Community bankers alarmed after big banks backtrack on faster-payments pricing

Two and a half years ago, the big-bank consortium that was preparing to launch a real-time payment system told the Department of Justice that it would charge the same price to all depository institutions, regardless of their size.

“Put differently, there will be no volume discounts that would benefit larger banks,” a lawyer for The Clearing House wrote in October 2016.

Nearly a year later, the Justice Department cited that assurance when it told The Clearing House that it had no intention to take an antitrust action against the consortium’s real-time payments, or RTP, network.

But last month, The Clearing House added a big caveat to its pledge: Its commitment to charge the same prices to banks of all sizes will now only apply as long as it is the sole U.S. operator of a real-time payment system.

The consortium’s backtracking comes as the Federal Reserve is mulling whether to develop its own real-time payment services, which could compete against the RTP network.

The revised stance has sparked consternation among community bankers who — already suspicious of the big banks’ intentions — want the Fed to launch a competing service. They believe The Clearing House is sending a message to the Fed that the nation’s largest banks will play nice with smaller institutions only as long as they have a monopoly.

“If they don’t take that as a dare, then I don’t know what it takes for the Fed to serve a central bank role,” said Bob Steen, the CEO of the $93 million-asset Bridge Community Bank in Mount Vernon, Iowa.

“The Fed needs to stand up and do what the central bank should do. They need to do their damn job.”

Mark Field, the president of the $97 million-asset Liberty Bank, in western Illinois, said that the big-bank consortium is at least being upfront about its intentions, which he argued will be bad for small institutions.

“They are paying lip service to the community banks to get us to line up like lemmings, and then off the cliff we will go,” he said in an email.

For its part, The Clearing House maintains that it did not intend to send a shot across the bow of the Fed when it released a list of business principles for the RTP network in late March.

The list includes several ideas that community banks would likely support in isolation, including a pledge by the big-bank consortium to run the real-time network as a utility for the benefit of the entire industry.

If The Clearing House faces new competition that is trying to poach its customers, the New York-based firm would have to adjust its pricing strategy, said Steve Ledford, a senior vice president at The Clearing House.

“All we’re doing is, we’re trying to make sure that if the situation changes from what it is today, we are able to adapt,” he said.

The RTP network launched in 2017. Today, 15 banks, all of which have at least $70 billion of assets, are using the service to process real-time transactions. Banks such as JPMorgan Chase, Bank of America, Citigroup and Wells Fargo pay fixed prices — often a few pennies or so — when they originate transactions. The Clearing House does not control how they price the service to their customers.

The RTP network has so far focused less on person-to-person payments than Zelle, which is also owned by big banks, and more on business payments.

But RTP can also be used by consumers. In March, JPMorgan announced that PayPal is using the network to enable consumers who have an account at one of the 15 participating banks to make instant transfers from their PayPal balances.

Late last year, the Federal Reserve sought public input on what role the central bank should play in the emerging sphere of real-time payments. Community banks called on the Fed to operate its own network that would compete with The Clearing House, much as it does for wire transfers and payments on the automated clearing house network.

But The Clearing House argued that if the Fed built its own service, adoption of real-time payments would happen more slowly, given how long it would take for the Fed to complete its work.

At a congressional hearing in February, Fed Chairman Jerome Powell said that the central bank has not yet made a judgment on whether to operate a real-time payment system. But he noted that federal law places limits on the Fed’s eligibility to compete with the private sector depending on the circumstances.

Supporters of the Fed building its own system include Thomas Hoenig, a former president of the Federal Reserve Bank of Kansas City.

“I much prefer a competitive environment than a promise from a monopolist that they’ll behave,” Hoenig said in an interview.

He compared The Clearing House’s promise to keep prices uniform for all banks to assurances that banks sometimes provide about how nothing will change once a proposed merger goes through.

“And then after the merger, of course, everything changes,” said Hoenig, who served most recently as vice chairman of the Federal Deposit Insurance Corp.

The Clearing House said that it is putting its principles into contractual documents with participating banks. Those principles include the proviso that its other commitments are no longer valid if the big-bank consortium faces competition.

And that condition is at odds with the statements that The Clearing House made to the Department of Justice back in 2016. At the time, The Clearing House was seeking the DOJ’s blessing under a process that allows companies to ask whether proposed activities are likely to draw an antitrust objection.

The Justice Department’s response letter in September 2017 made clear that its favorable assessment of the RTP network was predicated on the accuracy of the information that The Clearing House provided.

But The Clearing House said in a written statement Tuesday that its flat-pricing approach was just one aspect of what it presented to the Justice Department. The consortium also said that it does not think a change in its pricing structure because of the arrival of new competition would change the Justice Department’s view of the RTP network.