Who’s on First With Faster Payments?

The Clearing House has been doing it since 2017. Where’s the Fed?

By Bill Poquette, Editor-in-Chief

The Federal Reserve isn’t moving fast enough on faster payments to suit some people. Private enterprise has been stepping up and the question arises: Is a Fed-operated faster payments network necessary?

On Nov. 25, 2017, The Clearing House, which is owned by two dozen of the world’s largest banks, processed the first U.S. payment to clear and settle in real time. It was completed on TCH’s RTP network, which was billed as the first new payments infrastructure to be introduced in more than 40 years.

In March this year, saying it had been urged by community banks, credit unions and corporate users to share as much information as possible about the RTP network, TCH released a set of principles describing how the system works, including pricing.

The Business Principles for the RTP Network state that every federally insured U.S. depository institution is eligible to directly participate in the RTP network, and RTP fees shall continue to be flat for all participants regardless of size.

One of the eight principles triggered alarm in some quarters: “These principles apply so long as the RTP network is the only provider of faster real-time clearing and interbank settlement.”

The specter of monopoly was raised in an American Banker op-ed by Tom Hoenig, former FDIC vice chairman and retired president of the Kansas City Fed, and Bruce Summers, former operations manager for the Federal Reserve who now teaches at Virginia Military Institute.

This says, they argued, that any competition, from the Federal Reserve or another entity, “would cause The Clearing House to go dark and abandon these principles.”

Hoenig and Summers maintained that the needs of consumers and businesses and depository institutions would be best served by the Federal Reserve continuing its role as a payments processor.

“The alternative, we believe, is to award The Clearing House a de facto monopoly, resulting in a less competitive and less efficient market for immediate payments,” they wrote.

The Bank Policy Institute, in an unsigned blog on its website, scoffed at the Hoenig-Summers article, arguing that the only event that would disrupt the RTP’s fixed-fee pricing model would be the entry of the Federal Reserve into the market. BPI, it should be noted, represents the nation’s largest banks.

“Given the massive expense the Fed would incur in building and operating the system, it would need to capture huge volumes of payments in order to break even — the kind of volumes generated only by the large banks currently participating in the Clearing House system,” read the blog.

“The Fed would be forced to offer these incentives,” the blog continued, “and The Clearing House would then be forced to do the same or lose its largest customers.”

BPI also pointed out that the RTP network is connected to more than 50 percent of U.S. accounts. And if competition is the issue, other alternatives are available, such as NACHA’s same-day ACH, for example, and others are in the works.

The Federal Reserve is an incredible institution that does many difficult jobs exceedingly well. But the task of gearing up for faster payments doesn’t seem to be one of them. The Clearing House, with more than a century of experience in payments, also has the tools and has a faster payments system up and running. Maybe this was better suited to private enterprise rather than government. 

Bill Poquette, Editor-in-Chief,

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