WASHINGTON — As big banks and the Federal Reserve lock horns over a government-backed faster payments system, Republicans senators are sounding the alarm about potential complications with the Fed holding the reins.
At a hearing Wednesday, Senate Banking Committee Chairman Mike Crapo, R-Idaho, noted large banks’ concerns with the proposed FedNow system, set to launch by 2024. Big banks have questioned the costs associated with the Fed getting a real-time payments network running, and whether it would be interoperable with existing private-sector systems, including one built by the Clearing House in 2017.
“Throughout the Fed’s process, some financial institutions have raised concerns about the Fed’s analysis and process, the cost and amount of time it would take to develop its own real-time payment system, its prospects for achieving interoperability, inherent conflicts of the Fed operating its own system and its prospects for negatively affecting existing real-time payment systems,” Crapo said in his opening remarks.
Sen. Pat Toomey, R-Pa., said he thinks Congress should potentially step in to try to block the launch of FedNow.
“We should consider that,” Toomey said in an interview with American Banker. He highlighted concerns about how the Fed would price its service as well as whether it could operate alongside private-sector alternatives.
“We heard today that the Fed is not willing to make a commitment to uniform pricing, so we could have pricing discrimination against small banks," Toomey said. "We know that the Fed is not committed to interoperability, so that’s a real problem, so I think we should consider that.”
But Democrats on the panel largely supported the Fed’s effort, saying it will increase competition and create a level playing field for small and large banks.
“These big banks oppose the Fed’s efforts because they want to be the only game in town,” said Sen. Sherrod Brown, D-Ohio, the committee’s ranking member, in prepared remarks. “They want a monopoly. … But the Fed’s interest here is not to make a profit — it’s to make sure everyone can pay their bills on time and transfer money when they need it, whether they’re in a rural town or a big city. The Fed’s real-time payment system will benefit working families, small banks and credit unions, small businesses, and the public as a whole — and everyone except Wall Street agrees.”
Testifying before the committee, Federal Reserve Bank of Kansas City CEO Esther George defended the central bank's approach, saying the proposed service will help strengthen the financial system as a whole.
"The FedNow Service will allow the Federal Reserve to retain its ability to provide stability and support to the banking system, as well as promote the development and implementation of industry-wide fraud mitigation standards," said George, who has championed the project within the Fed system. Development of the service will also enhance safety of the U.S. payment system by promoting resiliency through redundancy."
The divide between Democrats and Republicans on how the U.S. should improve its payment systems reflects similar divisions between small banks and large banks.
Robert Steen, chairman and CEO of Bridge Community Bank in Mount Vernon, Iowa, supported the Fed's involvement in real-time payments at the hearing Wednesday.
“I am absolutely confident the Fed is doing the right thing,” Steen told the committee.
He added in his prepared remarks that the current system in which the big banks control real-time payments marginalizes community banks.
“A monopoly in the payments space and especially in real-time payments, operated by the largest banks, would surely marginalize our bank and our industry, weaken our customer relationships, and ultimately speed the pace of consolidation that is changing the American financial services landscape,” Steen said.
But others said it was inappropriate for the Fed to get directly involved in an area where the private sector is already innovating.
“The Clearing House was well-positioned to meet the need identified by the Federal Reserve for the development of a real-time payments solution,” said Robert Hunter, executive managing director and deputy general counsel at The Clearing House Payments Company. His organization, owned by the largest banks, already manages a real-time payments system known as the RTP network that launched in 2017.
Yet some argue that letting big banks control real-time payments favors them in benefiting from such as system.
“I do think the fundamental question comes down to this issue of competition,” Sen. Chris Van Hollen, D-Md. “It seems to me that keeping that monopoly position in the hands of [the] 15 biggest banks is not necessarily in the long run the best deal for consumers.”
Van Hollen and other committee Democrats have
Former Federal Deposit Insurance Corp. Chairman Sheila Bair warned that the failure of one of the largest banks could threaten the continuity of payments services for consumers in the industry-run service. She said the Fed providing its own network would be a good backup.
“I’m glad we have RTP, but we should have another system too,” Bair said.
She added that the Fed would likely need to step in regardless.
“I think eventually if we have this monopoly payments provider and there’s a disruption, the Fed is going to have to come in anyway,” Bair said.
Hunter said, based on how RTP is built, it is not likely that the Fed would have to step in under such a scenario.
“There is no circumstance where we would be subject to a bailout request," Hunter said.
He also noted concerns about how FedNow and RTP could operate simultaneously.
“We are not optimistic that these two systems will be interoperable," Hunter said.
George said interoperability is a goal Fed officials are trying to achieve with FedNow.
“Having interoperability will be a desirable outcome of this effort,” George said. “We are focused on gaining nationwide reach. We think it’s important that every financial institution gain access to real-time payments services and then we can begin as we design the system to look at what the nature of interoperability will be.”
She said operating a government-backed system "alongside the private sector" generally produces the "best outcomes."
