Payments system and community banks need FedNow
For years, my bank in a small town in Virginia has served the local community with an emphasis on quality in every customer interaction largely thanks to our access to the nation’s payment systems.
Rep. Denver Riggleman, R-Va., had a point when he said in a recent op-ed that the payments system is the "circulatory system of the financial sector," moving funds securely and expediently throughout the economy to keep it healthy. Unfortunately, Riggleman's proposal to restrict the settlement of real-time payments to a single, private-sector monopoly is akin to replacing a healthy heart with one that can only pump blood to less than 10% of the human body.
The Federal Reserve's decision to get involved in real-time payments was the right choice to support a strong and healthy payments system. The Clearing House — which is owned by the nation’s 25 largest banks — and the Fed have together well served 11,000 financial institutions nationwide with check clearing, ACH and wire transfers.
Having both the private and public sector (through the Fed) working together in concert ensures that all financial institutions will have access to payments settlement, while providing competition and resiliency.
The Fed and TCH both running interoperable real-time payments systems will result in a foundation for greater innovation as well.
The Fed already serves as an operator in existing payments systems, which has enabled financial institutions to introduce network innovations: from remote check deposit to same-day settlement, and beyond.
New uses for real-time payments — disaster relief, immediate bill payments, real-time payroll, as well as person-to-person, account-to-account and business-to-business payments — will emerge with both the Fed’s proposed FedNow and TCH’s existing Real-Time Payments systems.
Real-time payments will benefit our community bank and its customers, but only if we have access. TCH has historically provided direct access to less than 10% of financial institutions nationwide with check clearing and ACH, and even less in wire transfer.
Leaving real-time payments in the hands of an operator whose reach is so limited provides no guarantee that the financial circulatory system will reach our local community.
Additionally, TCH's plan to bring on more community banks and credit unions indirectly through core processors and correspondent banks will result in additional costs to banks, like ours. While FedNow opponents warn of market confusion over dual providers, the confusion would be much worse if there is a single provider with untested reach.
Having dual providers offers community banks a choice, with the competition lowering prices and encouraging a higher standard of service, rather than a monopoly run by the nation's largest banks. One private-sector solution presents a single point of failure, while dual settlement providers ensures greater systemic resiliency.
Now is not the time to halt the progress toward a healthy real-time payments system.
Rep. Patrick McHenry, R-N.C., ranking member of the House Financial Services Committee, recently said, “If we don’t build our real-time payments here in the United States, rest assured China will.”
“So let’s get on with it, and let’s be aggressive, and let’s be bipartisan and let’s get this thing done,” he added during a hearing.
A stop-and-study bill such as Riggleman’s would only put the banking system further behind. It is time for action, not analysis.
In the past, competing public- and private-sector settlement solutions have served the payments system well. Such a vital service should not be entrusted to a single provider with limited and untested reach.
Competition is a good thing. Competitive real-time payments are critically important to the health of the financial sector as well as the businesses and consumers it serves.