The Federal Reserve’s Essential Role in Faster Payments

By Cary Whaley

Will they, or won’t they? That is the question everyone’s asking as the Federal Reserve ponders its role in real-time gross settlement (RTGS) and the industry continues to weigh in. 

The agency’s October request for comment has generated more than 400 comment letters—the majority of which favor the Fed’s involvement in some capacity—and reads like a who’s who of the financial services industry.

It’s no surprise that ICBA supports the Fed’s leadership role in faster payments, which will provide safety, integrity, continuity and equitable access to all financial institutions. Financial Innovation Now, an alliance of technology leaders, which includes Amazon, Apple, Google, PayPal and Square, also voiced strong support for the Fed to “seize this opportunity and develop a RTGS system that will catalyze payments innovation for the twenty-first century.” Consumer Reports has also jumped onboard, urging the Fed to prioritize the needs of consumers by "serving as an operator of a new payments system—built from the ground up on principles of safety as well as innovation.”

But not all comments are glowingly supportive. Noticeably absent from the endorser list are the nation’s largest banks.

This is because big banks have developed a proprietary system in The Clearing House’s (TCH) Real Time Payments Network. Since its launch in November 2017, TCH has gone to great lengths to encourage financial institutions to join the system. Despite these efforts, however, only 15 financial institutions are live on the network today, raising the question: How long will it take to establish operator relationships with nearly 11,000 community banks and credit unions? It would take years upon years to onboard and prepare all the nation’s banks and credit unions—far longer than it would take if the Fed leverages its existing reach and enables those same institutions.

No other entity has the breadth to reach every financial institution in the nation. Without the Fed linking together the nation’s banks and credit unions, the market will become fragmented, creating great disparity between those consumers and businesses who have access to real-time payments and those who don’t.

Beyond scalability questions, there’s the benefit of spurring industry innovation with the Fed’s involvement. Today, the Fed serves as an operator in existing payments systems, which has enabled community banks to introduce network innovations—from remote check deposit to same-day settlement and beyond. Playing a similar role in RTGS would encourage new uses for real-time payments and continued market evolution.

From our perspective, the lion’s share of the industry supports the Fed’s role in RTGS, which is consistent with the Fed’s statutory responsibility for payments. Ultimately, industry-wide ubiquity may never be achieved without the Fed’s involvement, making it less of a choice and more of a strategic imperative. We need the Fed’s involvement in RTGS to ensure the industry continues its march toward a more modern payments system.

The question therefore should be not if the Fed engages, but when.

Cary Whaley is ICBA’s first vice president of payments and technology policy.