The Federal Reserve's proposal to operate real-time gross settlement through regional banks will soon receive feedback that may indicate support from small banks and merchants who have felt left out of current faster payment processes.
But the Fed's faster payments task force is not likely to receive welcoming feedback from current operators who aren't convinced a hands-on role for the Fed is needed.
The Fed will have final guidance after a
The feedback is certain to present plenty of pros and cons to the idea of the Fed becoming a player in the overall faster payments landscape, which has already moved forward quickly with private sector and bank-supported schemes.
And the debate has almost always been anchored with questions about the ability for any system to keep both the
The Fed has long stayed on the sidelines when it comes to a direct role in faster payments, preferring to push the concept of faster processing, along with facilitating discussion among industry stakeholders.
But that changed two months ago when
The Clearing House role
The Clearing House stands at the forefront, having put its real-time payments rails into play more than a year ago. TCH understands what it takes to develop real-time payments and what stumbling blocks need to be overcome.
It also stands to reason that The Clearing House will keep a close eye on what develops under the Fed guidance, since any type of Fed-operated payments settlement scheme would essentially operate as a competitor to the RTP already in place.
While TCH has been supportive of the Fed's encouragement of a faster payments initiative, there are concerns that a Fed-operated system would cause delays or market fragmentation, said Steve Ledford, senior vice president of products and strategy at The Clearing House.
"We have made good progress with RTP, but we still have a ways to go" to add to the network, Ledford said, "and we know that you just cannot do this overnight."
By the time the Fed gets through its comments period and develops a final proposal, there would be another period for feedback, Ledford added. "Then it would take some time to set up the system and that just delays the access to faster payments for everyone."
It would be better to allow the financial institutions and private sector to continue to add faster payment choices to the RTP, the Same-Day ACH and Zelle P2P networks, Ledford said.
Another key factor is that a Fed-operated system would not be interoperable with the RTP rails. "Users would have to join one or the other network and that would cause fragmentation or, if needed, they would have to be on both networks," Ledford said. "If everyone had to be on both, then that takes away the argument of wanting to have choices."
The merchants' view
Having a choice appears to be driving the thought process of major retailers like Walmart and Target, both of which have expressed positive feelings about a Fed-operated system. The idea of different players and options also has some appeal to merchants much smaller than the big-box corporates.
If The Clearing House is the only provider of real-time payments, it would "require smaller banks and credit unions to be subjected to the rules propagated by their competitors," said John Drechny, a former Walmart executive who serves as president of the Merchant Advisory Group and will become its CEO on Jan. 1.
That setup would trickle down to the merchants served by the various financial institutions.
"Merchants desire to have a new payment system which fosters competition and reduces complexities while moving at the speed in which consumers demand," Drechny added.
The MAG made its position known in a general statement in which it acknowledged the effort of the Federal Reserve's collaborative process to move the U.S. toward a "more competitive, real-time payment system."
That system "would be a great start to advancing the current archaic payment system and to catch up to what has been happening across the globe," the statement continued. "We look forward to the Federal Reserve moving forward with not just this critical step but also evaluating other steps needed to ensure the U.S. has a competitive offer on par with the rest of the world."
As much as anything, the merchants aren't entirely comfortable with The Clearing House system, which they claim operates as a prefunded account and still waits on a traditional batch settlement of funds before actual movement of money.
"If the Fed moves forward with standing up a 24x7x365 settlement system, in my view, it would benefit pretty much the whole ecosystem by creating competition and giving alternatives to all players," Drechny said.
The payment card dilemma
For merchants, businesses, consumers, smaller banks and credit unions, there could be a better way to pay than with cards, said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm.
Payment cards remain "a sore point for the nation's payment security and efficiency," and many users believe a new payment paradigm ought to support whatever use cases and pricing innovations the technology can provide, Mott said.
"Many are asking if they should bet the future of payments on a TCH solution provided by the nation's biggest banks, when their vested interests in the status quo of payments are so expensive," he added.
The Fed has historically solved access, relationship, cost and trust issues for ACH and wires by providing backup/default payment services for smaller financial institutions as an alternative to TCH.
With that sort of backdrop, it makes sense that some would want the Fed to step in and operate a real-time settlement process, Mott said. "Who wouldn't want to have a choice for something as important as making payments?"
Addressing key concerns
Still, the Fed will have to address the concerns about interoperability and calculate how long it would take to have another real-time settlement option in place. It has become clear, over time, that developers of mobile and real-time payments have not been waiting around for the Fed initiative to find its legs.
In many ways, it's been the Fed initiative that has sparked the ideas, fine-tuned the proposals and systems and put the concept at the forefront of the payments landscape. That, in turn, will have supporters feeling a more hands-on approach from the Fed can't hurt.
"There is definitely a lot of folks who would say let's have two systems," TCH's Ledford acknowledged. "The smaller banks would prefer that, but it is based on the assumption of interoperability between the Fed's RTGS and the RTP of The Clearing House."
The Clearing House stands ready "to do whatever we can to make sure as an industry we all get to faster payments by 2020, but the type of interoperability that folks are looking for has never really been done with faster payments," Ledford said.
The Clearing House RTP continues to handle every type of payment, though it is not set up to deliver debit pull-payments. Instead, it operates with the "request for payment" option in which a biller or customer wanting to receive money can request it.
RTP continues to move toward handling sophisticated supply-chain automation in which much messaging and payment fulfillment information is shared.
"People are calling that 'conversational commerce,' but those heading that way want to make sure they can reach everyone in their network before putting that into place," Ledford said. "We will see that later, as the capability is built into our system, but the industry network is not ready for it."
