August 5, 2019
Politico: Fed to offer faster payments system, setting up clash with big banks
The Federal Reserve on Monday announced it will build its own infrastructure for near-instant payments, a move that will have sweeping implications for banks and consumers nationwide.
Such a system would allow people to receive money in their bank accounts within seconds after it’s sent to them, lightning speed by today’s standards. Under the traditional system that handles card payments and direct deposits, transactions are settled en masse three times a day and only during business hours, a costly reality for the millions of Americans living paycheck to paycheck.
But big banks have spent weeks lobbying their allies in Congress to warn the Fed against building a real-time payments system, which would compete with a nascent one they’ve already built and — they argue — delay the goal of faster payments that can reach everyone.
“We are not making this decision lightly,” Fed Governor Lael Brainard, who is in charge of payments issues at the central bank, said in a speech at the Kansas City Fed. “After carefully weighing important considerations on both sides, we have concluded it is our responsibility to take action in support of a real-time payment infrastructure accessible to all.”
The central bank is putting out a request for comment before it finalizes the design and features of the system, which will be called the FedNow Service and is projected to be completed by 2023 or 2024. The Fed’s board in Washington voted to approve the decision on Friday, with Fed Vice Chairman for Supervision Randal Quarles dissenting.
Quarles said the government should only step in to provide payments solutions “when the evidence of market failure is clear and alternative means to achieve public goals are not feasible.”
“In this case, I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available,” he said in a statement.
Representatives of small banks and credit unions, along with large retailers and technology companies, have strongly urged the central bank to provide competition for the private-sector system and immediately praised the move.
“A Fed-operated real-time settlement system will ensure industry-wide access,” said Rebeca Romero Rainey, head of the Independent Community Bankers of America. “Fed involvement also will avoid the risk of having only one, for-profit settlement service run by the nation’s largest and riskiest financial institutions.”
The move was also lauded by Democratic lawmakers, who have taken the lead legislatively on pushing the Fed to implement a real-time payments system: Sens. Elizabeth Warren (D-Mass.) and Chris Van Hollen (D-Md.), and Reps. Chuy García (D-Ill.) and Ayanna Pressley (D-Mass.).
Big tech companies organized as Financial Innovation Now called it a “bold step into the future,” while the Retail Industry Leaders Association dismissed “distracting concerns from large financial institutions.”
The large bank-owned Clearing House Payments Co., the only private-sector operator of a real-time payments system, steered clear of directly criticizing the Fed move, but underscored that its system is already up and running.
“We are already seeing how these real-time capabilities are providing for tremendous advances in speed, convenience, and security in how Americans receive and send funds,” the payments company said in a statement.
TCH added that it is still dedicated to a flat-pricing model “that is the same for all participants where there are no volume discounts, volume commitments, or monthly minimums.”
For her part, Brainard said the Fed is committed to meeting its public policy goals “in a spirit of cooperation and competitive fairness.”
“We are pleased that the private-sector faster payment service is in the market, and we see important benefits from the resilient and competitive market that would result from the FedNow Service providing an alternative,” she added.
She outlined many of the same arguments as Fed Chairman Jerome Powell, who sent a letter to senators last week laying out reasons why the central bank was “seriously considering” moving forward with its own system. They included uncertainty about whether the private-sector system will be able to reach all financial institutions in the country.
“It turns out no single private-sector provider of any U.S. payment system has ever achieved nationwide reach on its own, whether it be checks, ACH, cards, or wire transfers,” she said. “Acting alone, a single private-sector [real-time] service will face significant challenges in establishing an accessible infrastructure for faster payments with nationwide reach.”
But the Fed still doesn’t have definitive answers on the extent to which its system will be able to interoperate with the private-sector system — that is, have transactions start on one system and end on the other — given the necessary speed. Large banks argue that a lack of interoperability could completely undermine the real-time aspect of a faster payments system.
“Such interoperability is an important goal that we will pursue as standards, technology, and industry practices change over time, although it is not yet clear whether it will be an initial feature,” Brainard said.
The Fed has determined that it will be able to recoup its cost over the long run — in line with statutory requirements — although it doesn’t yet have a clear estimate of how much building the system will cost.
Pricing decisions such as whether to offer volume discounts, a feature that would benefit large banks, will be made based on market practices at the time when the system goes live, a Fed official told reporters.