US Fed flags concerns over domestic payment system linkage to global networks for instant payments

US Fed has expressed its concerns over expanding fast payment systems, especially those interlinking with international systems for making payments at the global level. Christopher J Waller, a member of the Federal Reserve Board of Governors of the US, on Wednesday said that the interlinking of payment systems could lead to legal complications that can increase the compliance for the banks in the network. 

Speaking at Global Fintech Fest in Mumbai, Waller said: “There is no silver bullet that increases speed and efficiency without trade-offs. Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks participating in them.”

Expanding on the topic of interlinking fast payment systems, the concept is widely recognised as a strategic approach to improve global cross-border payments and minimise expenses. However, Waller noted connecting these systems may introduce a heightened level of risk management responsibilities for banks that are involved in the process.

“Today’s consumers and businesses can generally send a payment anywhere in the world, but they all seem to want faster and cheaper global payments, just like we always want faster flights and cheaper airfares. However, I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals...not all frictions that slow payments down are bad. Certain frictions are purposely built into the global payment system for compliance and risk-management reasons,” he said.

He added: “Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments,” he added.

India's Unified Payments Interface (UPI) is a real-time payment system that enables users to transfer money instantly across different bank accounts without disclosing sensitive bank account information to the recipient.

In recent years, several countries have adopted UPI apps as a means of accepting payments, showcasing the widespread acceptance and growing popularity of this fast and secure payment method globally.

In June, the RBI annual report stated that the central bank and NPCI International Payments (NIPL) are planning to extend the UPI to 20 countries by the FY29. According to the RBI Annual Report, efforts will be made to expand the global presence of UPI and RuPay.

Earlier this week, RBI Governor Shaktikanta Das said the UPI system has the potential to evolve into a cheaper, quicker alternative to available channels of cross-border remittances.

US-India UPI linkage

Waller, on the other hand, said that the US may look at connecting some of its private banks with India's UPI in a bid to accelerate the development of a fast payments network.

Waller mentioned that the US lacks sufficient connectivity among banks to establish a comprehensive fast payments system, primarily due to the stringent risk management and compliance protocols necessary to combat fraud and money laundering. Nevertheless, he suggested that partnering with the UPI could serve as a viable resolution to this issue.

He also lauded India's tech-driven payments revolution, which he attributed to a successful public-private partnership that built a digital payments infrastructure, promoting financial inclusion at a low cost. "I spent 3-4 hours yesterday at the NPCI (National Payments Corporation of India—the founder and manager of UPI), learned a lot about UPI and how it is done," he said at the event.