and on-going initiative to develop and improve payments options for the Euro area
Payment System Speed
Deferred payments like traditional ACH and check are receding further into the background of these conversations. Their main focus is centered on the development of cheaper, real time options for retail payments. Countries which already have real time payment projects underway include:
- The Kenya Bankers Association will launch a real time interbank switch in 2016.
- Banks in Australia will launch the New Payments Platform in 2017 that promises “faster, more flexible, data-rich payments”
- The clearing arm of the Euro Banking Association is planning to launch a pan European instant payments infrastructure in 2017
- The bank-owned collaborative called The Clearing House is developing a real time payments rail here in the U.S., in part based on the VocaLink technology behind both the U.K.’s Faster Payments and Singapore’s FAST systems.
- And, while not in the real time category but certainly at a faster pace, we also see countries like the U.S. (2016) and Peru (2015) implementing same day settlement of ACH payments
Globally, we are moving into a new era of improved payment options. Of course, the past decade has been a period of tremendous payments system innovation that extends well beyond this short trend list. However, many of those innovations were technologies or techniques that solved particular problems for the particular clients of a specific company. Examples include the proliferation of faster payment solutions that use debit rails to transfer funds between individuals and businesses. Another example would be the practice of using contractual arrangements and rule sets to create the effect of real time payments without actually having a real time payment system.
We don’t yet know how the landscape will be redefined. New payment rails like the one being built by The Clearing House will certainly initiate a defining period of payment change in the U.S. Of course, this is not to say that each payment system improvement solves all problems but they do, over time, tend to enhance the overall system and create opportunities for innovation and performance.
Just as in politics, new challenges and needs continue to rise into the collective consciousness of the payments industry. This is the really, really exciting part: to think about the potential of these new systems and how they will improve payment options for consumers, business and governments. And then there will be the work of building the future’s nextgen systems!
You surely have noticed that I did not include Bitcoin, other virtual currencies, or ledger based payments processing. This omission was intentional. We’d love to hear from you how these new technologies will influence payments as usual.
 If you’re interested, check out Walter Dean Burnham’s book Critical Elections and the Mainsprings of American Politics (1970).