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• Governor Christopher J. Waller discussed the potential and challenges of interlinking fast payment systems at the Global Fintech Fest.
• Interlinking could enhance global payments by making them faster and cheaper, but not all parties involved in transactions want faster payments.
• Waller highlighted legal, compliance, and operational challenges that come with interlinking, including ensuring compliance with different jurisdictions' regulations.
• The interlinking of fast payment systems holds potential for enhancing global payments, but requires addressing a range of challenges.

In a recent address at the Global Fintech Fest in Mumbai, India, Governor Christopher J. Waller of the Federal Reserve Board discussed the potential and challenges of interlinking fast payment systems. His remarks come at a time when the global financial community is increasingly focusing on enhancing cross-border payments. The G20, for instance, has outlined a roadmap for making cross-border payments more cost-effective and timely for consumers and businesses. One of the key strategies identified in this roadmap is the interlinking of fast payment systems.

Fast payment systems, which have been established in over 70 countries, have revolutionized domestic transactions by enabling instant payments. The idea of interlinking these systems is to extend this efficiency to cross-border payments. Interlinking would allow banks in different countries to send payments to each other through technical connections between their respective domestic systems. This could potentially enhance global payments by making them faster and cheaper.

However, Governor Waller raised several concerns about this approach. He pointed out that not all parties involved in cross-border transactions necessarily want faster payments. For instance, while sellers would prefer to receive their money as quickly as possible, buyers or their intermediaries might prefer to delay payment. This raises questions about how to properly incentivize all parties to use faster systems.

Legal, Compliance, and Operational Challenges

Moreover, Waller highlighted the legal, compliance, and operational challenges that come with interlinking. These include ensuring that interconnected systems comply with different jurisdictions' regulations, managing technical connections and data sharing across borders, establishing clear oversight and management frameworks for international payment networks, and protecting personal and financial data as it crosses borders. He also noted the need for efficient and secure mechanisms to settle transactions between different countries' systems.

Waller's remarks reflect the Federal Reserve's cautious approach to interlinking. While the Fed has been working on enhancing its own domestic infrastructure through the FedNow Service, it is wary of directly linking these systems without first addressing the aforementioned challenges. FedNow, which provides real-time payment capabilities, has seen widespread adoption in the U.S., with close to 1,000 depository institutions on the network. However, Waller emphasized that the Fed's focus in the near to mid-term is on building the FedNow network domestically and increasing participation in the service.

Global Trend Towards Financial Innovation

The discussion on interlinking fast payment systems is part of a broader global trend towards financial innovation and digitization. As technology continues to evolve, it is likely that we will see more efforts to enhance the efficiency and speed of cross-border payments. However, as Waller's remarks highlight, this is a complex task that requires careful planning and collaboration among central banks, regulatory bodies, and private sector participants. It also requires a delicate balance between advancing innovation and managing risks.

The interlinking of fast payment systems holds significant potential for enhancing global payments. However, realizing this potential requires addressing a range of legal, compliance, operational, and incentive-related challenges. As the global financial community continues to explore this possibility, it will be crucial to learn from past experiences, engage in robust dialogue, and develop comprehensive strategies that balance innovation with risk management. The future of global payments may well hinge on how effectively these challenges are navigated.