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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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August 10, 2015

Payments at the Speed of Electricity--What Could Go Wrong?

From mobile phones to the Internet—it's hard to think of many of today's great inventions that aren't beholden to the wonder of electricity and the pace at which it can facilitate the management and movement of data. Electricity has underpinned numerous payment advances already. Now, harnessed current promises to help us build a payments scheme that will make it possible to pay (and be paid) almost as fast as one can conceive of the need. That happy thought might cause us to forget this otherwise widely known truth: electricity is just as efficient in yielding a bad outcome as it is in bringing about a good one.

Those who have begun work to design a faster payment scheme will obviously be thoughtful about everything, from functional design and basic operation to ongoing management of the new system. Giving due consideration to what could go wrong may not be the most glamorous task, but it's necessary.

One way to identify potential problems is to reflect on lessons from the past. Look at the photograph below and see if you know what's depicted.

Source: Wikimedia Commons

If you guessed the photo shows a bank run, congratulations. As most of us know, rapid, heavy cash withdrawals constitute a bank run and can be caused by a variety of things, including diminished confidence in a bank, in the banking system broadly, or the local economy, among other things.

Back to faster payments. A faster payment platform offers many upsides, but for all its promise, it could also offer the unexpected, the unintended. Circa 1929, when the picture was taken, making a run on a bank meant standing in line and waiting for a teller to retrieve your money. Circa 2015, even with ATMs and other improvements, bank runs still have some natural choke points, including weekends, when customers know with certainty that their bank is closed for at least one day, and limits on ATM withdrawal amounts in a 24-hour period. A fast, 24/7, universally accessible system could offer depositors a way to drain cash reserves like never before.

What to do? Setting aside broader systemic actions, it seems reasonable that individual banks consider measures to guard against this possibility. To deal with runs in the "old days," withdrawals were limited or even fully suspended for a time. These mitigations could be efficiently, readily mimicked and become part of the new system's basic construct. Automated tools capping withdrawal amounts might be in order. Logic in the core platform that considers the full range of activity across institutions and accounts and that allows for automated or manual controls (or a combination of these) may also make sense. Tailored rules could prove worthwhile.

The considerations should be fulsome—across not just this, but a range of issues—among those who may design, build, and operate the system and also those who may use it. Meanwhile, here's to anticipating a new system that moves money as fast as electricity allows, insulated from shocks.

Photo of Julius Weyman By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed