The Federal Reserve’s announcement Monday that it will build a real-time payment (RTP) system, FedNow, to provide an alternative to The Clearing House (TCH) network, elicited applause and complaints.
Business Insider summarized the positions: “The fear of competition hangs over the number of reported reasons why major banks are against the Fed building an RTP system. It could slow adoption and it could present problems of interoperability.”
FedNow Could Foster Innovation
But BI added, “It could popularize alternative payments, impacting card networks alongside big banks.”
TCH, which in 2017 launched a real-time payment network that now reaches 51% of demand deposit accounts in the country, said it would continue to expand to reach more banks: “The network was built for and is available to every U.S. depository institution, regardless of size, on equitable terms — no discounts for volume or minimum volume requirements.”
However, only seven of the 24 TCH member banks offer real-time sending and receiving today, nearly two years after the RTP launch.
Rampant Distrust of Big Banks
Almost all banks that are not TCH member-owners favored a Fed network in comments to the Fed last year.
The Independent Community Bankers of America (ICBA) was pleased with Monday’s decision.
“The Fed system will ensure universal access to real-time payments, avoid a megabank monopoly, and encourage innovation that will benefit consumers nationwide,” it said.
The Wall Street Journal complained that the Fed was trying to expand government control of the economy and that it would slow adoption of real-time payments because many banks would wait for the new service, FedNow.
“Big tech companies, community banks, retailers and progressives endorsed the Fed’s market grab for parochial reasons,” the WSJ editorial board added.
Smaller banks and merchants, from Walmart to convenience stores, don’t trust the big banks, as you can see from the comments site. The Fed’s target of 2023 or 2024 will be a disappointment to banks and merchants; a recurring theme in the comments was that the Fed should move quickly.
Kevin Wack, who has been covering the issue for American Banker, noted that the Fed apparently will disappoint tech companies like Amazon and Google and grant access to its new service only to depository institutions with banking licenses.
A Yacht Named Overdraft
The Fed’s announcement was welcomed by Democratic legislators who have introduced a bill to require the Fed to provide real-time payments, which also would require banks to make customer funds available immediately upon deposit.
Aaron Klein, a fellow at The Brookings Institute, said the bill would give bank customers immediate access to their funds without waiting for FedNow to become operational: “Banks could either clear using the existing RTP system or they could continue using the Fed’s slow ACH [automated clearing house] system, but would have to make your funds available right away, even if the payment takes a few days.”
Some banks and credit unions already do that, but the consumer savings come out of bank profits — not a popular prospect among banks accustomed to a gravy train.
As The Washington Post pointed out: One bank CEO made so much money from overdrafts he named his yacht Overdraft. (Cringey.)