Fed Offers Four Options for Speeding Up Payments

by KEVIN WACK

JAN 26, 2015 12:32pm ET

 PRINT

 EMAIL

 REPRINTS

 COMMENT

 TWITTER

 LINKEDIN

 FACEBOOK

 GOOGLE+

RELATED

Banks Signal Support for Same-Day Payments Plan

The Clearing House to Build Real-Time Payments System

Ready or Not, Real-Time Payments Are Coming

10 Ways Technology Will Change Banking in 2015

Top 5 Security Threats Banks Will Face in 2015

A 'Defining Moment' for Marketplace (aka Peer-to-Peer) Lending

The Federal Reserve System released a detailed vision Monday for improving the speed of the U.S. payment system.
It is the latest step in a process meant to spur change at a time when the country has fallen far behind many nations that have adopted real-time payments.
Payment industry insiders have long been awaiting the Fed's report, which is titled "Strategies for Improving the U.S. Payment System."
The report lays out four options for building a faster payment system: evolving the existing PIN debit infrastructure, which is currently used in retail stores and at ATMs, to enable real-time payments; using common protocols and standards to facilitate the clearing of transactions over the Internet; building a new payments infrastructure that would build on existing technology and only have limited uses; or building a new payments infrastructure that would process a wider range of transactions.
The report states that the four options will be studied further. The Fed said that early this year it plans to establish a task force on faster payments, which will get input from stakeholders, and then by 2016, identify one or more approaches for implementing faster payments.
A separate task force will be established to study payment-security issues.
Over the last few years, the Fed has been trying to walk a tightrope with respect to improving the U.S. payment system. The Fed wants to encourage the private sector to take a more forceful role in the effort, but it's also wary about being seen as overstepping its bounds.
During a conference call with reporters Monday, Fed staffers said that they see the new report as representing an increase in the Fed's role as a leader or catalyst for change. But at the same time, they said that the Fed will not step in and build its own new payment service unless the private sector cannot meet the need, and certain other criteria are met.
Fed officials pushed back against the idea that there is a lack of urgency in the U.S. payment industry about developing a faster system. They noted that The Clearing House, a group that is owned by many of the nation's largest banks, laid out its own vision for building a faster payment system late last year.
These officials also said that inside the Fed system, there is a strong sense of urgency on the issue of payment speed.

www.google.com/+EricAu118

The Cryptocurrency that Dare Not Speak Its Name

by MARC HOCHSTEIN

JAN 26, 2015 1:30pm ET  

www.google.com/+EricAu118

The Federal Reserve appears to have looked at Bitcoin as a potential set of rails for real-time payments in the banking system but shelved the concept for now.
The agency's white paper on improving the payments system, released Monday, coins a new euphemism for Internet cryptocurrencies (of which Bitcoin is by far the best known): "Digital Value Transfer Vehicles." These are defined as "decentralized digital stores of value that can be exchanged."
One such transfer vehicle, which goes unnamed in the paper, "was not considered a sufficiently mature technology at this time, but was identified for further exploration and monitoring given significant interest in the marketplace," the Fed said. Of the hundreds of cryptocurrencies that have sprouted up in the last few years, we're pretty sure the Fed is not referring to HoboNickels or PhilosopherStone.
However, the white paper acknowledges similarities between the Cryptocurrency That Dare Not Speak Its Name and one of the design options that the Fed deemed worthy of closer consideration.
Like Bitcoin, this option would take advantage of the distributed architecture of the Internet to facilitate direct messaging between parties at a lower cost than a hub-and-spoke model would. Distributed networks, first envisioned by the computer scientist Paul Baran in a 1964 paper, are "the ultimate form of decentralization," write Wall Street Journal reporters Paul Vigna and Michael J. Casey in their forthcoming book "The Age of Cryptocurrency." "No single entity anywhere has control over the system, which means it has no vulnerable point of attack."
Unlike Bitcoin, however, the parties in the Fed's Option 2 would be financial institutions, not individual users (and the Fed notably uses the term "point-to-point" instead of "peer-to-peer"). And very much unlike Bitcoin, which relies on a distributed public ledger known as the blockchain, Option 2 calls for a central ledger and a central authority to set the rules.
During a conference call with reporters Monday, Fed staffers were asked why the paper made no mention of Bitcoin. They responded by saying that they plan to monitor developments with digital currency, and that later, as those technologies mature, regulators will possibly have a different strategy.
It's understandable why the Fed might be reticent to wholeheartedly embrace Bitcoin's distributed model, and not only because of the currency's association with black markets. As Vigna and Casey write,

Without a CEO in charge of the currency or anyone to subpoena, how do you control the bitcoin economy? The law is designed to deal with centralized institutions in which identifiable managers are deemed responsible for an organization's conduct.

More on the Fed's white paper here.

Marc Hochstein is the editor in chief of American Banker. The views expressed are his own. He owns some bitcoins, but he owns a lot more U.S. dollars.

Bank prime rate cuts fail to match Bank of Canada reduction

www.google.com/+EricAu118

28 Jan7:27 AM

[TORONTO] Canada's six biggest banks cut their prime lending rates 15 basis points to 2.85 per cent, failing to fully match a rate reduction by the nation's central bank six days earlier.

Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and National Bank of Canada made the first change to their prime rates, which sets borrowing levels on everything from variable mortgages to credit lines, since September 2010, according to data compiled by Bloomberg.

The Bank of Canada reduced its trend-setting overnight lending rate 25 basis points to 0.75 per cent on January 21, saying a plunge in oil prices would reduce growth and inflation. The commercial banks typically move prime rates in tandem with the central bank though a slide in market interest rates has raised concerns about margin erosion.

"People were up in arms about the banks not cutting prime rate and the banks saw this as an opportunity to retain margin and threw us a bone," Robert McLister, who has a mortgage brokerage and runs rate search engine RateSpy.com "On mortgage books that are in the tens of billions, that 10 basis points adds up." Wide Margin There have been exceptions to the general rule of banks following the Bank of Canada. In December 2008, the Bank of Canada cut its overnight rate 75 basis points to 1.5 per cent while the six large lenders cut their prime 50 basis points to 3.5 per cent, creating a 2 percentage point margin between the two rates.

If today's gap of 2.1 percentage point persists it would be the highest on a consistent basis since the Bank of Canada started shifting to the overnight rate as its target in 1994, according to Bloomberg data.

"We believe our announcement is a balanced approach which reflects our actual cost of funds and helps clients save money on products such as variable-rate mortgages, lines of credit and floating-rate loans," Wojtek Dabrowski, a spokesman for Royal Bank, said in an e-mailed statement.

"Financial institutions set their prime rates based on a number of factors, including the cost of short-term funds and competitive pressures, Louise Egan, a Bank of Canada spokeswoman, said in an e-mailed statement. ''It is up to the management of these institutions to decide what to charge their customers.'' The prime rate cuts will telegraph a message to consumers that borrowing costs are lower and they can borrow more, John Clinkard, chief economist at Deutsche Bank Canada, said by phone from Toronto. From the Bank of Canada ''this was the message: to increase the stimulus in the system. The fact that the banks also lowered mortgage rates will be positive for housing.''

BLOOMBERG

      

" "

MORE

• Harper backs Bank of Canada rate cut; no fiscal stimulus planned
• Canada rate cut clearly driven by oil price drop: finance minister
• Canadian dollar at almost 6-year low as BOC cuts interest rates
• Bank of Canada makes shock rate cut due to oil, slashes forecast