How the Fed Can Stop a Megabank Monopoly

By Rebeca Romero Rainey

As the Federal Reserve nears its decision on whether to develop its own real-time payments system, the nation's largest banks continue to strongly oppose the idea—to the detriment of community banks and the communities they serve. While megabanks push to guard The Clearing House's Real-Time Payments settlement service against competition, a Fed-operated real-time settlement system is needed to ensure universal access and to promote future payments innovations.

The Fed is uniquely positioned to provide access to all financial institutions because all banks have access to a settlement account with it. A Fed-operated real-time settlement system is consistent with the roles it already serves in providing integrity, safety, transparency, equitable access, and ubiquity for checks, ACH payments, and wire transfers to nearly 11,000 financial institutions of all sizes and charter types. The Clearing House simply doesn't have that kind of reach.

In short, industry-wide ubiquity may never be achieved without the Fed developing and operating a real-time gross settlement system and interoperating with the private sector. If we want to maximize access to real-time payments for financial institutions and consumers nationwide, only the Fed can do it.

Further, the Fed's development and operation of a real-time gross settlement system would insert needed competition into real-time payments. The Fed is a trusted partner among community banks and has provided operational continuity, especially in times of national crisis. Extending its long-standing roles in the payments system to real-time payments would avoid the risk of having only one, for-profit, private-sector settlement service run by the nation's largest and riskiest financial institutions. We can't afford to leave it in the hands of a private monopoly, especially one that does not have a proven track record of reaching smaller banks.

The Clearing House's rollout of its settlement service hasn't exactly calmed anyone's nerves. The megabank consortium has already walked back its prior commitment to operating Real-Time Payments without volume discounts benefitting the largest institutions. In a set of principles on the service, The Clearing House added one major caveat to its pledge to the Justice Department to charge the same to all depository institutions, regardless of their size—it must not have any competitors. Having dual—private- and public-sector—settlement services will provide at least some choice in the marketplace. This will help ensure equal access to all financial institutions, create a competitive environment in real-time payments, and ensure settlement continuity in the event of disruption in the private sector.

Providing universal access for all financial institutions will also yield a clear public benefit. Real-time gross settlement is consistent with the Fed's traditional role in payments, which is ensuring that all depository institutions can receive payments. This model has ensured ubiquity and community bank access in check clearing, ACH and wire transfer. Ubiquitous access for all payments system end-users to faster, more efficient and more secure payments—irrespective of their financial institution's size or charter type—will also provide a foundation for a robust payments system that will lead to more innovation. Once ubiquity is achieved, new use cases will emerge, such as real-time payroll, immediate bill payment, person-to-person payments and business-to-business payments.

The demand for faster payments is already here, and it's only going to increase. After all, the U.S. financial services industry must upgrade its payments system to catch up with the rest of the world, remain relevant to consumers, and encourage further innovation. And these upgrades should be available to all banks, not just the largest. By playing a settlement role in real-time payments as it already does for checks, ACH payments and wire transfers, the Fed would provide safety, integrity, choice and equitable access to all financial institutions. The Fed has not only the authority, but the responsibility, to offer real-time settlement.

Rebeca Romero Rainey is president and CEO of the Independent Community Bankers of America.