June 2022 Innovating Payments Executive Summary— A CBDC Will Not Cut Banks Out of the Banking System, Says Fed Reserve Vice Chair Lael Brainard

Welcome to the June 2022 issue of NEACH's Innovating Payments Executive Summary. This month's top story features the Federal Reserve. In her May 26 testimony before the House Financial Services Committee on the benefits and risks of a U.S. central bank digital currency (CBDC), Federal Reserve Vice Chair Lael Brainard stated that a federally issued digital dollar would not cut banks out of the banking system. Also from the Fed: A May 19 news release stated that the Federal Reserve Board finalized a rule that governs funds transfers over the Federal Reserve Banks' FedNow.

Also in May, PYMNTS and The Clearing House announced the release of a new report, Real-Time Payments: The Fast Track to the Future of Corporate Payments, which offers fresh insights on the intersection of real-time payments and the future of corporate payments. Speaking of reports, The Future of Authentication in Financial Services Playbook: Finding the Balance Between Security and Convenience, examines consumers’ expectations around their financial experiences across digital channels and devices.

Read on to learn more.

The Federal Reserve

A CBDC Will Not Cut Banks Out of the Banking System

In her May 26 testimony before the House Financial Services Committee on the benefits and risks of a U.S. central bank digital currency (CBDC), Federal Reserve Vice Chair Lael Brainard stated that a federally issued digital dollar would not cut banks out of the banking system.

According to PYMNTS.com, the Fed has faced a backlash of anger from the commercial banking industry over a national digital currency. In a May 20 statement about the Federal Reserve’s January CBDC report, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” the Bank Policy Institute stated, "By attracting deposits away from banks, particularly during a period of economic stress, a CBDC likely would undermine the commercial banking system in the United States, and severely constrict the availability of credit to the economy."

“It’s very important to consider the risk of bank intermediation,” Brainard also said. “A vibrant healthy banking system with banks of all sizes is very important to the economy and to the Federal Reserve.”

Brainard did acknowledge that a “widely available CBDC could serve as a substitute for deposits,” adding that “anything that we would want to do in this space would have to be consistent with banks remaining really important intermediaries.”  In a later comment, Brainard said, “It [the Fed] would confine their use to payments and not impede important functions of a vibrant banking system.”

Brainard was also clear that developing a CBDC would take at least five years.

Related, read NEACH’s response to the Federal Reserve’s Money & Payments Request for Comment, which addresses a potential CBDC, here.
 

Federal Reserve Finalizes Rule that Governs Funds Transfers over Its FedNow^(S.M.} Service

“The Federal Reserve Board finalized a rule that governs funds transfers over the Federal Reserve Banks' FedNow℠Service,” according to a May 19 news release. “The final rule is substantially similar to the proposal from last year, with a few clarifications in response to comments.”

The final rule provides a comprehensive set of rules governing funds transfers over the FedNow Service that offers legal clarity on the rights and obligations of parties to a transfer over the FedNow Service, the release reports.

To learn more, click here.

Real Time Payments

“Real-time payments usage may be nearing an inflection point," according to PYMNTS and The Clearing House in their joint report, "Real-Time Payments:  The Fast Track to the Future of Corporate Payments.” Their findings are based on a survey of 100 executives with $50 million to $1 billion in annual revenue conducted from January 12 to January 31.

Highlights in the report, as provided by PYMNTS, include:

• 75%: Share of the companies that use real-time payments for receiving payments that say it helps them manage their cash flow
• 71%: Portion of the companies that say there is a substantial difference between the benefits and the drawbacks of real-time payments and expect to increase the volume of real-time payments they send in the next year
• 20%: Portion of companies that say the high cost of the necessary technology is the biggest factor hindering their usage of real-time payments for sending payments

According to the report, “Nearly three-quarters of companies receiving real-time payments say they expect to increase payments received via this method in the next year, and 69% of companies sending real-time payments say they expect to increase usage of real-time.”

You can download the full report here.

Nacha

The ACH Network experienced overall growth in the first quarter of 2022, even as recent forms of pandemic-related government assistance have ended, according to a Nacha news release. Growth in the first quarter was fueled by business-to-business (B2B) payments and the increase to the Same Day ACH dollar limit.

B2B payments increased by 15.5% from the first quarter of 2021, with more than 1.4 billion ACH B2B payments made. That also is a 35.5% increase from the first quarter of 2020, when COVID-19 initially closed many workplaces. 

“Many businesses and organizations have come to realize that ACH payments are not just the new normal, but the best way of doing business, given their reliability and convenience,” Jane Larimer, Nacha President and CEO, said in the release.

The Same Day ACH per payment limit increased to $1 million on March 18, 2022, contributing to a 53.3% increase in Same Day ACH dollar value over a year earlier, to $290.3 billion, along with a 7.8% volume increase to 154.2 million payments.

The Clearing House

The Clearing House (TCH) announced that CHIPS, the world's largest private-sector USD clearing and settlement system, remains on schedule to implement the ISO 20022 message format in November 2023 as planned.

TCH, the operator of CHIPS, remains committed to the ISO 20022 message format to enhance payments processing efficiency, allow participants and end-user customers to glean value from enriched data content and structured message formats, and support the dollar as a global reserve and settlement currency.

CHIPS is a domestic and cross-border payments system for international payment activity, with approximately 95% of CHIPS payments having a cross-border leg. The November 2023 message format conversion will place CHIPS messages in the same ISO 20022 format as other large, global high-value payment systems.

While working with the industry to implement the ISO 20022 message format, TCH continues to enhance CHIPS by extending operating hours (March 2021), strengthening resiliency, and considering improvements to its patented liquidity savings mechanism. CHIPS participants recommended that TCH continue to follow the ISO 20022 implementation plan, as outlined in early 2021.

The Future of Authentication in Banking

A new report, The Future of Authentication in Financial Services Playbook: Finding the Balance Between Security and Convenience, examines consumers' expectations that their financial experiences will be highly secure across various digital channels and devices.

Key findings from the study, drawn from PYMNTS' article: "REPORT: Two-Thirds of U.S. Digital Banking Customers Choose Security Over Convenience," appear below:

• More than half of consumers consider data security "extremely" important when sharing personal data online. Most consumers say their private data is valuable to entities other than their F.I.s. When transacting online, the security of personal data is "extremely" important for 52% of respondents, while another 28% find it "very" important. Nearly four-fifths of consumers say their personal data is valuable to at least one entity other than their F.I.s, with 24% saying their data is valuable to all entity types.

• Security and a good user experience are highly influential in building consumer trust in financial providers. Consistency across different platforms is also critical to most consumers' trust. Security is "highly" important for 83% of respondents, and a good user experience is "highly" important for 80%. We also find that 53% of consumers say consistent experiences across different platforms have a "very" big or "extremely" significant impact on their trust in F.I.s. This share is higher among consumers who access their accounts mostly using mobile apps or multiple environments, at 60% and 58%, respectively.

• Six out of 10 consumers are willing to log in to their accounts with alternative authentication methods. While 61% of all consumers are willing to log in to their accounts with alternative authentication methods, 60% of those who use mobile apps, mobile browsers, and computer browsers also say they would be "very" comfortable logging in using methods other than login I.D.s and passwords. This share rises to 73% for users who leverage multiple devices to access their accounts. Just under half of these users believe passwords will eventually be phased out as an authentication method.

These findings suggest numerous opportunities for financial institutions to educate their customers/members about the advantages of banking with traditional financial institutions and the protections afforded customers/members in conventional banks that other online financial services companies cannot provide.

To learn more about these findings, download the report here.

NEACH—YOUR STRATEGIC PARTNER

Are you ready for NEACH’s Payments Management Conference 2022 VIRTUAL? Join our one-day virtual conference experience as we explore the U.S. payments system, with sessions on Faster Payments; Risk & Fraud; Operations & Quality; and Compliance. Enjoy keynote and general session speakers, networking events, and more. Our exciting virtual model removes travel and geography as barriers to participation.

Register here to reserve your seat. 

We hope to see you there!

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