Despite some significant advancements in the past two years, rifts are already developing in the U.S. move to faster payments.
A truly universal agreement between larger and smaller banks seems out of reach — let alone getting the Fed and private-sector developers to see eye-to-eye. It was less than six months ago that the Federal Reserve solicited
That public comment period ended in December, with
As part of that feedback, the Fed proposal's timing has also come into question when considering the 26 member banks of The Clearing House have their Real-Time Payments rails in motion and competing crypto-based blockchain initiatives garner more attention for speed and security.
The Fed
The Fed certainly can't be criticized for how it has brought the need for faster payments in the U.S. to the forefront, but the scope of its project is simply massive. In that regard, the Fed has mostly served as a moderator in the process knowing full well that many different stakeholders had different opinions.
When revealing the real-time settlement proposal last year, Federal Reserve Governor Lael Brainard explained that the Fed's intention was to support private sector advancements, much in the same manner it did when the Automated Clearing House was created in the 1970s.
But the Fed has not committed to doing anything specific related to its real-time settlements proposal, choosing to test the waters for a period of time before making a move. It has been clearly stated that a Fed task force would like to see all of the moving parts come together by 2020, whether a Fed service would work hand-in-hand with The Clearing House's Real Time Payments platform or not.
But to view the Fed's wishes of 2020 as an actual deadline would be somewhat ambitious for some, and too long of a wait for others.
"One of two things will happen," said Erika Baumann, senior wholesale banking analyst for Aite Group. "The Fed is going to drop its bid, or reveal exactly what their plans are in more detail and open another period of comment."
The timing of either of those scenarios is not clear, as the Fed has not officially indicated when it will make a decision. Regardless, it would come about with
While the council includes most key stakeholders who have either developed or would be part of faster payments networks, its roots come from the Fed's own U.S. Faster Payments Task Force. That group essentially recommended that a private-sector group be formed to continue pushing the faster payments agenda.
The Clearing House
The creation of that council, which includes The Clearing House, does not hide the fact that many of its members were either surprised by the timing of the Fed's real-time settlement proposal last fall or quickly came out against it.
For its part, TCH supported the idea that the Fed could provide a liquidity management tool, or Liquidity Service, through the expansion of Fedwire Funds operating hours. That, in itself, is a form of real-time settlement.
However, in a separate situation with Nacha and the Automated Clearing House, the Fed's response to a proposal for an
That response resulted in Nacha declaring its timetable for the extra window would be moved to March 2021, or six months later than it had hoped.
At the same time, The Clearing House did not see the need for the Fed to deliver a real-time gross settlement service, declaring it would not support such a proposal. Obviously, TCH had a vested interest in advancing its RTP rails, which debuted in 2017, without any sort of hindrance from a Fed timetable.
In its response to the Fed, TCH stated it was "very concerned that the Fed RTGS Service will harm the faster payments environment — unless the service is fully interoperable and functionally aligned with the RTP network and implemented by 2020."
TCH is not alone its concerns over how the Fed system would fit in and, more importantly, when.
"There has been a lot of vocal feedback in the townhall meetings at Fed banks and on the public feedback posting that came out against the Fed proposal, especially since indicating it would like to go live (if deciding to move forward) with real-time settlement by 2020," Baumann said.
"That seems to be next to impossible when you look at where we are and the fact that there would probably be another open comment period," she added.
The rest of the market
The comments on the Fed's site for the initial proposal run the gamut. There are several, especially from smaller banks, supporting the Fed's role in faster payments because those banks see it as an easier way for them to benefit.
But others raised concerns over the costs involved. Similarly, some comments encouraged the U.S. to instead embrace Ripple and its distributed ledger cryptocurrency methods, citing its promise to trim fees.
JPMorgan Chase, for one, likely had that sort of feedback in mind when launching its
Some supporting the Fed's role feared that private companies developing faster payment systems would eventually get acquired by one or all of the larger banks, a move that would again leave smaller banks on the outside looking in.
One comment suggested keeping the legacy payments system in place, even while faster payments were being established, just in case the ability to keep pace with ongoing technology became too rich of a burden for banks to handle as its only option.
It's the sort of feedback that the U.S. Faster Payments Council as well as the Fed have to take seriously.
"The more than 400 comments on the Federal Reserve's proposal on Real-Time Gross Settlement show how relevant and important these conversations are to continued progress toward ubiquitous, faster payments," said Kevin Christensen, acting executive director and interim board chair for the council.
"We see this as a point of continuing dialogue for the industry and a key focus of ongoing FPC conversations," Christensen added.
The council has already identified six work groups to focus on what it considers the most pressing challenges facing faster payments, and where it can make an immediate impact. Three work groups — safety and security, education and awareness, and end-user transparency — have already started meeting and will continue to do so in the second half of 2019.
In that regard, the council is doing what it was created to do — zeroing in on topics that will be critical for any system under any governance in the future.
Australia
The council has some models to emulate if they choose to do so.
"Australia figured this out early, and went with just one, industry network, operating as a utility for everyone to use — with minimal membership requirements — and banks securing the end points," said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm. "But anyone who wanted to create a new payments innovation or overlay service, as Australia calls them, can simply bolt them on top of the network."
Australia's
"Network participants and users in Australia can choose to use those overlay services or not," Mott added. "I support the Fed's moving to RTGS as necessary for the industry, and maybe a step toward an Australia-like deployment here in the U.S., which would benefit all participants."
