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Letter from the CEO: The Fed’s Democratic Approach to Payments is a Better Way (MAG Quarterly- Volume Five, Issue Four)

Mark Horwedel headshot
By Mark Horwedel, CEO, Merchant Advisory Group

December 7, 2017

Several months ago, the Federal Reserve launched two significant efforts to examine the state of U.S. payments relative to faster and secure payments. The two efforts were given the titles of Faster Payment Task Force and Secure Payment Task Force.
As background, U.S. policymakers as well as payments stakeholders outside the banking industry have increasingly criticized U.S. payments for falling behind much of the rest of the world both in terms of slowness as well as in vulnerability to fraudsters. Presumably, the Fed, perhaps realizing that it might receive some of the blame for our dilemma, sought to reassure its potential detractors by conducting a fairly exhaustive study of domestic payments by comparing U.S. payments to those of other countries, as well as examining solutions that would lead to both faster as well as more secure payments for the U.S. 

To the Fed’s credit, it sought involvement and participation from all of the stakeholders in the payment system, including consumer advocates, merchants, governmental agencies, consultants and technologists. It also reached out to the banking industry, financial services trade associations and payment networks, which are primarily responsible for operating our current payment infrastructure and make most of the rules governing participation in U.S. payments.

After many months of fairly intense efforts including countless online meetings, as well as many face-to-face conversations, the Fed released a report on Faster Payments with the MAG casting the sole dissenting vote against the paper’s conclusions. Along with registering our vote, our comments suggested that U.S. payments owed its lack-luster condition primarily to the ineffective and self-serving management of the big banks and their networks with little hope of change unless the Fed would seize the reigns by taking an operational role in developing faster payment solutions for the future. 

As we speak, the Fed’s Secure Payment Task Force rolls on with the expectation that it will soon publish a whitepaper of its own with thoughts and ideas on how to better protect out payments ecosystem from fraud. The paper’s conclusions and precise language are still being hotly contested with merchants and consumer interests squared off against big banks and networks as we head toward the paper’s finish line. Much of the debate revolves around payments “standards” and what constitutes “open standards” and “accredited standards” versus what we term as “payment industry rules, proprietary specifications and closed standards” of the payment industry. The big banks and their networks have historically excluded merchants, consumer interests and virtually all others from the process. 

Regardless of the outcome of the various debates surrounding both faster and secure payments, Fed staff has distinguished itself by successfully taking on the rigorous task of trying to bring all of the stakeholders to the table in order to conduct an inclusive, democratic process leading to more secure, efficient payments. Taming such an extraordinarily diverse group has certainly come with challenges, but it is clear that all of the participants have learned and profited a great deal by the Fed’s leadership through sharing their diverse perspectives. This important work of the task forces begs the question: what will be the future role of the Fed be in helping secure payments in this country. 

We believe the Fed should institutionalize its role in secure payments by acting as an open (and perhaps, accredited) standards body operating within the framework of ISO, the International Standards Organization, to represent U.S. interests in developing standards to mitigate payments fraud. We believe it is time to move away from the present one-sided processes led by the PCI Security Standards Council and EMVco, both of which are governed solely by the networks and the issuers they represent. We continue to have little faith PCI and EMVco will adequately represent the interests of consumers and merchants, while the Fed has demonstrated a willingness and desire to conduct the kind of process needed to develop tools and encourage technologies to help protect against payments fraud.

The MAG appreciates the democratic approach taken by the Federal Reserve Board in which all stakeholders have voting rights and opportunities to participate as peers to big bank interests in the quest to better secure payments for all stakeholders. The Fed’s approach stands in stark contrast to the one-sided and closed efforts of the payments industry in forcing on consumers and merchants their proprietary specifications masquerading as standards.