Susan Foley, senior associate director, Federal Reserve Board of Governors, addresses participants at the Fed's recent town hall meeting. Photo courtesy of the Federal Reserve Bank of Boston

Contrary to advancements the U.S. has made in technology, the country lags behind many of its peers when it comes to payments – online and debit transactions can still take hours, if not days, before the funds are actually transferred or deposited into an account.

But this could soon change.

Payments officials from the Federal Reserve Board of Governors recently visited Boston to hear public comments from New England stakeholders on potential actions the Fed could take to facilitate real-time interbank settlement of faster payments.

The stop was part of a series of town halls the Fed is holding in each one of its 12 districts to determine the best course of action moving forward.

The Fed is specifically considering the development of a 24-7-365, real-time gross settlement system to support faster payments, and a liquidity management tool to help banks support their funding needs outside standard business hours.

“We have a gap,” Susan Foley, senior associate director at the Federal Reserve Board of Governors, said during the town hall event. “If I send money to someone, they have access to the funds before banks have completed the transaction or have the cash. … We have a long way to go still.”

The current U.S. payments system has three layers: the end-user service, clearing and the settlement.

In the first layer, the end-user service, the person initiating the transaction, the sender, initiates a payment to the receiver, or end-user. In the second layer, called the clearing, the sender’s bank account is debited, and the receiver’s bank account is credited. The last layer, the settlement, is when the exchange is finally made, and the cash is actually transferred from one bank to another.

The current system is considered risky because the recipient’s receiving bank has paid out the funds before receiving them from the sender’s bank.

In a real-time model the settlement would happen before the receiver has access to funds, eliminating this risk.

The Reserve Bank of Australia earlier this year rolled out a new payments platform equipped with real time payments, while the European Central Bank has a goal to launch an instant payment system potentially this year.

Considerations and Complications

The majority of attendees at the town hall said they do support the development of a real-time system.

Kenneth Oros of POSitive Resources, a payments consulting firm, went so far as to say that the Fed is already too late and that the ideal timeframe to develop this new system would have been last year.

But while most agreed that a real-time payments system is needed, there were still many concerns from smaller banks. Even Foley acknowledged that while a real-time payments system eliminates risk from the current system, it is also a much more demanding.

Larger banks with more resources at their disposal have already begun to take steps on their own to implement a real-time system.

At the end of last year, 25 U.S. banks started a new payment clearance and settlement system for the first time in more than four decades, which could move funds between accounts in three seconds. Earlier this month, Citizens Bank said it would phase in real-time payments for its commercial banking business starting in 2019.

The idea was that a faster payments system was “going to be commercially led,” said Peter Gordon, a former board member of Newton-based First Commons Bank, which was recently acquired by Brookline Bank. “The small banks are not participating overall.”

Many stakeholders from community banks are still wary about some of the changes they would need to make to accommodate a new real-time payments system.

For starters, a real-time system would likely require banks to switch from a five-day accounting model to a seven-day accounting model, which comes with the challenge of updating technology.

Banks with in-house core processing would need to update their systems and then revise the architecture of that system to handle all of the payments, a potentially huge and costly undertaking, said one of the attendees at the town hall.

Bram Berkowitz

For banks that outsource their core processing, they would be dependent on the companies they with whom they contract.

“From the smaller bank’s perspective, it’s a question of what takes place in the back office and the changes we would need to make to accommodate a seven-day system,” said Steven Whitney, executive vice president at Maine-based Norway Savings Bank. “Most of us are at the mercy of big core processors.”

Foley did not have an exact timeline of next steps but urged everyone to submit public comments in writing by Dec. 14.