Fed essential to ensuring equal access in real-time payments
In a recently released set of principles on its Real-Time Payments settlement service, The Clearing House pledged to operate the system as a public utility with one major caveat — it must not have any competitors. While TCH opposes the entry of the Federal Reserve as a competitor in this sector of the payment system, a Fed-operated real-time settlement system would ensure access and choice for all financial institutions and customers and create a foundation for a new generation of payments innovation.
The Fed's development and operation of a real-time gross settlement system, or RTGS, would insert needed competition into real-time payments and avoid the risk of having only one, private-sector settlement service. The Fed is a trusted partner among community banks and has provided operational continuity, especially in times of national crisis.
The Clearing House, on the other hand, is owned by the largest banks. It has already conditioned its prior commitment to operating RTP without volume discounts benefiting the largest institutions only insofar as it is the sole U.S. operator of a real-time payments system. Having dual — private and public sector — settlement services will ensure equal access to all financial institutions, create a competitive environment in real-time payments and ensure settlement continuity in the event of disruption in the private sector.
The Fed is uniquely positioned to provide access to all financial institutions because all banks have access to a settlement account with it. A Fed-operated real-time settlement system is consistent with the roles it already serves in providing integrity, safety, transparency, equitable access and ubiquity for checks, ACH payments and wire transfers to nearly 11,000 financial institutions, regardless of size and charter type. Industrywide ubiquity is a distant possibility and may never be achieved without the Fed developing and operating an RTGS service and interoperating with the private sector. While TCH has developed RTP, reaching every financial institution is nearly impossible without the Fed's help.
Providing access for all financial institutions will also yield a clear public benefit. RTGS is consistent with the Fed's traditional role in payments, which is ensuring that all depository institutions can receive payments. All payments system end users should be able to obtain faster, more efficient and more secure payments — irrespective of their financial institution's size or charter type. This ubiquity will also provide a foundation for a robust payments system that will lead to more innovation. Once ubiquity is achieved, new use cases will emerge, such as real-time payroll, immediate bill payment, person-to-person payments and business-to-business payments. The Fed has not only the authority, but the responsibility, to offer RTGS.
The demand for faster payments is evident in the evolution of the payment systems toward real-time authorization and memo-posted transactions. Customers are already using bank and nonbank applications for person-to-person transactions, and demand for real-time settlement will only escalate as soon as all financial institutions are able to receive RTGS payments.
In our hyperconnected world of instantaneous communication and electronic transactions, the financial services industry must upgrade its traditional system of batch payments to remain relevant to consumers and encourage innovation. By playing an operational role in real-time payments as it already does for checks, ACH payments and wire transfers, the Fed would provide safety, integrity, choice and equitable access to all financial institutions.