Big Banks Ask 'What's the Rush?' on Faster Payments
If checks, a payment method that's hundreds of years old, can be updated for the Internet age, why can't America's four-decade-old electronic payments system? It's not for lack of trying.November 13
The central bank is making clear it has doubts about the private sector's ability to implement a faster electronic payments system on its own.November 15
The largest U.S. banks are throwing cold water on the push to build an ultra-fast nationwide electronic payments system.
In a 15-page paper to be released Thursday, a trade group representing the biggest banks describes a long series of criteria that would have to be met before its members would support such a modernization initiative.
The laundry list of hurdles could make it hard to realize a vision hatched earlier this year by the nation's Federal Reserve banks - to build, within 10 years, a ubiquitous electronic retail payments network that moves money far more quickly than banks do today.
Supporters of that approach - a group that includes many community bankers - argue that without a coordinated modernization by banks, speedy proprietary networks will proliferate, and the advantages of a single nationwide system that all banks can access will be diminished.
In an interview Wednesday, Steve Ledford, senior vice president of product and strategy at the Clearing House, hesitated when he was asked whether the Fed's 10-year vision is reasonable.
"Ten years is a long time," he responded. "We don't think that needs to be done in one fell swoop."
It's not a surprise that the Clearing House is responding warily to the Fed's ambitious ideas regarding the payments system. Last year the trade group, whose members include JPMorgan Chase (JPM), Citigroup (NYSE: C), and more than a dozen other big commercial banks, emerged as the most visible opponent of a doomed industry-led plan to marginally speed up the processing of payments across the existing automated clearing house network.
But its paper makes plain how deeply skeptical many of the nation's big banks remain about proposals to build a fast, ubiquitous payments system.
Worries that such a system would erode existing wire transfer revenues are likely one factor in the big banks' thinking. Some observers also suspect that big banks are looking for a leg up over smaller competitors by building their own proprietary electronic payment networks.
The Clearing House paper argues that any industry-wide modernization plan needs to generate a reasonable return on the banks' investment spending not just in the long term, but also in the nearer term. "The business case needs to be staged to produce net benefits, as feasible, at each phase of deployment, instead of front-loading costs and back-loading benefits," the document states.
In other countries that have already built near-real-time payment systems, including Sweden and South Africa, banks have found ways to generate revenue from the service. Those overseas payment systems are being used by both consumers and businesses.
Earlier this year, a survey of U.S. adults found that 94% of them were willing to pay a fee for a real-time outbound foreign money transfer, 59% were willing to pay for a person-to-person payment, and 34% were willing to pay for an expedited bill payment. The survey of around 1,500 adults was conducted for FIS, a technology firm that is building its own proprietary network for near-real-time payments.
Even staunch supporters of a much faster U.S. payments system acknowledge that a major overhaul would entail large upfront costs, but they argue that the long-term benefits would make the investment worthwhile. The Clearing House argues that a more stringent standard should be applied.
"There's a lot that the industry as a whole needs to be investing in," Ledford says, citing as one example the costs of complying with new regulations. "We need to make sure that improving the payments system has a reason to get to the top of that list."
The Clearing House's comments will be filed as a response to a public consultation paper released by the Federal Reserve banks in September.
In that paper, the Fed signaled that it plans to be more proactive with respect to improving the payments system than it has been in the past.
But Fed officials have also been careful not to come across as heavy-handed, and have refrained from even raising the possibility that banks could face a mandate to make changes.
Last year's proposal to move to same-day processing of automated clearing house payments got support from a majority of the members of Nacha, the industry-owned group that establishes rules for the ACH network, but failed to reach the super-majority needed for passage.
In its comments, the Clearing House argues that the Fed should take a back seat to industry participants. The trade group's paper states that it is appropriate for Federal Reserve banks to facilitate discussions, but any evolution in the payments system should be industry-led.
"Significant changes or enhancement to the payment system that are market driven will have better outcomes and fewer unintended consequences than changes mandated through regulation or legislation," the paper states.
"How can we expect that to be done and done well unless it's done through market mechanisms?" Ledford adds. "I don't think just going out with a mandate or a fiat is the way to get there."