Is Five Years of Deliberation Over Real-Time Payments Enough?

The Federal Reserve is set to announce sometime this summer whether it will build a real-time payments (RTP) network that would offer an alternative, and a competitor, to the partially implemented network from The Clearing House (TCH). Currently, only 16 of the 25 TCH member banks are on the RTP network, and only seven can both send and receive. See Kevin Wack’s account in The American Banker.

A Monopoly is Nice

No surprise: TCH, owned by some of the largest banks in the world, opposes competition from the Fed.

Just about everyone else — community banks, credit unions, big tech players like Google, the Congressional Black Caucus, and merchants from convenience stores to Walmart and Amazon — want the Fed to run a network. They don’t trust the big banks.

Congress to the Rescue

Senators Chris Van Hollen (D-MD) and Elizabeth Warren (D-MA), as well as Reps. Ayanna Pressley (D-MA)  and Sylvia Garcia (D-TX) introduced legislation in late July that updates the Expedited Funds Availability Act of 1987 to ensure funds availability in real time and requires the Fed to build a real-time payments network.

The Fed doesn’t need the legislation, said Aaron Klein, a fellow at Brookings. It should just use its existing authority, something it is hesitant to do.

Fed Prefers Talk, Talk to Act, Act — Cost $100 Billion

The Fed has chosen to consult, study, and build consensus, which it has been doing since 2015. No way will it meet its 2020 target for a ubiquitous real-time network. 

By contrast, in the U.K., Faster Payments was a regulatory mandate and launched in 2008. 

If the U.S. had launched real-time payments at the same time, it might have saved consumers $100 billion, Klein said.

Slow Payments Hurt the Poor

“Implementing real-time payments is the single most important policy level that the Federal Reserve can directly utilize to reduce income inequality in America,” said Klein.

For people living paycheck to paycheck, the costs of delays are high. Klein illustrated: “November 30th was Friday. Many obligations are routinely due on the 1st of a month, often taken out by direct debit (rent, mortgage, child care monthly subscriptions, memberships, etc . . .) Using the existing payment system, it could take until Tuesday or later before funds paid on the last day of the month are available.”  (Some neobanks provide access to Friday paychecks two days early.)

But Slow Is Profitable — For Banks

Banks provide the financing for payday lenders and check cashers that have moved into low-income areas banks have deserted, while keeping their hands clean. More directly, they make $11.45 billion in overdraft fees in 2017.

Payments Lag Behind Amazon Prime

Real-time payments would also help ecommerce, because companies face cash flow problems as they need to restock when their goods sell. But consider Amazon Prime, which can move goods faster than the banking system can move money. 

Maybe it’s time to catch up to Mexico, South Africa, and Poland, which all have real-time payments.