The Federal Reserve’s August announcement that it would enter the real-time payments market moved the esoteric topic of behind-the-scenes payment processing rails to the editorial page of The Wall Street Journal — in the space of three days.
The two Journal editorials firmly opposed the Fed’s move, a view that is in the minority. Over 90% of responses the Fed received during the open comment period supported its role as an operator of real-time payments rails, providing a market alternative to The Clearing House’s RTP network that went live in late 2018.
The United States lags most major countries in payments infrastructure; the underlying rails are highly reliable, but older and slower. According to the Fed, key benefits of a real-time system should include flexibility for consumers and businesses in managing balances and time-sensitive payments. As Americans’ expectations shift toward the “anytime, anywhere” digital banking and e-commerce models, these capabilities will progress from value-adds to table stakes for banks.
The Fed is calling its real-time entry “FedNow” — a somewhat ironic name, given that it is slated for release in 2023 or 2024. By contrast, The Clearing House (TCH) has a goal to achieve ubiquity for its RTP network by 2020 — a tall order that would require connectivity to more than 10,000 U.S. banks and credit unions.
TCH’s objection to the Fed’s move is that it will “freeze the market” because financial institutions will choose to stay on the sidelines for the time being, rather than move forward with real-time payments strategies. This could cause the U.S. to fall further behind other economies.
It’s a valid concern, but hardly the sole reason for the TCH opposition. TCH is jointly owned by 25 of the largest U.S. banks. Several community banks and credit unions have expressed reluctance to entrust an important aspect of their plumbing to a well-funded consortium of competitors.
The Independent Community Bankers of America and Credit Union National Association both filed comment letters encouraging the Fed to offer an alternative set of rails, much as they do today for the ACH network.
Another reason for banks to slow-walk a solution is that consumers have yet to voice clear demand for real-time services. This may be a classic chicken and egg problem: until these products are brought to market and promoted, most consumers (and to a lesser extent, businesses) may not grasp the value of instant availability of credits and funds. It’s the role of financial institutions and nonbank innovators to design products that resonate with their audience; the Fed and TCH simply provide the underlying technology.
The full value of real-time payments hinges on its ubiquity. TCH boasts that roughly half of U.S. accounts have access to RTP through the consortium banks. But, as is often the challenge for the U.S. market, closing the loop with the remaining endpoints across some 10,000 financial institutions is no easy task.
The American Bankers Association, which declined to choose sides in the debate over Fed entry, issued a statement following the FedNow announcement that emphasized three recommendations:
- FedNow and RTP should be interoperable.
- These solutions should be available through all core processing companies.
- Banks should continue to consider whether to connect to RTP.
The call for interoperability in real-time payments builds on the interoperability of the Fed and TCH’s parallel ACH offerings, a recommendation that has been endorsed by virtually every industry group. If the Fed confirms interoperability between the two systems, the timing of FedNow’s release largely becomes a moot point. Regional and community banks seeing an imminent market opportunity for real-time payments won’t want to cede a multi-year head start to the largest banks. TCH has extended an olive branch by committing to egalitarian pricing, shunning volume discounts that would advantage large financial institutions. Community bank skepticism is a legitimate position on that possibility.
The ABA’s recommendation regarding core providers is also critical: The majority of U.S. institutions will need a connection to real-time rails via their core system. Therefore, it’s imperative for banks to understand their providers’ readiness to support both networks and set aside enough time to discuss pricing and implementation requirements before they turn into rushed negotiations. There will be differences in the timeliness among these vendors — differences that could have material implications on financial institutions depending on them.
Regardless of which set of rails a bank decides to ride, real-time payments will eventually become a key component of its product suite, much like ACH and mobile banking. Is your institution solidifying a strategy and crafting a plan now?