In a recent address at the Global Fintech Fest in Mumbai, Federal Reserve Governor Christopher Waller raised critical concerns about the potential risks associated with rapidly linking faster payment systems across borders.
While faster payments are increasingly favoured globally, Waller emphasised that rushing into cross-border connections could heighten risks like fraud and money laundering.
The US, which recently launched its FedNow real-time payment system, has been slow to adopt such innovations compared to countries like India and Brazil.
Despite the global push for quicker and cheaper payment solutions, Waller urged caution, pointing out that interlinking national systems could involve significant trade-offs.
“I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals,” he said. “There is no silver bullet that increases speed and efficiency without trade-offs.”
Some friction is good
Waller underscored the importance of “friction” in the payment process – a concept often viewed negatively in commercial transactions.
He argued that certain frictions are intentionally built into global payment systems to manage risks like fraud and money laundering effectively.
These measures, while slowing down payments, are vital for compliance and risk management, ensuring the safety of cross-border transactions.
The Fed has already signed up nearly 1,000 depository institutions to the FedNow network, with a goal of attracting around 8,000 of the nearly 10,000 banks and credit unions in the US.
However, Waller noted that the central bank’s immediate focus remains on increasing domestic participation in FedNow rather than rushing into cross-border integrations.
The potential for a faster link between the US, Europe, and Canada remains on the table, but Waller emphasised the need for a careful assessment of the costs and benefits.
He recalled a previous attempt at such a connection through an ACH system that was ultimately discontinued due to lack of use. Any future endeavors, he suggested, would proceed cautiously, with a strong emphasis on ensuring security and efficiency.
Waller’s comments also highlighted the G20’s goals for speeding up global payments, particularly to benefit migrant workers sending remittances.
However, he noted that remittances make up only a small percentage of cross-border payments by value, suggesting that the broader implications of faster payments require careful consideration.
Waller’s remarks serve as a reminder that while innovation in payment systems is essential, it must be balanced with robust risk management and a clear understanding of potential trade-offs.
As the Fed continues to develop and expand FedNow, the focus will be on ensuring that any move towards cross-border payment integration is carefully considered, keeping the global financial system secure and stable.
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