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Treasury report says space is ripe for emerging tech such as P2P payments and digital wallets

U.S. Treasury Report – Payment Systems

18 July 2019

The Department of the Treasury has released a report "A Financial System That Creates Economic Opportunities - Nonbank Financials, Fintech, and Innovation", which reiterates the Treasury's position that innovation is critical to the success of the U.S. economy, particularly in the financial sector. The report surveys a wide range of activities and provides specific recommendations for regulatory reform. This article summarises the Report's review of the U.S. payments system ans the opportunities for innovation.

The Report notes that there is a growing consumer demand for a more efficient, secure and seamless payments system, which has attracted a number of industry disruptors comprising largely of nonbank institutions. While recognizing the contribution such firms have made in revolutionizing the front-end customer experience, the Report acknowledges that the operationally complex nature of the U.S. payments system and fragmented regulation remain significant barriers for new entrants and further innovation. The Report elaborates on these challenges in the context of money transmitters, person-to-person payments and digital wallets, and targets enhancing speed and security of payments transactions as the next important step to modernizing the U.S. payments system.

A significant portion of the Report, particularly in the payments section, is also educational in nature and delves into the mechanics of the various U.S. payment systems and service providers currently in place, differentiating platforms used for large value, wholesale payments between businesses (such as wire transfer services) from platforms used for everyday noncash transactions between individuals (such as credit and debit card networks). The Report also analyzes their uptake among consumers as an indicator of the future growth or demise of the system. Although the Report elsewhere hints at the role distributed ledger technology might play in the future in conducting interbank payments, it does not explore this medium in depth. The Treasury's key findings can be categorized as set out below.

Key Recommendations
Improving regulatory environment for money transmitters

The Report notes that although money transmitters can generally be identified as nonbank firms that transfer or receive funds on behalf of individuals, the variance in state licensing law as to what activities count as money transmission means that firms that are not traditionally considered money transmitters may fall within its remit. Such money transmitters are also subject to requirements imposed by the Bank Secrecy Act and the Financial Crimes Enforcement Network. This puts money transmitters with national aspirations in a difficult position as they grapple with divergent standards and reporting requirements both between states and between the state and federal level, which impacts on their ability to compete with banking counterparts offering the same services. The Treasury advocates state harmonization in this sector as part of its wider bid to modernize regulatory frameworks. The Treasury also supports the Consumer Financial Protection Bureau's efforts to reassess onerous remittance disclosures currently imposed by Regulation E, and in particular recommends improving flexibility in the disclosure rules and reducing the current threshold which allows companies to qualify for the de minimis exemption from applicability of such disclosure rules.

Encouraging use of emerging technology in person-to-person payments and digital wallets

The Report singles out person-to-person (P2P) payments as a product area which has not evolved in the U.S. due to its reliance on core payment systems such as wire transfers and automated clearing houses (ACH), which still rely on the outdated practice of payment receivers supplying sensitive information to senders such as routing and account numbers. The Treasury notes that this space is therefore ripe for innovation and recommends that companies take advantage of emerging technology enabling bank account to bank account transfers using debit card infrastructure and P2P account balance transfers using a company's service platform.

The Treasury also acknowledges the increasing use of digital wallets by consumers which use tokenization to secure payment information, but notes that for the technology to reach ubiquitous status, cards issued by even traditional banks will need to have enrollment capability.

Enhancing speed and security in payment transactions

The Report highlights that the complexity of the U.S. payments system can be attributed to a misalignment of underlying technology: cutting-edge front-end customer-facing software is layered on top of outdated existing payments infrastructure. The Federal Reserve commissioned two working groups, the Faster Payments Task Force (FPTF) and the Secure Payments Task Force (SPTF), to envision private sector solutions to enhance speed and security in the back-end payment process, which were set out in separate strategic papers. To this end the FPTF recently successfully piloted a real-time payments system at The Clearing House and increased the volume of same-day ACH payments. The Report notes however that the real-time payment system is limited to direct participation by depository institutions and payments on both systems are capped at $25,000 per transaction. The SPTF disbanded shortly after producing its findings report. The Treasury therefore encourages the Federal Reserve to (a) take charge of facilitating innovation in the real-time settlement space that is inclusive of smaller financial institutions such as community banks and credit unions and (b) coordinate and drive solutions proposed by the SPTF in its report with relevant stakeholders.


The Treasury's recommendations in the payments system is consistent with the Report's overall theme of increasing support for nonbank institutions and encouraging innovation by loosening the regulatory noose where possible and offering greater certainty. It frequently draws parallels to payment systems around the world that have made significant leaps in establishing real time settlements and conducive licensing regimes for nonbank institutions to shed light on the progress that needs to be made in the U.S. While the Treasury is supportive of the successful self-regulation by the private sector in certain market segments (as in the case of private card networks), it generally tasks the Federal Reserve and the Bureau with reforming existing regulations and ushering in a new era for the U.S. payments system.

Written by Nikhita Suria, Clifford Chance Banking & Finance Group, New York