As faster payments shift to the implementation stage in the United States, developing a faster payments ecosystem with an effective governance framework in a timely manner will help address the foundational issues pertaining to broad adoption; safety, integrity, and trust; and interoperability. In an environment where there might be only a few faster payments solution operators, it is conceivable that coordination on these foundational issues might take place through bilateral contractual agreements.
The task force believes, however, that multiple faster payments solutions coexisting is preferable as such competition encourages innovation, increases choice for financial institutions and other service providers, and enhances the value of faster payments for end users. Therefore, it is ideal from the task force perspective, to create an inclusive governance framework that supports competition and new entrants while enabling all faster payments stakeholders to have influence on the way the faster payments system evolves in order to ensure the task force vision is met.
It is possible that faster payments solutions could be consolidated to a few solution operators due to economies of scale and scope and network effects. However, this may have negative effects; with limited competition, solution operators may not have incentive to respond to the demands and interests of end users and other service providers, especially smaller ones. Specifically, smaller depository institutions, nonbank service providers and smaller solution operators are concerned that the major solution operators would set pricing, rules and other processes that are not transparent and could make it difficult for smaller service providers to compete with their larger counterparts on a level–playing field. In addition, business end users are concerned about having the ability to manage usage in a way that enables them to balance the expenses they incur with the benefits they receive from faster payments.
To avoid negative effects created by a lack of competition among solution operators, government mandates or regulations are often used in other countries. In contrast, the United States has historically taken a market–based approach, including by supporting competition between public and private solution operators to determine the evolution of ACH and checks. Creating a pro–competitive, inclusive and collaborative environment at the beginning stage of faster payments implementation likely will help ensure these concerns can be addressed.
A formal governance framework is essential for diverse participants of the ecosystem to effectively collaborate and make decisions. For example, to achieve interoperability or to address weak–link, security concerns, cross–solution rules and standards are needed. Similarly for broad adoption, cross–solution guidelines that define baseline features, such as timing in the steps of the payments process, legal rights, and risk management for cross–solution payments, may be helpful in providing transparency, predictability, and reliability to end users. At the same time, it is worth noting that these guidelines need not prevent solution operators and service providers from offering features superior to the baseline features. A governance framework determines how these cross–solution rules, standards, and guidelines will be set.
In addition to implementation and enforcement of cross–solution rules and standards, there is a need for a framework that helps the faster payments system thrive and evolve in ways that foster competition and ensure sustainability. This could include exploration of ways to: continuously improve the security of the faster payments system against evolving threats; identify and address potential gaps with respect to the Effectiveness Criteria, including around harder–to–address use cases; deepen collective understanding of the risks and potential of new technologies; and identify impediments to compliance with existing laws and regulations, including whether changes are needed to laws and regulations. The framework could also play a role in establishing education and/or advocacy programs.
To create such a governance framework, active collaboration clearly is needed from faster payments solution operators as well as from all other participants in the ecosystem, including depository institutions and other service providers, payment processors, technology vendors, and end users. Inclusivity will contribute to a sustainable, evolving ecosystem.
A key concern in creating a governance framework, however, is whether participants in the ecosystem have incentive to collaborate. Their incentives may be influenced by a variety of factors including the purpose and expected outcomes of a given collaborative effort, the timing of the effort, or other business or legal considerations. For example, most solution operators may be willing to participate early on in a collaborative effort that defines the baseline security all solutions should maintain to avoid creating weak links and ensure the integrity of the overall faster payments infrastructure. This is because strong security is more likely to be achieved via security features built in during the design stage of a solution. In contrast, some solution operators may not wish to participate in a collaborative effort that develops standards and rules for interoperability, choosing instead to focus solely on building the reach of their own solution until the market demand for interoperability is strong. In that event, an established faster payments solution operator may tend toward bilateral agreements with a small number of other established solutions.
To facilitate participation in collaborative efforts and/or the governance framework, articulating the focus may help, for example, by limiting the scope to issues that are commonly shared across faster payments solutions. In addition, starting with a flexible governance framework and allowing it to evolve could help overcome reluctance to participate early on. Similarly, framing rules, standards, and guidelines to provide some degree of flexibility can help. For example, to facilitate interoperability, cross–solution rules and standards could enable the mechanics of interoperability through high–level “rules of the road” that bridge differences across solutions and only address areas that are essential for interoperability. Nevertheless, defining and implementing cross–solution rules and standards will be a challenge given that all solutions, including those already in the market, will have their own rule sets and standards, delivery mechanisms, and technologies. It is also a challenge to find the right balance; cross–solution rules and standards should be flexible enough to encourage participation in the coordination effort, as well as competition and innovation, but prescriptive enough to achieve the desired goals.
A related challenge is enforcement of the cross–solution rules and standards. In some areas, such as end–user protections, regulatory enforcement may exist, but in other areas industry self–enforcement may be needed. Again, a balanced approach to enforcement is critical. If it is too strict, incentives of stakeholders to participate in a collaborative effort or the overall governance framework may be diminished; but if it is too loose, the desired outcomes may not be achieved.
In the final analysis, inducing diverse stakeholders to participate in and accept the authority of a voluntary and broadly inclusive governance framework will be challenging. The structure and scope of the framework will be key. Issues pertaining to membership, decision making, and funding must be collaboratively defined and evolve as needed with development of the faster payments ecosystem. This includes processes for ensuring equitable segment–level representation and the ability to influence decisions that may affect different groups to varying degrees (e.g., voice vs. vote). Moreover, how the framework is funded and how that influences these processes must be considered in the design of the framework, especially given concerns about a “pay–to–play” approach for the allocation of votes and/or membership.