By Mike Faden
Currently, only private-sector real-time payment systems exist in the U.S. For B2B payments, experts say the primary existing system is RTP, which launched in late 2017 by The Clearing House (TCH), a payments provider owned by large banks.1
In October 2018, the U.S. Federal Reserve announced that it is considering changing that situation. It published a proposal for two possible new developments:2
Experts say the first option, if implemented, would create a Fed-operated real-time payments system that competes with RTP.3 That represents a change of direction for the Fed, which has previously focused on promoting and supporting efforts to make U.S. real-time payments ubiquitous by 2020, rather than building its own real-time payments infrastructure. But it would mirror the situation with older U.S. payment systems: both the Fed and TCH have operated ACH and wire transfer payment systems for decades, giving banks the option of using either payment infrastructure.
In May 2019, Susan Foley, senior associate director of program direction for the Federal Reserve System, said the Fed expects to make a decision by the end of the year. “As you might imagine, this is a very large decision for us,” Foley said. “We haven’t entered a new payment business in 40 years, and that was the ACH network. It is being taken of the utmost importance by senior policy makers both at the Reserve banks and at the board [of Fed governors].”4
The Fed sought public comments on several aspects of the proposals, including whether the 24/7 RTGS service is the right approach, and whether providing the RTGS or liquidity management tool—or both in combination—would help the Fed achieve its goals of ubiquitous, nationwide access to safe and efficient faster payments.
The Fed said it believes the proposed RTGS could help make payment systems accessible to all banks on an equitable basis and, through them, to the public nationwide. That’s in part because the Fed could take advantage of its existing payment network connections to some 11,000 banks, which represent the vast majority of U.S. banks. In comparison, “it may be difficult for the private sector to create an infrastructure that, on its own, could provide equitable access to enough banks to achieve ubiquity,” according to the proposal. It said a Fed-operated system could also increase the resilience and safety of U.S. payment systems during a financial crisis or natural disaster.
The RTGS proposal generated conflicting responses among the more than 400 replies received by the December 2018 deadline for public comment. Many of the commenters strongly supported the proposal, including smaller community banks and credit unions, while large banks involved in TCH typically opposed the idea.
Among the many commenters urging the Fed to proceed with developing the RTGS were small banks, banking associations, technology companies, retailers, and consumer-advocacy organizations. Many said they are worried that RTP, the existing real-time payments system, is effectively owned and controlled by large banks. As the Community Bankers of Iowa Association put it, “community banks are very concerned that a payments system designed and controlled by the largest banks in the country will not be in the best interest of community banks and their customers.5
Financial Innovation Now (FIN), an alliance of technology companies including Amazon, Apple, Google, and several fintechs, said the Fed should move quickly to implement an RTGS, to ensure real-time payments become ubiquitous. “FIN has advocated for real-time payments to be widely available by 2020. Unfortunately, without action by the Federal Reserve, there is no sign that the marketplace can achieve this milestone, or even by 2025, given that so many institutions of all sizes and charter types are unlikely to participate in the systems already in the marketplace. Only the Federal Reserve can serve as the catalyst to achieve real-time payments ubiquity in a timely manner.”6 Some retailers agreed. “The clearest path to ubiquitous faster payments is an environment with at least two faster payments platform operators, all interoperating with each other,” according to a comment from Walmart.7
Among the smaller number of commenters that opposed the Fed RTGS proposal were some of the large banks that own TCH. Several suggested that the Fed’s consideration of a public-sector network could slow adoption of RTP and hinder progress toward the goal of universal access to real-time payments.8,9 One described the Fed’s proposal as counterproductive, saying banks “may decline to join existing or future developing private sector solutions while they wait for the Federal Reserve’s system.”10
If the Fed does move ahead with developing the RTGS, smaller banks may face considerable work to adapt their internal systems, noted the National Association of Federally-Insured Credit Unions. “Credit unions would need to make programming changes, expand service hours, and potentially adjust staffing levels to appropriately manage liquidity needs during non-standard hours,” the association said.11
Smaller banks also supported the Fed’s liquidity tool proposal—but so did some larger banks, in contrast to their opposition to the RTGS proposal. They said a Fed-backed liquidity tool could let banks move liquidity continuously to facilitate 24-hour, 365-day operation of payment systems, including private-sector systems such as RTP.12,13 With RTP, banks must maintain enough liquidity in a jointly held Fed account to support 24/7 payments by their customers. But because they can only move funds during current Fed operating hours, there are times during nights, weekends, and holidays when banks are unable to top up that account if needed.14
The National Association of Federally-Insured Credit Unions also highlighted the importance of the Fed’s liquidity management proposal: “If the Board does not develop a liquidity management tool, operational costs will likely be higher and prevent many smaller credit unions from accessing a future, RTGS service,” it said.15
For the first time, the Federal Reserve is considering developing and operating a real-time payments system in the U.S. Small banks have responded favorably to the proposal, while large banks were generally opposed. A Fed official has said the agency expects to make a decision about whether and how to proceed by the end of 2019.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “Wait, What Did the Fed Just Say About Real-Time Payments?,” Payments Journal; https://www.paymentsjournal.com/wait-what-did-the-fed-just-say-about-real-time-payments/
2. Potential Federal Reserve Actions To Support Interbank Settlement of Faster Payments, Request for Comments, Federal Reserve System; https://www.federalregister.gov/documents/2018/11/15/2018-24667/potential-federal-reserve-actions-to-support-interbank-settlement-of-faster-payments-request-for
3. “Wait, What Did the Fed Just Say About Real-Time Payments?,” Payments Journal; https://www.paymentsjournal.com/wait-what-did-the-fed-just-say-about-real-time-payments/
4. “The Fed Says an Announcement About Operating a Real-Time Payment System Is a Ways Off,” Digital Transactions; https://www.digitaltransactions.net/the-fed-says-an-announcement-about-operating-a-real-time-payment-system-is-a-ways-off/
5. Response to Federal Reserve proposal, Community Bankers of Iowa Association; https://www.federalreserve.gov/SECRS/2018/December/20181217/OP-1625/OP-1625_121318_133069_355906507769_1.pdf
6. Response to Federal Reserve proposal, Financial Innovation Now; https://www.federalreserve.gov/SECRS/2019/February/20190207/OP-1625/OP-1625_121418_133155_441345478200_1.pdf
7. Response to Federal Reserve proposal, Walmart; https://www.federalreserve.gov/SECRS/2019/February/20190207/OP-1625/OP-1625_121318_133073_507593113601_1.pdf
8. Response to Federal Reserve proposal, Santander Holdings USA, Inc.; https://www.federalreserve.gov/SECRS/2019/February/20190207/OP-1625/OP-1625_122118_133368_639698677722_1.pdf
9. Response to Federal Reserve proposal, HSBC; https://www.federalreserve.gov/SECRS/2019/January/20190128/OP-1625/OP-1625_121418_133279_407018078744_1.pdf
10. Response to Federal Reserve proposal, Capital One Financial Corporation; https://www.federalreserve.gov/SECRS/2019/January/20190128/OP-1625/OP-1625_121418_133280_416371366498_1.pdf
11. Response to Federal Reserve proposal, National Association of Federally-Insured Credit Unions; https://www.federalreserve.gov/SECRS/2019/January/20190128/OP-1625/OP-1625_121418_133282_656940203500_1.pdf
12. Response to Federal Reserve proposal, HSBC; https://www.federalreserve.gov/SECRS/2019/January/20190128/OP-1625/OP-1625_121418_133279_407018078744_1.pdf
13. Response to Federal Reserve proposal, Santander Holdings USA, Inc.; https://www.federalreserve.gov/SECRS/2019/February/20190207/OP-1625/OP-1625_122118_133368_639698677722_1.pdf
14. Response to Federal Reserve proposal, BNY Mellon; https://www.federalreserve.gov/SECRS/2019/February/20190207/OP-1625/OP-1625_121418_133238_352756000024_1.pdf
15. Response to Federal Reserve proposal, National Association of Federally-Insured Credit Unions; https://www.federalreserve.gov/SECRS/2019/January/20190128/OP-1625/OP-1625_121418_133282_656940203500_1.pdf