March 30, 2012
Payment Systems
Posted by Gordon Smith

This week we paid off our mortgage, and we are debt-free for the first time since entering law school. This is a big milestone, but I was struck at how difficult it was for me to move the money around to make this happen. I kept asking myself, why don't we have a better payments system? 

Then today at the Economic Bloggers Forum, Felix Salmon got all passionate about payments, suggesting that we need to focus on improving our payment system in the US. He urged us to read Bruce Summers, so I did. Summers and co-author Kirsten E. Wells try to answer my question, citing four obstacles to the creation of a general purpose system of immediate funds transfer (IFT):

  • Pricing: Payments are not free, but should users pay a fixed fee per transaction or an ad valorem fee? Or both?
  • Network Reach: Payments through proprietary payment networks work well only for members of the network, but how do we get from incompatible networks to a national system?
  • Payment Routing: Bank account information is not standardized, and financial addresses are not portable. How do we get there from here?
  • Payment System Governance: The current system is disaggregated, but a general purpose system would require national coordination, and who bears the cost of establishing such a system? And who takes the lead?

The authors conclude with this:

Perhaps the most critical enabling factor [for a general purpose system of immediate funds transfer] is strong sponsorship by a national body with the responsibility and motivation to stimulate continuous improvement in the national payment system. This body might be a consortium of private banks collaborating through a national payment association, a public authority such as the central bank, or a public–private partnership. It is not clear that such sponsorship can be readily found in the U.S., at least not at the present time, because there is no national body that takes responsibility for the development ofthe national payment system. As a consequence, [immediate funds transfer] and other national payment innovations are likely to progress in a halting and incomplete manner and at a pace that lags innovation that is observable in other countries....

Bottom line: the obstacle to better payments isn't technology, but coordination. Seems like an invitation to Congress.

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