Can existing payment networks meet future needs? A conference summary

Chicago Fed Letter, Oct 2003 by Chakravorti, Sujit, Ciesielski, Thomas, Clark, Carol, Davis, Erin

In his presentation, Norman Litell, vice president, Visa U.S.A., Inc., stressed that innovations in payment systems do not always come from technological change-they can also be the result of changes in the soft infrastructure, such as rules. For example, Visa Commerce addresses businesses' payment needs by allowing payments to be scheduled and negotiated between the parties, rather than processed immediately. Litell identified some of the challenges and opportunities associated with being a global organization like Visa. Products often need to be customized between and within countries to adapt to consumer preferences and various regulations, while maintaining compatibility across market segments and jurisdictions. However, this diversity does allow Visa to accumulate and transfer expertise with different products to new environments.

Federal Reserve role in payments

Gary Stern, president and chief executive officer, Federal Reserve Bank of Minneapolis, and chair of the Federal Reserve System's Financial Services Policy Committee, emphasized that the Fed "should not provide new payment services unless markets are failing and the Fed has a unique competitive advantage." He also stressed the difficulty the Fed faces in responding to changes in the demand for existing and future services. He suggested a new principle to guide these decisions, that the Fed "should ensure that the size, reliability, and capabilities of its basic retail infrastructure supporting established services correspond to market demand." However, he acknowledged that forecasting market demand is a difficult task.

Jeff Marquardt, associate director, Board of Governors of the Federal Reserve System, shared the results of the Payments System Development Committee's study on the future of clearing and settlement. The study was based on interviews with 49 organizations regarding the barriers to innovation in the payment mechanism. While no single, consistent recommendation emerged from the survey, the interviewees emphasized that technical innovation alone is not enough-new services must provide significant benefits for key participants. Interview participants also voiced their concern over the lack of a mechanism for Internet payments that combines reasonable cost, security, and reliability.

Conclusion

In his concluding remarks, Sujit Chakravorti, senior economist, Federal Reserve Bank of Chicago, noted that most participants thought that networks can meet future needs, but that significant opportunities exist for financial institutions, merchants, payment processors, and networks to improve upon today's payment mechanisms. Many networks are expanding from their core market segments. For example, online and point-of-sale merchants are considering ACH payments that were primarily developed for recurring payments.

Payment innovations may take longer to adopt than innovations in other industries because of the need to balance the interests of multiple agents-consumers, merchants, financial institutions, and networks. In addition, payment providers must often operate both legacy and new systems side by side, increasing costs in the short run.