Cautious Approach Needed for Interlinking Fast Payment Systems, Warns Fed Governor
The rapid advancement of fast payment systems around the world has sparked a growing interest in the possibility of interlinking these domestic networks to enhance cross-border payments. However, Federal Reserve Governor Christopher Waller has cautioned against rushing into such interlinking arrangements, emphasizing the need for a measured and cautious approach.
In a recent speech at the Global Fintech Fest in Mumbai, India, Waller highlighted the potential risks and practical challenges associated with interlinking fast payment systems, underscoring the Fed’s focus on strengthening its own FedNow network domestically.
Waller acknowledged the general desire for faster and cheaper global payments, but he warned that not all frictions that slow down payments are necessarily bad. The governor emphasized that certain “frictions” are purposefully built into the global payment system to address compliance and risk-management concerns.
Slowing down the clearing and settlement of payments, for instance, helps banks prevent money laundering, counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments.
Furthermore, Waller noted that the incentives of the parties involved in a cross-border transaction may not always align when it comes to the speed of payments. While sellers often want to receive their money as quickly as possible, buyers or their intermediaries may have an incentive to delay payment. This dynamic raises the question of whether it is necessary or desirable to incentivize faster cross-border payments across the board.
In addition to the potential risks, Waller also highlighted the practical challenges of interlinking fast payment systems. He emphasized that achieving true interoperability is not a simple task, as it involves navigating legal, compliance, settlement, and governance hurdles, in addition to the technical aspects.
Waller noted that the variation in domestic fast payment network adoption around the world means that the value of globally interlinked systems is not yet clear. He pointed to the experience of the United States, where the Federal Reserve had to step in to build the FedNow network after determining that private-sector systems were unlikely to reach all depository institutions.
The governor also cautioned that even when technical connections are established between fast payment systems, payments may not be truly instant due to differences in the implementation of the ISO 20022 messaging standard, which is widely used by these systems. Coordinating common practices and aligning on standards across borders is a significant challenge.
Waller acknowledged that some countries have already established bilateral links between their domestic fast payment systems, primarily to support remittance payments. While these arrangements demonstrate that linkages are technically possible and that legal and compliance issues can be addressed, he noted that each link is unique and requires resource-intensive negotiation and alignment between the parties.
The governor suggested that new multilateral arrangements for interlinking could potentially address some of the challenges associated with bilateral links. However, he cautioned that such multilateral efforts would still be “no small undertaking,” as they would require significant coordination and cooperation among the participating countries.
Given the potential risks and practical challenges, Waller emphasized that the Federal Reserve’s primary focus in the near to mid-term is on continuing to build the FedNow network domestically and increasing participation in the service. The central bank is also working to improve existing cross-border payment rails, such as by considering expanded operating hours on its Fedwire Funds Service and adopting the ISO 20022 messaging standard.
However, Waller acknowledged that the Federal Reserve will remain engaged in international forums to explore ways to improve the speed and efficiency of cross-border payments, including the potential for interlinking payment systems. The central bank will continue to conduct research and experimentation on emerging technologies that could shape the future of the payments landscape.