The Clearing House: FedNow could create ‘bifirucation’ in real-time payments

The Clearing House launched its real-time payments (RTP) network two years ago with the goal of bringing instantaneous payments to financial institutions in the U.S. So far, more than half of the transaction accounts in the U.S. are on it. The goal is to reach all accounts by 2020. But a real-time payments network operated by the Federal Reserve may throw a wrench in those plans.

Tim Mills

In August, the Federal Reserve announced plans to launch a separate real-time payments network, called FedNow, by 2023 or 2024. In the past, The Clearing House told Bank Innovation this additional development could slow the process of making real-time payments ubiquitous in the banking industry. 

According to Federal Reserve Governor Lael Brainard, FedNow will allow banks of every size in every community across the country to provide real-time payments to their customers. From her point of view, FedNow’s “nationwide reach” means it has a different value proposition than a real-time payments network operated by the private sector.

“Acting alone, a single private-sector [real-time payments network] will face significant challenges in establishing an accessible infrastructure for faster payments with nationwide reach,” Brainard said in a recent presentation.

On the margins of the recent American Bankers Association annual convention in Seattle, Bank Innovation met with Tim Mills, vice president of business development and product management at The Clearing House. The discussion focused on RTP and the impact of the proposed launch of FedNow. Responses have been edited for clarity.

What are your concerns around the Federal Reserve getting involved in real-time payments?
The Fed plays two roles in the marketplace. They’re a payment system operator like The Clearing House, and they’re also a regulator. There’s a separation between those two functions. What the Fed does as a payments service operator is supposed to be completely removed from what they do as a regulator. The expectation is that the Fed as a regulator would treat those systems equally. The Monetary Control Act, requires the Fed to operate on a level playing field. You wouldn’t expect the Fed, as a regulator, to show favoritism.

What are some of the problems in your mind with FedNow?
We live in a free market. If there’s competition, so be it. What the industry needs to think about is, “Does it facilitate the growth in the journey to ubiquity, or does it provide distractions and challenges?”

If you have another entrant that shows up and they build a network without interoperability, all you’ve done is create a bifurcation. There’s also uncertainty. With FedNow, we don’t have a definitive idea of what is coming. You could, in theory, end up with a first-class and second-class configuration. It really hinders ubiquity instead of growing it.

Has The Clearing House altered its plans for RTP since the FedNow announcement?
Not really. Our focus is to grow the network. The Fed is talking about a timeline that ends four or five years from now. We’ve been in this space now for two years. We’re seeing scale, so we’re continuing to focus on how to grow this network and how we can help financial institutions.

Who do you see as the primary clients for the RTP network?
Financial institutions connect and serve as the gateway to the network itself. It’s through those financial institutions that we reach end users, whether it’s fintechs, consumers, small businesses. Right now, we have 17 of the top 25 banks in the country on the network. That’s critical, because it brings us volume. We’re now starting to see that next tier coming in. We’re seeing community banks implementing it. Banks like Avidia of Massachusetts, First Bank of Colorado and Cape Cod 5, to name a few. 

What are some of the challenges of reaching smaller institutions?
[I would say] it’s developing the capability to integrate into their legacy systems. The majority of bank core systems are not realtime. Smaller banks, in most cases, are connecting through a technology provider, so it’s ensuring those technology providers have what they need. Small banks also are thinking about how they monetize RTP. They realize it’s becoming table stakes, but at the end of the day, they still have to support themselves.

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