M-RCBG Associate Working Paper No. 239

Reaching Real Time: Payments in the United States

2024 Policy Analysis Exercise Prepared for The Digital Assets Policy Program

Logan Herman
Kabir Mehta

Executive Summary

Payments and settlement infrastructure are a fundamental feature of economic activity. The essential tasks performed by these systems underlie every transaction, from small consumer purchases and mortgages to business transactions and financial market movement. The features and effectiveness of a payment system can support or undermine economic efficiency, financial inclusion, or everyday life. Our near-term policy and business decisions associated with instant or real-time payments and payment infrastructure carries profound implications for the United States’ domestic economic activity and global competitiveness. 

The landscape of real-time payments in the U.S. presents a unique conundrum – the current U.S. payment system often measures transaction times in days rather than seconds, creating a disconnect in an economy where immediacy is increasingly the benchmark. Despite its pioneering role in technology and finance, why does the U.S. lag behind its counterparts in the widespread adoption of a real-time payments system? This gap can be attributed to a complex interplay of factors, chief among them being the lack of a government mandate driving adoption rates, coupled with a payments infrastructure controlled by private entities and absence of a concerted effort towards a public payment system. This situation has resulted in a trilemma where quest for universal access to payment systems, traditional control exerted by large financial institutions, and the need to align with national policy priorities are in constant tension.

The recent merger proposal between Capital One and Discover, although indirectly related to our exploration of real-time payments, signals that market consolidation could inadvertently overshadow the critical push for upgrading the U.S. payment infrastructure. As such, the urgency for policy interventions that prioritize systemic improvements, rather than reshape market dynamics, becomes even more pronounced. 

Against this backdrop, our analytical approach employs a multidimensional lens, evaluating the interplay between market dynamics, regulatory frameworks, and the strategic roles of public and private sectors in payments innovation. We explore competing theories of change, including private-sector development, government-driven competitive environments, and direct governmental creation of payment systems. We also draw insights from the United Kingdom, which addressed the trilemma by assigning a central role to government oversight, thereby ensuring that the payment system operated as a public good, accessible to all and geared towards national economic objectives. 

By dissecting the underlying structures that have stalled progress in the U.S. and comparing them with the more agile approaches of the U.K., we chart a course for a balanced, resilient, and inclusive payments infrastructure. A cornerstone of these proposals is an Executive Order on Payment Systems Interoperability and Financial Inclusion. This order would mandate the creation of a payments ecosystem that is accessible to all, reflecting the need for a unified approach to financial services that caters to every citizen, which has been a key factor in the success of the U.K.’s payment system. 

Further, the proposals recommend leveraging international expertise through collaboration with the BIS Innovation Hub to refine the FedNow service, drawing from the global best practices in real-time payments while ensuring the safeguarding of national security and financial stability. This collaboration seeks to incorporate lessons from the U.K. experience, particularly the emphasis on a public good developed and maintained by the central bank. 

We also propose a study by the Financial Stability Oversight Council to assess payment systems risk, advocating for a comprehensive understanding of systemic risks and the pursuit of universal standards and enhanced interoperability. 

Additionally, the provision of a government-facilitated application for real-time payments is proposed to support small and community-based institutions, a policy informed by the U.K.’s prioritization of financial inclusion. This approach aligns with our analytical perspective, which maps the complex dynamics defining the U.S. payment systems against a backdrop of global financial innovation. 

Our proposals address the U.S.’s delay in real-time payments adoption by suggesting a combination of executive action, regulatory reform, and strategic public sector intervention, all aimed at recalibrating the trajectory of U.S. financial infrastructure towards a system that champions innovation, competitive parity, and systemic resilience. The objective is to foster a payments landscape that serves the economy and its citizens effectively and equitably, while maintaining the U.S.’s position as a leader in global financial innovation.

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