Federal-Level Payments Framework Needed, Urges US Treasury Report

September 21, 2022
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The Biden administration is becoming as enthusiastic about payments policy as its allies in Europe, as a new policy paper from the Treasury talks up instant payments and financial inclusion.

The Biden administration is becoming as enthusiastic about payments policy as its allies in Europe, as a new policy paper from the Treasury talks up instant payments and financial inclusion.

Pursuant to an executive order issued by President Joe Biden in March, the US Treasury has authored three payments-related policy reports.

Although the first two focus on crypto and illicit finance, its latest report, the Future of Money and Payments, sets out how US lawmakers can navigate fast-moving innovation in the payments space.

The US Treasury suggests that the current system of money and payments has substantial strengths; however, it warns that certain legacy payment systems can be slow, difficult to adapt and challenging for some consumers or businesses to access.

The Treasury also notes that the US has a significant population that is underserved by existing systems, indicating there remains substantial opportunities to promote broader financial inclusion.

Among the recommendations made is a call for a federal framework for payments, which the Treasury argues will help realise the benefits from non-bank entities, while also ensuring consumer protections and money laundering requirements are adhered to.

“A federal framework for payments regulation could support responsible innovation in payments by establishing appropriate federal oversight of nonbank companies that are involved in the issuance, custody, or transfer of money or money-like assets,” the report suggested.

State oversight of non-bank payment providers varies significantly in the US and, according to the Treasury, is “generally not” designed to address run risk, payments risks or other operational risks in a consistent and comprehensive manner.

Much like the EU’s Payment Services Directive, federal legislation in the US “would provide a common floor for minimum financial resource requirements and other standards that may exist currently at the state level, and thus build on existing state frameworks”, suggests the Treasury.

In addition, the financial regulator has proposed that regulation of this could encompass possible innovations such as instant payments and central bank digital currencies (CBDCs).

Encouraging the use of instant payment systems to support a more “competitive, efficient and inclusive” US payments landscape is another of the Treasury’s recommendations.

Although instant payment systems, such as The Clearing House's RTP are currently available in market and the Federal Reserve's FedNow service is being readied for launch, the government department says that frictions may limit the extent to which the potential benefits of instant payment systems are realised.

For example, consumers, businesses and financial institutions may need to adjust their financial habits and practices to incorporate new technologies.

Creating access

In addition, some instant payment systems are directly accessible only by depository institutions or members of the Federal Reserve System.

Here, the Treasury has advised the government to continue its outreach efforts to consumers, businesses and financial institutions, with a focus on inclusion of underserved communities.

It says the government should promote development and use of innovative access technologies by payment providers, to facilitate greater consumer access to, as well as use of, instant payment systems.

Efforts could involve continued engagement in standard setting, including for interoperability, clarification of regulatory frameworks where necessary and potentially public-private partnerships to explore possibilities for low-tech instant payment system access.

This could also include investigating the potential benefits and drawbacks of expanding eligibility to directly participate in the country’s instant payment systems.

The Treasury has also suggested that the government should walk the walk, not just talk the talk with instant payments, arguing that government agencies should adopt the use of instant payment systems where appropriate.

“The US government sends and receives millions of payments per day,” the report points out. “The use of instant payment systems by US government agencies could promote the expedient distribution of disaster, emergency or other government-to-consumer payments, potentially providing more rapid support for underserved communities.”

As well as these initiatives, the Treasury has argued that work must continue on the development of a CBDC, cautioning that research in this field “could take years”.

Similar to other G20 nations, it has singled out improving cross-border payments as a particularly important use case.

The US has “a strong national interest in being at the forefront of technological development and supporting global standards for cross-border payment systems”, the report suggests.

It argues that such systems should reflect US values, including privacy and human rights, and that they are consistent with anti-money laundering considerations and protect national security.

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