The Department of Justice is conducting an antitrust review of a next-generation payment system that is being developed jointly by the nation's largest banks, American Banker has learned.
The formal review was requested by The Clearing House, a payments company that is co-owned by 24 big banks and has started work on modernizing the nation's payment rails. The Clearing House has been marketing its faster payment system to smaller financial institutions and a thumbs-up from antitrust officials could prove useful in convincing community banks to sign up.
"This isn't being initiated by the DOJ. It's being initiated by The Clearing House," said a source with knowledge of the situation.
The New York-based firm is striving to move quickly in a competitive environment in which other companies are also vying to build the rails of a modernized U.S. payment system. The Clearing House first announced plans to build a real-time payment system in 2014 and in April of this year the company said that it was planning a pilot launch for the first quarter of 2017.
It remains to be seen whether the antitrust review will affect the timing of the system's launch.
The Clearing House declined to comment on the record for this article and a Justice Department spokesman said that the agency does not comment on whether specific matters are under investigation. But a former Justice Department official said that companies frequently forgo the DOJ process because it tends to move slowly, which can lead to delays in launching the business ventures that are under review.
"There are no time limits on the government to respond to a request for a business review," said David Balto, a former antitrust lawyer for the Justice Department who is now in private practice. "They proceed oftentimes at a Methuselah-like pace."
The Clearing House requested the DOJ review under a formal process whereby businesses can ask for a determination about whether a proposed joint venture or other business conduct is likely to draw an antitrust objection. When the Justice Department determines that business conduct is anti-competitive, it can sue.
Industrywide buy-in is crucial for The Clearing House, since the usefulness of any real-time system hinges in large part on whether it can send money to and from all of the nation's financial institutions.
Businesses that ask for an antitrust review generally receive one of three responses, according to materials posted on the Justice Department's website. The DOJ may state in a letter that it does not presently intend to bring an enforcement action; it may decline to declare its intentions; or it may state that it will sue if the proposed conduct occurs.
The Justice Department rarely, if ever, issues a letter promising to sue a company that has requested a review.
Still, a favorable outcome is not necessarily guaranteed. The private-sector firm that requested a review may decide to pull the plug prior to the conclusion of the process if a negative response seems likely, Balto said.
He said that The Clearing House is "very prudent in this situation to seek the judgment of the Department of Justice, because this is a minefield."
The Clearing House was already moving on two parallel tracks with respect to faster payments – it is seeking to launch its own real-time system at the same time it competes against other firms in a modernization effort overseen by the Federal Reserve – and the DOJ's antitrust review adds an additional wrinkle.
A Fed-organized task force is currently considering 19 separate proposals for a faster U.S. payment system, including one from The Clearing House.
That process is scheduled to culminate around May or June of next year, with the public release of a report that will include detailed evaluations of all the proposals. While no winner will be crowned, the proposals that score best are expected to have an advantage in the market.
There have long been simmering tensions between big banks and smaller financial institutions that resent the control the largest firms exert over the U.S. payment system.
A 2012 proposal to allow for same-day payments over the automated clearing house network was effectively torpedoed by a bloc of big banks, to the chagrin of some smaller institutions, though the plan was later revived and recently took effect.
The Clearing House was formed in 1853 and is owned by JPMorgan Chase, Citigroup, Bank of America, Wells Fargo and a host of other banks with more than $50 billion of assets. It operates one of the nation's two automated clearing house networks; the Fed operates the other one.
Since 2014, when The Clearing House embraced idea of faster payments, the firm has been pursuing an aggressive strategy aimed at ensuring that it retains a central role in the U.S. payment system.
Last December, when The Clearing House signed a contract with U.K.-based VocaLink to develop its real-time system, its press release suggested that widespread adoption was inevitable.
"Once completed, customers will pay or receive money in real time from any financial institution," James Aramanda, chief executive officer at The Clearing House, said in the press release.
It is difficult to assess the likely impact, if any, of Justice Department's review. In general, Democratic administrations have taken a harder line on antitrust enforcement than GOP administrations, which suggests that the incoming Trump administration might be less inclined than the current DOJ to lodge an objection.
If The Clearing House does get a stamp of approval from the Justice Department, that would not protect the firm from private antitrust lawsuits.
Sources in the banking industry said they were contacted by the Justice Department in recent weeks and asked a series of questions related to The Clearing House's plan. One of the sources described the DOJ's questions as reflecting an effort to get a basic understanding of how the U.S. payment system works.