Real-Time Payments Coming…at Federal-Reserve Speed

Ten years after the UK launched Faster Payments, the US is partway through the launch of a real-time payments network run by The Clearing House (TCH), a private corporation owned by 25 of the largest banks in the country. It will be the first new rails in electronic payments in four decades.

For years, the largest banks blocked efforts to move toward real-time payments, and unlike the UK regulator, the Fed did not insist American banks move to faster payments. In 2012, the big banks blocked an effort by NACHA to go to same-day Automated Clearing House (ACH) payments. In 2014, the Fed hired McKinsey to do a study of real-time and began a series of consultations over several years that concluded with a list of desirable attributes in a payments system and a call for proposals. 

TCH made the sole proposal to become an operator of a real-time payments system using technology from Vocalink, which facilitated the Faster Payments in the UK and FAST in Singapore before it was acquired by Mastercard. The TCH system, branded RTP, completed its first payments in November 2017 and now has 16 total banks on the network, seven capable of sending in addition to receiving real-time payments. The 16 banks boast 52% of US checking accounts. A number of core vendors, such as Fiserv, FIS and Jack Henry, are working to get on the RTP network starting later this year.

The overhanging question now is what the Fed will do. Last October, Federal Reserve Board Governor Lael Brainard issued a request for comments on whether the Fed should develop and operate its own 24x7x365 real-time gross settlement (RTGS) system, and whether it should create a liquidity management tool which “could improve the level of participation by banks in a real-time settlement infrastructure for faster payments.”

It received more than 400 comments

They largely broke down into two camps:

  1. The big banks and TCH think their one system is plenty and that a Fed entry would freeze the market, delay ubiquity, increase costs and create interoperability problems

  2. Smaller banks, credit unions and merchants wanted the Fed to operate a separate real-time network

In writing to support the Fed’s operation of an RTGS system, Walmart said the Fed could keep real-time payments competitive as it has with ACH, as well as keep the market disciplined:  

“For decades, the United States has continued to operate an archaic payments system wherein certain incumbents are enriched by preventing disruptive innovation from coming to market. The result is a payments system that is slower, more expensive, less reliable, and more fraud-prone than any other industrialized nation in the world.”

Many commenters said the most important thing for the Fed to do was make a decision quickly, because delay was causing the market to freeze.

Whether they wanted the Fed to build and operate an RTGS system or leave it all to TCH, respondents asked that the Fed make a decision sooner rather than later.

Payment experts from AIté Group and IBM said they expected a decision in Q1 because the Fed needs to get started if it decides to build an RTGS system, which is expected to take at least two years.

But the Fed, which has been studying this since 2013, doesn’t appear to be in a hurry.

The Fed is supposed to announce its decision this summer, although a payments expert at one bank said that at Fed-speed, it probably wouldn’t happen until September.