By Katy Burne and Telis Demos

The Federal Reserve on Thursday released a high-level synopsis of its work to identify gaps in the U.S. payments system and potential improvements, marking the latest step in the central bank's two-year project to make the system faster and more secure.

The 62-page report issued this month constitutes part one of a final report that will be issued in June, containing recommendations for the future of payments and assessments of different provider proposals.

Some 19 companies have made a business case for better real-time payment systems, each drawing on different concepts. Some allow for upgrades to existing infrastructure, while others adopt newer technologies.The work is being led by the Federal Reserve Bank of Chicago, assisted by Fed teams in New York, Cleveland, Atlanta, Kansas and San Francisco. Esther George, president of the Federal Reserve Bank of Kansas City, and Federal Reserve Board Governor Jerome Powell are the senior Fed sponsors of the work.

The initiative, begun in 2015, wasn't motivated by a feeling the old systems were creaky, but by the changing nature of end-user expectations over how payment systems work. It also comes at a time of heightened cybersecurity awareness, and concerns over data protection and fraud.

"Protecting payment systems and transactions has become a critical function for central banks, financial institutions and technology providers as sophisticated cyberthreats have increased in size and scale throughout the world," Mr. Powell, who co-chairs the initiative's oversight committee, said in a statement.

The Fed controls a large chunk of the U.S. payments system by virtue of operating systems like Fedwire and check clearing. Its intention isn't to pick winners and losers of the future payments architecture, but to help shape industry discussion and market developments at an early stage, letting the market decide what can be deployed and how.

In 2015, the Fed issued a paper including five desired outcomes for the industry. The 19 submissions up for feedback had to show how they met those five criteria, which included factors on governance, safety and standards. Last October, the Fed invited industry comments by a Nov. 8 deadline and its assessments and recommendations for next steps will appear in the June final report.

The central bank's work is divided into two task forces, one for speed and one for security of payments. But compiling a final road map may be challenging: there are hundreds of participants with disparate views across the two panels, drawing from government, retailers, financial institutions, industry and consumer groups.

"The Fed's priority is to advance improvements that are in the public interest so that consumers and businesses alike have access to efficient, real-time and highly secure payments," said Ms. George of the Kansas City Fed.

A range of industry payments providers are working with the Fed on the initiative. The Clearing House, an industry group and payments operator owned by U.S. banks, has submitted a proposal for an instant payments system, it said previously.

The Clearing House also is working with International Business Machines Corp. and VocaLink, a technology company recently acquired by MasterCard Inc. that built the U.K.'s faster-payment network. A pilot of the Clearing House's new system is slated to launch later this year.

"We think it's important that the whole country get behind the need for faster payments," said Steve Ledford, senior vice presidentat the Clearing House. "We want to get individuals and companies using this quickly."

Startups also are trying to get in on the act. In the current system, where money moves primarily via the Automated Clearing House, or card networks like Visa Inc. and MasterCard, non-banks offering new services don't play a direct role in facilitating payments. Their aim is ultimately to be able to have direct access to the payment system.

One small firm, Dwolla Inc., which offers software to help companies make and take payments directly from banks, also has said it submitted a proposal to the Fed. Jordan Lampe, head of policy affairs at the company, said his hope is that Fed can lead the industry to "build a system more fair and open than the previous systems, which were created behind closed doors."

Write to Katy Burne at katy.burne@wsj.com and Telis Demos at telis.demos@wsj.com

(END) Dow Jones Newswires

January 26, 2017 18:18 ET (23:18 GMT)

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