The Federal Reserve may or may not opt to build a real-time settlement system, but whatever it decides, it is sure to ruffle a lot of feathers in the banking industry.
In October, the Fed
The Clearing House, a payment company that is owned by many of the nation’s largest banks, already operates such a service and is now planning to argue that a real-time service from the Fed would be duplicative. Its RTP system launched in November 2017 and its participants include JPMorgan Chase, Bank of America, Citigroup and seven other big banks.
But smaller depositories, which generally have been reluctant to sign up with The Clearing House, are planning to press the Fed to provide competition by building its own settlement system.
Cary Whaley, a vice president at the Independent Community Bankers of America, said in an interview that his organization favors a system similar to the one long used for automated clearing house transactions.
Banks have the option of routing ACH payments over competing networks, either one operated by The Clearing House or another by the Fed.
A Fed-operated service would ensure that all 11,000-plus banks and credit unions in the U.S. have access to real-time payments, Whaley said.
Big banks plan to stake out the opposite position in comments that are due to the Fed by Dec. 14.
Steve Ledford, a senior vice president at The Clearing House, argued in an interview that a real-time service from the Fed is unnecessary because the RTP system will reach 50% of all U.S. transaction accounts by the end of this year. He added that The Clearing House has a credible plan to reach all U.S. financial institutions over time.
In addition, Ledford argued that if the Fed decides to build its own settlement service, adoption of real-time payments will happen more slowly, given how long it will take for the work to be completed.
“We all feel there’s a need to get there quickly,” he said.
In arguing that the Fed should take a smaller role, Ledford also pointed to technical challenges associated with making two real-time systems interoperable. Interoperability would enable a payment to be initiated on one of the two systems and completed on the other one.
“I think that an assumption that these systems would be interoperable isn’t well founded,” Ledford said.
Consumer groups will also have a voice in debate, so it was notable that Christina Tetreault, senior policy council at Consumer Reports Advocacy, indicated that her group plans to side with the small banks.
“There is a role for the Federal Reserve to support the development of a new faster payments system, including as an operator,” she said.
The Fed is facing pressure to act quickly, as private-sector firms including The Clearing House, PayPal, Square and Early Warning Services, which operates the Zelle network, push ahead with their own technology. Real-time capabilities that connect all domestic banks have long been in place in the U.K., Sweden and a host of other countries.
“It’s embarrassing that the U.S. is not even a fast follower globally,” said Stephen Ranzini, the CEO of University Bank in Ann Arbor, Mich., and a onetime member of a Fed-convened task force that focused on payment security in a modernized system.
Over the last five years, the Fed has been pushing banks and other payment industry participants to forge a path toward real-time payments.
In July 2017, a Fed task force established the goal that within three years, anyone with a U.S. bank account should be able to receive payments that are highly secure and delivered in something close to real time. But the working group’s report was not clear on how to get there.
Then in October, Fed Gov. Lael Brainard warned that small institutions could be left behind if there is insufficient coordination in the development of faster payments. At the same time, the Fed released the 47-page request for comment on its own role in a future system.
Some of the issues that the Fed raised are not expected to generate much controversy. For example, there appears to be broad support for the Fed’s development of a liquidity management tool that would allow banks to settle payments around the clock.
Still, that there opposing views on a Fed-built settlement service puts the central bank in a difficult spot,
“I don’t think we can predict at this point what the Fed is going to do,” said Sarah Grotta, a consultant at Mercator Advisory Group. “I think they’re doing a very good job of playing it close to the vest.”
