Daniel Gorfine, Founder & CEO, Gattaca Horizons LLC, is pleased to join J. Christopher Giancarlo and Brian Peters in co-authoring a piece in the Milken Institute Review that makes the case for payments modernization in the U.S.
As noted in the paper, over the past decades, legacy payment systems have seemingly failed to modernize and seamlessly “solve the challenges of consumers and businesses.”
According to the paper, cross-border payment costs remain high, transaction speeds remain slow and “overall adoption of digital technologies remains spotty.”
It is further noted that these challenges persist “despite the U.S. having the deepest capital markets, the best talent, a large consumer base, and the world’s top technology hubs.”
It is time to recognize payments-focused innovators “with modern chartering and licensing frameworks that grant them direct access to national payments systems and allow them to build for the future.”
The paper also mentioned that over the past decades, legacy bank payments systems in the U.S. that “handle trillions of dollars in transactions each day have failed to modernize with an eye to seamlessly solving the challenges of consumers and businesses.”
That’s why, it is asserted in the paper that it’s not surprising, then, that researchers at the Federal Reserve Bank of Richmond concluded the U.S. is lagging behind other countries in “adopting mobile payments innovations,” and researchers affiliated with MIT found that the “U.S. experiences substantial frictions due to legacy infrastructure, market fragmentation, and lack of competition.”
Europe, while lagging the U.S. economy overall, has “produced more successful new payments and related fintech firms.”
The update noted that the failure to date is largely the “result of outdated regulations and policies that have entrenched traditional banking models and locked in legacy money movement systems.”
The paper pointed out that “making money movement more integrated, seamless and programmable would allow businesses to better serve customers and reduce costs.”
Additionally, reducing the singular reliance “on banks that engage in maturity transformation — that is, borrow short and lend long — would reduce risk and increase system resilience.”
The update also stated that while U.S. payments-focused firms have taken strides to solve these problems, “more can be done by recognizing such firms with modern chartering and licensing frameworks — notably by including the option of a federal payments charter that permits direct access to national payments systems.”
The research report added:
“Beyond the challenge of a system that lacks incentives to pursue payments modernization is the downside of exclusive reliance on bank-fintech partnerships. While most such partnerships are well managed and should remain strongly supported, they create operational, resiliency, supervisory and customer-access risks. Many firms are effectively navigating this complexity, but it is not optimal from the perspective of end-users of the payments system for such partnerships to be the only viable path for payments-focused firms.”
Specifically, U.S. payments systems “rely on a small number of banks supporting retail payments at scale.”
Many payments firms work “through bank partnerships to interconnect with these systems. And both regulatory and competitive pressure risks further constricting access to payments services through these partnerships, rendering the payments ecosystem increasingly fragile — not to mention concentrated among a handful of vertically integrated conglomerates.”
The paper further noted that under both Republican and Democratic administrations, the U.S. Treasury has “recommended the establishment of a federal payments framework and harmonization of regulations to protect users, safeguard the financial system and support responsible innovation.”
In a speech before she left office, Treasury Under Secretary for Domestic Finance Nellie Liang highlighted technology-driven changes in payments and proposed a federal payments charter to “promote innovation and fair competition that benefits consumers through a consistent and comprehensive, though calibrated, regulatory framework … [and that] raises the possibility that [payments firms] could get direct access to some public payment rails, like FedNow.”
Trump administration officials have said “much the same in the past.”
In 2018 the Treasury concluded:
“There has been very little relative change to the back-end processes that actually move value throughout the financial system. … Regulation of payments is fragmented; further, the core payment systems exist to move money between financial institutions and their customer accounts and as such, only regulated financial institutions have direct access to the infrastructure. … This fragmented approach to payments governance has perhaps in some ways entrenched legacy systems and slowed down innovations in areas like faster payments.”