Fed governor raises doubts about Global Fast Payment Systems

In a surprising twist, Federal Reserve Governor Christopher J. Waller has cast doubt on the effectiveness of interlinking fast payment systems globally, challenging a key initiative of the G20’s cross-border payments improvement roadmap. Speaking at the Global Fintech Fest in Mumbai, India, Waller questioned whether such interconnections would truly deliver on the promises of faster and cheaper international payments.

Waller’s scepticism stems from a nuanced understanding of payment system dynamics and a pragmatic view of the challenges involved in creating seamless global payment networks. His remarks come at a time when over 70 countries have established fast payment systems, and there’s growing interest in connecting these systems to enhance cross-border transactions.

“I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals,” Waller stated, referring to the objectives of faster and cheaper global payments. This statement marks a significant departure from the generally optimistic tone surrounding international financial technology initiatives.

The Fed Governor’s perspective is rooted in several key observations:

1. Not all payment frictions are negative: Waller pointed out that some delays in the payment system serve crucial purposes. “Certain frictions are purposely built into the global payment system for compliance and risk-management reasons,” he explained. These intentional slowdowns help banks prevent money laundering, counter terrorism financing, detect fraud, and recover misdirected payments.
2. Misaligned incentives: Waller highlighted a fundamental economic tension in transactions. “The fundamental friction in any transaction is that the seller of an object… wants to receive their money as fast as possible. However, the buyer of the object, or the buyer’s intermediary, typically has an incentive to wait as long as they can to pay for something they have purchased,” he noted. This misalignment of incentives raises questions about who truly benefits from faster cross-border payments and whether there’s sufficient motivation for all parties to adopt such systems.
3. Private sector innovation: The speech emphasized that private companies are already making strides in improving cross-border payments. Waller cited examples of real-time payment systems for wholesale clients and improvements in traditional banking networks. He suggested that market forces and competition might be sufficient to meet consumer and business demands for more efficient international transactions.
4. Technical and regulatory hurdles: While acknowledging that technological connections between payment systems are feasible, Waller stressed that “legal, compliance, settlement, and governance challenges… are more substantial.” He pointed out that even with technological links in place, payments may not be truly instant due to variations in how different countries implement global standards.
5. Scaling challenges: The Fed Governor expressed doubts about the scalability of bilateral payment system links, noting that “establishing bilateral links across the globe simply will not scale.” While multilateral arrangements might bring efficiencies, Waller cautioned that they are “no small undertaking.”

Waller’s speech also touched on the Federal Reserve’s own experiences with international payment initiatives. He revealed that after more than two decades, the Fed discontinued its direct ACH linkages to Europe and Canada due to lack of use by banks. This historical context adds weight to his cautionary stance on new international payment projects.

The Governor’s remarks come at a crucial time for global fintech initiatives. As countries around the world rush to modernize their payment infrastructures and explore international connections, Waller’s speech serves as a reminder of the complex realities underlying these systems.

For the United States, Waller emphasized that the immediate priority is building out the domestic FedNow network. “Our chief focus in the near-to mid-term, however, is continuing to build the FedNow network domestically and increasing participation in the service,” he stated. This focus on domestic infrastructure before pursuing international links aligns with Waller’s view that valuable global interlinked networks must be founded on robust domestic systems.

Despite his skepticism, Waller did not entirely dismiss the potential of interlinking fast payment systems. He acknowledged the Federal Reserve’s ongoing engagement with international forums to improve cross-border payments and investigate issues critical to interlinking payment systems. However, his speech suggests that such initiatives will be approached with careful consideration of their economic viability and practical challenges.

Waller’s perspective adds a crucial voice to the global conversation on the future of payments. As financial technology continues to evolve rapidly, his call for a measured, evidence-based approach to international payment system development provides a valuable counterpoint to more enthusiastic proponents of global financial integration.

As the fintech world digests Waller’s remarks, it’s clear that the path to truly global, instant payments may be longer and more complex than many have assumed. The coming years will likely see continued debate and careful evaluation of the benefits and risks of interlinking fast payment systems, with Waller’s speech serving as a key reference point in these discussions.

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