New front opens in fight over Fed's real-time payments network

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The Federal Reserve’s recent decision to build a real-time payment system — against the wishes of a big-bank consortium that operates its own next-generation network — has kicked off a new phase in the fight over how Americans will move money in the future.

In the three-plus weeks since the FedNow announcement, lobbying groups that cheered the move have begun pressing the central bank to shorten its four- to five-year timeline for the system’s birth. The Fed has said that it expects the new service to be available by 2023 or 2024, and that achieving nationwide reach is likely to take longer.

That timeline is too slow for community banks and tech giants that want a modern, Fed-operated payment network to compete against the system built by the nation’s largest banks.

“We need them to move faster,” said Cary Whaley, who works on payments policy at the Independent Community Bankers of America. “I’m not saying the Fed should move fast and break things. But by the same token, we need this infrastructure now.”

Brian Peters, executive director of a trade group whose members include Amazon, Apple, Google and PayPal, also urged the Fed to move quickly. “The faster they can do this, the better,” he said.

One reason the pace of the Fed’s progress matters to the project’s supporters is that a long lag time could give detractors more opportunities to mobilize political opposition. In the run-up to the Fed’s Aug. 5 announcement, the debate over the central bank’s role in payments grew more partisan. Congressional Republicans could still take steps to slow or stop the project.

A slow rollout by the Fed also figures to help The Clearing House, the big-bank-owned firm that started its own real-time system in 2017, which is seeking to sign up as many banks as possible.

“When the Fed said that it would be 2023 or 2024 before they would be able to enter the market, we weren’t surprised. This is very hard to do,” said Steve Ledford, a senior vice president at The Clearing House. “Does that mean there’s an opportunity for us between now and then? Absolutely.”

Since the Fed’s announcement, some observers have speculated about whether the big banks will file a lawsuit in an effort to stop the central bank’s real-time system. The Clearing House does not plan to sue, according to Ledford. “We want to win in the marketplace, not in courts,” he said.

Ledford also said that The Clearing House will honor a set of business principles — first published earlier this year — for its real-time network. That document includes a pledge to charge the same price to all depository institutions, regardless of their size.

A prior version of the document stated that the principles would only apply as long as The Clearing House was the sole U.S. operator of a real-time payment system. But the most recent published version of the list of business principles no longer includes that caveat.

“The principles remain operative,” Ledford said in an interview after the Fed’s announcement. “We believe in the principles. We’ve always believed in the principles.”

The Clearing House has said that its RTP Network already reaches more than 50% of U.S. demand deposit accounts. But that penetration rate is largely a result of the fact that the nation’s biggest banks have such large market share. Ledford said that The Clearing House has seen an uptick in interest in the RTP Network since the Fed’s announcement.

The question now is whether most banks and credit unions will be willing to wait several years to launch real-time payments through the Fed, or will instead turn to The Clearing House because they feel more urgency.

“Midtier and large-tier banks, they can’t afford to wait,” said Erika Baumann, an analyst at Aite Group. She argued that the Fed’s stated timeline is so long that “It’s almost irrelevant today.”

Some observers have wondered whether the Fed established a four- to five-year timetable so that it would be in a position to surpass expectations. And there are several factors that point to the possibility of a speedier implementation.

For example: Because real-time payment systems are operational in dozens of other countries, the technology that the Fed will need is well established. And because the U.S. central bank convened a large task force on faster payments earlier this decade, it has the staff-level expertise needed to hit the ground running.

On the other hand, the Fed could be slowed by a requirement that it solicit public input, which does not apply to private-sector innovators. Earlier this month, the central bank published a request for comment on the FedNow proposal.

Christina Tetreault, a staff attorney at Consumers Union, dissented from the view that the Fed needs to launch its system before 2023. “It’s important to get it right,” she said.

But her opinion appears to be in the minority.

“I think the Fed has indicated that it understands that time is of the essence,” said Kim Ford, executive director of the Faster Payments Council, a group whose members include financial institutions, tech companies and businesses that use the payment system.

Indeed, the Fed is taking note of the loud calls for a speedier launch. Ken Montgomery, who is heading the development of FedNow, said in a recent interview that he will be looking for opportunities to beat the four- to five-year target.

“To the extent that we can bring in the solution sooner, we’re certainly going to strive and endeavor to do that,” said Montgomery, who is also first vice president and chief operating officer at the Federal Reserve Bank of Boston.

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