I ’ve just returned from the Federal Reserve’s inaugural FedPayments Improvement Community Forum in Chicago, and the impact of announcements made there are starting to sink in; the importance of next steps in the development of faster payments in the U.S. is now the focus. The most intriguing announcement as articulated in a press release from the Federal Reserve was this:
The Federal Reserve Board on Wednesday invited public comment on actions the Federal Reserve could take to support faster payments in the United States. The potential actions, which would facilitate real-time interbank settlement of faster payments, build on collaborative work with the payment industry through the Federal Reserve System’s Strategies for Improving the U.S. Payment System (SIPS) initiative.
Faster payment services are valued for the conveniences they provide, such as the ability to pay another individual on-the-spot using a mobile phone application. They also provide consumers, households, and businesses more flexibility in managing their money because faster payments can be sent and received at any time, on any day.
Views are being sought on two potential actions that may support the further development of faster payments in the United States while increasing the resiliency and security of services offered to the public: 1) the development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year (24x7x365); and 2) the creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks. The Board is not committing to any specific action and is seeking input on which, if any, actions the Federal Reserve should take.
Upon reading that statement or even hearing the announcement in person, you might think that the Fed is proposing to provide the mechanics to swap funds from one financial institution to another in support of real-time transactions, and also provide the capabilities to assist for purposes of real-time payment settlement financial institutions in managing balances in their account at the Fed. The Fed referred to the service they are proposing as a Real Time Gross Settlement or RTGS system, which confused the audience further since to most industry participants, this nothng but the Fedwire system.
What is being sought is the banking community’s interest in having the Fed as a point of interbank settlement; but also on the table is is at least an inkling that the Fed also provide a real-time payments platform to compete with The Clearing House (TCH) RTP solution.
Now that is interesting. And surprising to many.
The idea of the Fed playing a more significant role in real-time payments had been a point of discussion within the Faster Payments Task Force, according to some who participated. Mid-sized and small banks who are not owners of The Clearing House are particularly interested in pursuing this line of thought. Currently, TCH is the U.S. real-time solution, and some institutions would like to see more options and a competitive environment.
For non-owner banks and credit unions, having TCH as the sole provider of 24X7X365 real-time payments (at least for the foreseeable future) feels a bit like what happened with P2P payments in the U.S. Legacy P2P solutions are beginning to collapse into Zelle, offered by Early Warning Systems (EWS), which is also a bank-owned provider. Non-owner banks are put in the position of paying for Zelle transactions, which enriches their large bank competitors. Having TCH as the only real-time payments option creates a similar business model.
The next question to consider is if the Fed’s line of inquiry matters at this point of real-time payments’ development. If the Fed pursues the role of faster payment operator based on the direction and feedback they receive from the industry, they are several years from launching a service. TCH has eight of the largest banks live on their system already. Several other financial institutions are far along in their efforts to integrate with TCH; collectively they would represent the majority of accounts in the U.S. Other organizations including the large processors are already developing product overlays and services like fraud detection capabilities based on the TCH model. Would the Fed’s entry bifurcate the country’s faster payments business, creating a two-tier, large vs. small institution system?
While there may be more questions than answers at this point, what is clear is that the introduction of a new real-time payment option will slow the decision-making process for many financial institutions as they wait to understand what the Fed’s next move will be. Adoption in the U.S. is already anticipated to be slow due to other near real-time solution options such as same-day ACH, the card networks’ push payments and Early Warning’s Zelle solution offering competing products to real-time.
The other apparent message is that those who have an opinion or a stake in the direction of this part of the payments industry should comment on the Federal Reserve’s proposal by Dec. 14. That can be found here.