Comments to FRB on Faster Payments Council

David Sapenaro

Payments Strategy Director

First Vice President and Chief Operating Officer
Federal Reserve Bank of St. Louis

Dear Mr. Sapenaro:

Thank you for the opportunity for the American Bankers Association (ABA) to comment on the “Operating Vision for the U.S. Faster payments Council” document issued by the Governance Framework Formation Team (GFFT) on April 24, 2018.

We commend the Federal Reserve’s leadership role in facilitating a broad discussion on how to improve the payments system to the benefit of all parties. Moreover, we recognize the substantial resources invested by the Federal Reserve in serving a convener’s role among stakeholders who want to work collaboratively to move the faster payments discussion forward. Specifically, we feel this moment is an appropriate opportunity to recognize the work of you and your Faster Payments team led by Sean Rodriguez, as well as your predecessor, Gordon Werkema, and the executive leadership in the Federal Reserve System whose vision in establishing this group has produced so many important discussions. The effort to find stakeholder consensus on such wide-ranging issues is challenging, but worthwhile, and we value our partnership on these matters.

The GFFT proposal, as written today, would create a Faster Payments Council (FPC) that would be independent from the Federal Reserve and focused on “private-sector approaches to solving problems and removing barriers to achieving ubiquity.” Ideally, the FPC would operate collaboratively toward three main goals: a long-term vision of greater interaction between faster payments solutions; a high-quality customer experience; and enabling cross border transactions. Our members share these goals and work to implement them in their payment services offerings, and we believe that market incentives in the payments space are aligned toward their advancement.

ABA supports these important objectives and recognizes the need for open dialogue among parties involved in the payment system. In fact, many of our members participate in multi-stakeholder forums and organizations that facilitate such dialogue today. The results of those efforts and the private sector underlying them are clear: a payment system which is more accessible, more ubiquitous, and more secure than ever before.

The current proposal for comment contemplates an FPC with significant authorities, which was a key area of discussion and debate within the GFFT that led to the decision to open a comment period and seek feedback before proceeding. These authorities which would essentially define the FPC as a semi-regulatory body are an area of significant concern for our members, and are unnecessary to drive a collaborative, private-sector process forward.

In addition, while we applaud the decision to seek comment at this stage, it is important that these comments are interpreted in the context of the uncertainty about the scale, scope, cost, organization, and authority of the ultimate group. Some of the basic building blocks of next steps are, as yet, unknown and unexplored. The comments received as part of this process are likely to lead to further revision as more details become available.

A number of our members have also expressed concerns that the draft by-laws and charter for the FPC have not been publicly released, as we believe sharing those would inform some commenters and reinforce your commitment to total transparency. For instance, while the public-facing documents about the FPC explain potential benefits of the project, the draft organizational documents provide for fines, penalties, and marketplace practice restrictions – elements which we believe are material and would have been fair for commenters to know about and examine as they weighed their submissions.

The ABA believes that the chances of success of any future effort will be greatly increased if next steps focus on issues where cross-segment industry collaboration is clearly possible and if the consumer is placed at the center of the discussion. By narrowing the scope, and focusing on areas of agreement, there is an opportunity to advance ideas, educate end-users, and support industry work on ubiquitous access to faster payments for all users. Following this approach, industry-led efforts can be established more quickly and at a lower cost of membership with less debate about its governance structure and membership fees than the proposed FPC.

Competition, among both companies and technologies, is essential to the incentives that drive ubiquity in a two-sided market such as payments. Because of the success of existing market incentives in advancing payments along the trajectory desired by you and by us, the ABA believes strongly that the scope of this group should not include rulemaking or standard setting. Having too broad a scope and attempting to manage as-yet-unknown sources of innovation through another set of rules will stifle the ability of new product features to come to market, harming consumers, financial institutions, and merchants alike. Given the sheer scale of examining the factors underlying rules that have taken decades to refine, failing to explicitly exclude rulemaking and standard- setting (or evaluation) would result in mission creep and minimal progress.use we believe there is value in education and dialogue on emerging payments as they evolve, ABA would support a narrowly focused initiative that does not include rulemaking or standard setting.

There are several ways to accomplish this with varying degrees of involvement of the Federal Reserve. Whether this might be an advisory committee of the Federal Reserve (modeled on the Community Depository Institutions Advisory Council), or the Federal reserve periodically convening key stakeholders as it has done over the last several years, the key attribute should be a forum for an open and transparent discussion. By taking a simple, private-sector centric approach with a narrow focus that precludes rulemaking or standard setting and a commitment to transparency that safeguards minority views and prohibits the use of confidentiality or binding agreements, a successor forum could come together quickly, without complicated governance or funding issues. The more complicated the scope of the structure, the less likely it will be that a group would form and be successful. A simple, narrow approach also obviates the issues we have identified in the legal basis of incorporating and maintaining a separate organization that attempts to guide market actions of competitors but does not compromise consumers’ right to a competitive market.

Scope

ABA supports initiatives focused on education and awareness that would accelerate adoption of faster payment options for financial institutions and merchants of all sizes, with concern for minimizing the burden of any action on smaller entities. Any initiatives should be voluntary, without penalty for dissent/non-participation, and should benefit all stakeholders without intruding into business models, practices, and cost structures or overlap with rule sets, including those that are already established. Having a transparent and open process where all information is available to all members in real time and leadership accountability is provided for is critical to success.

According to the paper, the FPC would rely upon “Consensus-Driven Problem Solving” to identify and resolve barriers to ubiquity. The process would first focus on “light touch” methods that would include things like establishing education programs or polices or guidelines. Yet, the paper states that when those methods don’t yield the desired results, the FPC would consider stronger tools like rules, standards, and certification processes. These “heavy touch” tools pose potential risks to parties that may be subject to increased liability, undefined enforcement actions, or expenses related to reengineering established systems—all of which create the specter of unconfined risk and would drive away potential participants.

The bylaws required of an FPC with a broad scope of work as proposed (particularly around decision making and standard setting) would be significant and likely to create gridlock among participants. Such an effort would likely not succeed and the benefit of having an open discussion among stake holders could be lost altogether.

A narrow scope focused on the voluntary exchange of information would have a greater likelihood of success and would avoid any “heavy touch” tools and problems associated with establishing a rules or standards setting body. Regardless of the ultimate structure, care must be taken to assure that the scope of this body remains narrow and is not used to advance positions of any particular group or be used to intervene in a market that is working for American consumers and businesses.

Governance

The role of governance of the FPC takes on heightened importance when rules and standards are considered part of the group’s responsibilities. Implementing rules and standards that may impose additional legal obligations or financial penalties on parties may create a natural but counterproductive competition for positions of authority including the number of board seats, the chairmanship of working groups, or even the number of voting members of the organization.

By adopting a policy that the new group, however structured, be permanently enjoined from contemplating the creation of rules or standards or restraints on the marketplace conducts of participants, this governance competition would largely disappear and the attendant benefits of voluntary and genuinely collaborative participation would be realized.

Funding

To be successful, any initiative that develops from among interested parties must make effective use of the time and resources of industry stakeholders. The original FPC proposal calls for an initial budget of $2 million with an ongoing obligation of $4 million per year. The amount is based upon the expenses associated with managing a group of 11 standing committees and work groups. The tiered due structure sets dues stretching from $500 at the lowest level to $150,000 for the largest corporate structures. With a narrower focus, the Federal Reserve could certainly convene a forum with far less concern over cost or resource allocation from the participants.

Conclusion

Thank you for the opportunity to comment on the FPC proposal drafted by the GFFT. These are challenging issues and many different segments of the industry have diverging views. The ABA believes that an open and transparent discussion among payment system stakeholders is appropriate and beneficial. However, it is vital that the interests of consumers be kept at the forefront as the primary consideration. Any group that assembles should be disciplined by and attuned to consumers’ needs through a presumption of free market principles and an exclusion of regulatory or other tactics that would select winners and losers.

We believe that success of any future initiative can only be achieved if rulemaking and standard setting are not part of the mission of this group. A more focused scope of duties has a much higher probability of success and can be a vehicle for much needed education and discussion on the increasing ubiquity that we all are seeing and seeking to sustain in payments.

Once again, we appreciate the partnership between the Federal Reserve and financial services trade associations on payment issues and look forward to continued collaboration in pursuit of common goals.

If you like to discuss this comment in greater detail, please contact Stephen Kenneally at 202-663-5147.

Sincerely,

Stephen K. Kenneally

SVP, Payments and Cybersecurity Policy