December 24, 2013 To: Financial Services Policy Committee of the Conference of Presidents Federal Reserve System Re: Response to Federal Reserve s Payment System Improvement - Public Consultation Paper Dovetail is pleased to comment on The Federal Reserve Bank s Payment System Improvement Public Consultation Paper in which the Federal Reserve Banks seek input on its perspective of gaps, opportunities and desired outcomes for the U.S. retail payments system. Dovetail commends The Federal Reserve for initiating this dialogue among industry stakeholders to drive payment system improvement. This is an important first step in developing a payments roadmap for the U.S. retail payment systems. Responses to Questions General Q1. Are you in general agreement with the payment system gaps and opportunities identified above? Please explain, if desired. i. What other gaps or opportunities not mentioned in the paper could be addressed to make improvements to the U.S. payment system? Dovetail is in general agreement with the gaps and opportunities identified in the paper. We feel there are two areas though that were not addressed that need to be considered. An opportunity to be evaluated is linking the ATM networks with the ACH network. This will provide an opportunity to leverage the best qualities of both networks to provide a solution. Another area was regulatory changes and implications for any potential impacts to the retail payment system. Q2. Are you in general agreement with the desired outcomes for payment system improvements over the next 10 years? Please explain, if desired. i. What other outcomes should be pursued? Dovetail is in general agreement with the desired outcomes for payment system improvements over the next 10 years. There are a number of initiatives in the current environment that are working toward achieving the second Desired Outcome but they are fragmented approaches. As part of the fourth Desired Outcome, U.S. IBANs need to be considered as part of any solution geared at efficient and timely cross-border payments. Q3. In what ways should the Federal Reserve Banks help improve the payment system as an operator, leader, and/or catalyst?
Dovetail strongly believes that The Federal Reserve Banks needs to act as a leader. The absence of leadership has the potential for chaos with every stakeholder going in different directions and having a very fragmented retail payments system. Ubiquitous near-real-time payments Q4. In discussions with industry participants, some have stated that implementing a system for near-realtime payments with the features described in the second desired outcome (ubiquitous participation; sender doesn t need to know the bank account number of the recipient; confirmation of good funds is made at the initiation of the payment; sender and receiver receive timely notification that the payment has been made; funds debited from the payer and made available in near real time to the payee) will require coordinated action by a public authority or industry group. Others have stated that current payment services are evolving toward this outcome and no special action by a public authority or industry group is required. i. Which of these perspectives is more accurate, and why? ii. What other perspective(s) should be considered? Industry participants have articulated two perspectives on how to achieve the outcomes identified in the Paper. Dovetail believes that some aspects of both of these perspectives are accurate and needed in order to reach the proposed outcome. The history of the U.S. payment system shows this to be true. As the needs of the payments systems evolved, industry stakeholders joined together to drive the needed changes in a coordinated way to allow for strong core payment systems from CHIPS, to ACH and to Image Exchange. An industry group or public authority is needed to drive the underlying structure of a solution in order to have it be ubiquitous, but the evolution and market needs will drive the products and services that will use that new system. Q5. The second desired outcome articulates features that are desirable for a near-real-time payments system. They include: a. Ubiquitous participation b. Sender doesn t need to know the bank account number of the recipient c. Confirmation of good funds is made at the initiation of the payment d. Sender and receiver receive timely notification that the payment has been made e. Funds debited from the payer and made available in near-real time to the payee i. Do you agree that these are important features of a U.S. near-real-time system? Please explain, if desired. ii. What other characteristics Dovetail believes that the described features articulated above are needed for a payments system to meet the needs of customers for the future. Banks in the U.S. today have access to ubiquitous payments systems; they should have the ability to ensure that good funds are available at the time of payment initiation. The major weaknesses are in part real-time delivery and payment posting. While knowing the bank account information of the receiver is a barrier it would be a nice feature to be able to pay by a more well-known number for the payment recipient such as mobile number or other identifier. 2
Q6. Near-real-time payments with the features described in the second desired outcome could be provided several different ways, including but not limited to: a. Creating a separate wire transfer-like system for near-real-time payments that leverages the relevant processes, features, and infrastructure already established for existing wire transfer systems. This option may require a new front-end mechanism or new rules that would provide near-real-time confirmation of good funds and timely notification of payments to end users and their financial institutions. b. Linking together existing limited-participation networks so that a sender in one network could make a payment to a receiver in another network seamlessly. This option may require common standards and rules and a centralized directory for routing payments across networks. c. Modifying the ACH to speed up settlement. This option may require a new front-end mechanism or new network rules that would provide near-real-time confirmation of good funds and timely notification of payments to end users and their financial institutions. Payments would be settled periodically during the day. d. Enhancing the debit card networks to enable ubiquitous near-real-time payments. e. Implementing an entirely new payment system with the features described in the second desired outcome above. i. What would be the most effective way for the U.S. payment system to deliver ubiquitous near-real-time payments, including options that are not listed above? ii. What are the likely pros and cons or costs and benefits of each option? What rule or regulation changes are needed to implement faster payments within existing payment processing channels? iii. Is it sufficient for a solution to be limited to near-real-time authorization and confirmation that good funds are on their way, or must end-user funds availability and/or interbank settlement take place in near-real time as well? iv. Which payment scenarios are most and least suitable for near real-time payments? (B2B, P2P, P2B, POS, etc.) Dovetail believes that the most effective way for the U.S. Payment system to deliver ubiquitous near-real-time payments including options that are not listed above would be to expand the existing options or combine several of the options: a. Linking existing limited participation networks could get more coverage than today but will not solve the ubiquitous aspect of the second desired outcome. b. Modifying ACH settlement will not accomplish any of the goals described in the second desired outcome, we are not sure why the settlement issue is getting bundled into a potential solution. The ATM and debit card networks do not settle immediately, in fact they settle through the ACH but people walk away with money, goods and services and there is no discussion about speeding up settlement. The ACH could be modified to include a new transaction type for realtime transfer either as a single payment or a real-time payment batch that would be processed 3
and delivered in real-time. Banks would need to be able to receive these payments in real-time requiring different communications interfaces for smaller banks and bank systems would need to be modified to accept these real time payments and be able to at least memo-post the transactions. The notification systems are already in place that can advise the payment recipient that the payment has been posted to the account. c. Using the debit card networks alone or with one of the other payment systems could be a viable option. d. Creating new payments systems from scratch will be extremely expensive and take many years to develop. e. Another option might be to develop enhancements to the existing wire transfer systems to implement a lower-cost transaction type that would have all of the real time capabilities that exist today without the real time settlement and finality of payment. f. End-user funds availability is a must, interbank settlement is not. g. All payment types should be eligible for near real-time payments though we felt that POS transactions currently have a number of existing options today to do this. Q7. Some industry participants have said that efforts to make check payments easier to use, such as by enabling fully electronic payment orders and/or by speeding up electronic check return information, will incrementally benefit the payment system. Others argue the resources needed to implement these efforts will delay a shift to near-real-time payments, which will ultimately be more beneficial to the payment system. Which of these perspectives do you agree with, and why? Dovetail believes that no additional resources should be spent on the current check collection system. The industry should encourage and provide education to move consumers and businesses away from checks. All efforts should be focused on how to solve the near-real-time payments issues rather than focusing on check. Q8. How will near-real-time payments affect fraud issues that exist with today s payment systems, if at all? i. Will near-real-time payments create new fraud risks? If yes, please elaborate on those risks. Dovetail does not believe that near-real-time payments will increase or create new fraud risks. A credit-push model is less susceptible to fraud then debit-pull models and incorporating a verification process into enrollment would also provide better tools for financial institutions. The use of sophisticated fraud prevention and detection tools will ensure that the electronic payment environment is secure. Q9. To what extent would a ubiquitous near-real-time system bring about pivotal change to mobile payments? 4
Dovetail believes that mobile payments are just another payment channel. The expectation when using mobile devices that transactions occur in near-real-time payments should be no different. Near-realtime payments should be able to be initiated from the Internet (on-line banking), mobile phones, tablets or other devices. Q10. What would be the implication if the industry and/or the Federal Reserve Banks do not take any action to implement faster payments? i. What is the cost, including the opportunity cost, of not implementing faster payments in the United States? Dovetail believes that if the industry or the Federal Reserve Banks do not take any action to implement a near-real-time payment system, that we will continue down the fragmented road we are on and the U.S. will not have an efficient retail payments system. Q11. To what extent will the industry need to modernize core processing and other backend systems to support near-real-time payments? i. What is the likely timeframe for any such modernization? Financial institutions will need to modernize core processing and other backend systems. But many are either currently implementing or evaluating modernization strategies because they understand that their current environments will not allow them the ability to easily adapt to any future changes needed for them to be competitive. The changes can be for a new or modified payment system or from providers of new services. Q12. Some industry participants suggest that a new, centralized directory containing account numbers and routing information for businesses and/or consumers, to which every bank and other service providers are linked, will enable more electronic payments. A sender using this directory would not need to know the account or routing information of the receiver. i. What are the merits and drawbacks of this suggestion? ii. What is the feasibility of this suggestion? Dovetail does believe there are merits for this suggestion, the ability to pay someone without knowing their account number would help facilitate electronic payments. However, the database must be accurate and up to date at all times and needs to be maintained by payment system operators and not stand alone organizations. The Clearing House currently has a similar solution in operation today UPICs (Universal Payment Identification Codes) for organizations. The UPIC is being used by many corporates, government agencies and municipalities for ACH payments. The drawback of UPICs is that it has not been adopted for the wire transfer systems which results in companies having to provide two payment instructions. This infrastructure could be used and expanded to included consumer information linked to 5
an email, a mobile number or even a PAN. Since this type of solution is already in practice it is feasible to implement. Electronification Q13. Some industry participants say that check use is an enduring part of the U.S. payment system and that moving away from checks more aggressively would be too disruptive for certain end users. i. Is accelerated migration from checks to electronic payment methods a high-priority desired outcome for the U.S. payment system? (Accelerated means faster than the current trend of gradual migration.) ii. Please explain, if desired. iii. If yes, should the Federal Reserve Banks establish a target for the percent of noncash payments to be initiated via electronic means, by a specific date? For example: By the year 2018, 95% of all noncash payments will be made via electronic means. iv. What is the appropriate target level and date? Dovetail believes that an accelerated migration from checks to electronic payment methods should be a priority. The younger generation has limited or no use for paying by check, but many segments still tote reasons why they need to have checks. Each segment of significant check writing should be analyzed and a plan should be developed for each segment to reduce or eliminate that segment. Target levels and dates should be developed for each segment, to attempt to set a target and date for check writing reduction for the checks in general is just a guess and will not be accomplished without a specific plan. Q14. Business-to-business payments have remained largely paper-based due to difficulties with handling remittance information. Consumer bill payments also are heavily paper-based due to the lack of comfort some consumers have with electronic alternatives. In addition, many small businesses have not adopted ACH for recurring payments due to technical challenges and/or cost constraints. The payment industry has multiple efforts underway to address these issues. i. To what extent are these efforts resulting in migration from checks to other payment types? ii. What other barriers need to be addressed to accelerate migration of these payments? iii. What other tactics, including incentives, will effectively persuade businesses and consumers to migrate to electronic payments? iv. Which industry bodies should be responsible for developing and /or implementing these tactics? This question focuses more directly on the segments that have still not moved to electronic payments which we referenced in our response to Q13. As indicated above, Dovetail believes that a targeted plan needs to be developed for each segment specified in Q14. The plan would include an evaluation of what is currently underway and how effective it has or has not been. Today the different payment system governing bodies have their own parochial interests and the Federal Reserve Banks would be the best organization to lead the way for a coordinated U.S. strategy. 6
Cross-Border Payments Q15. To what extent would the broader adoption of the XML-based ISO 20022 payment message standards in the United States facilitate electronification of business payments and/or cross-border payments? Dovetail does not believe that the broader adoption of XML-based ISO 20022 payment message standards in the U.S. would have much impact on domestic business payments electronification, but we strongly believe it would have a big impact on consumer and business cross-border payments as long as it is implemented with the ability to allow for full remittance information (payment related information) to be carried with the payment not limited as it is in SEPA implementation or as it is in the current IAT transaction. Q16. What strategies and tactics do you think will help move the industry toward desired outcome four consumers and businesses have greater choice in making convenient, cost-effective, and timely cross-border payments? IBAN. Dovetail believes that the U.S. needs to adopt industry standards such as the ISO standard and Safety Q17. Payment security encompasses a broad range of issues including authentication of the parties involved in the transaction, the security of payment databases, the security of software and devices used by end users to access payment systems, and security of the infrastructure carrying payment messages. i. Among the issues listed above, or others, what are the key threats to payment system security today and in the future? ii. Which of these threats are not adequately being addressed? iii. What operational or technology changes could be implemented to further mitigate cyber threats? Dovetail believes that all the issues listed above are important and need to be addressed in any payment system old or new. Data breaches are one of the biggest concerns and could have the most significant negative impact on electronic payments. Encryption at rest should be a change that is required for all payment related data. Q18. What type of information on threat awareness and incident response activities would be useful for the industry? i. How should the information be made available? 7
Dovetail believes a service similar to what is provided by FS/ISAC for institutions of all sizes. Currently FS/ISAC is a membership organization and the majority of participants are large organizations. This type of information needs to be shared with all stakeholders and in some cases especially smaller organizations that may not have some of the sophisticated tools or staff resources to keep up with all types of threats. Q19. What future payment standards would materially improve payment security? i. What are the obstacles to the adoption of security-related payment standards? Dovetail believes that a layered security approach should be required for financial institutions. A specific security standard cannot be required because of the different types of stakeholders, but best practices or recommendations should be provided. Each bank will need to evaluate its security and how best to meet the changing demands. Q20. What collaborative actions should the Federal Reserve Banks take with the industry to promote the security of the payment system from end-to-end? Dovetail believes that the Federal Reserve Banks can plan a collaborative role on sharing the different threats to the industry, providing training and educational seminars on how to combat the threats and providing best practice recommendations. Q21. Please share any additional perspectives on U.S. payment system improvements. 8