An increasing number of the world’s population have access to instant payments, but a payment rail is just the beginning. To ignite open banking innovation through APIs, faster payment services should be interoperable in order to facilitate competition.
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In the U.S., The Clearing House (TCH) launched its trademarked real-time payments system, RTP, in November 2017. While the service is open to all U.S. financial institutions, there has been slow adoption across all tiers of U.S. financial institutions. At present, TCH has 18 of the top 25 banks live on the network enabling over 50% of DDAs to receive RTP. While TCH is beginning to see traction among smaller banks, the question remains as to how quickly they can expand their reach and whether they can gain ubiquity in an environment of free market adoption.
This year the Federal Reserve Board announced their real-time gross settlement (RTGS) service, provisionally called FedNow, as an alternative service to TCH RTP, in addition to exploring the expansion of operating hours for Fedwire Funds Service. The system is expected to be operational by 2023 or 2024 and will initially support credit push in a similar fashion to TCH’s RTP system.
One debate in the industry is whether FedNow will interoperate with TCH. Announcing the service in August 2019, Federal Reserve Governor Lael Brainard highlighted the concept's objective of “permitting banks of every size in every community across the country to provide real-time payments.” This is telling as it suggests that the intention is for FedNow to give the market a choice, particularly to smaller, local banks. If choice is the predominant element here, then interoperability between the TCH and FedNow is a must.
If FedNow is interoperable with TCH, banks will have the ability to either operate both services or switch seamlessly between the two with no impact on customer service. Fintech partners can help with the overlay of open APIs and alignment of ISO 20022s, but what about rules and standards? If the guiding principles and network rules for faster payments in the U.S. are not overarching, we will almost certainly have two separate rails that do not complement each other.
Two systems which are not interoperable could lead to market fragmentation and in turn will see a continuation of similar pain points with the current system. My view is that the new payments ecosystem will be characterized by speed, transparency, integrated information, process simplification and flexibility through choice. This will provide benefits such as payment confirmation and payment request, reduced time settlement enabling immediate access to funds, and real-time view of cash positions.
So, while the Federal Reserve works towards building a system, TCH races to increase adoption among all sized U.S. financial institutions to reach ubiquity. What’s clear is that the industry and its stakeholders would be best served with interoperable networks that not only move funds faster but will allow for wider innovation within the banking system.
