Tuesday, November 29, 2022

Fed needing comments on real-time payments

The Federal Reserve Board of Governors published a notice on Oct. 3 asking for comment on actions the Fed could take to facilitate real-time interbank settlement of faster payments.

The goal, according to the notice filed, is to “achieve ubiquitous, nationwide access to safe and efficient faster payments.”

“Technology has changed everything,” said Esther George, president of the Federal Reserve Bank of Kansas City, at a recent Town Hall meeting hosted by the bank. “[Reality] is forcing us to think about how we want the payments system to look … [and] what is our role?”

The underlying question is what’s the best way to maintain the speed, safety and efficiency of the U.S. payments system.

“As I understand it, the process begins with the question of whether the Fed should even be in the business of developing ‘a service for 24/7/365 real-time interbank settlement of faster payments;” OBA President and CEO Roger Beverage said. “A growing number of consumers, particularly millennials and ‘Gen Z’ers’, do business today.

“In general, consumers can ‘bank’ with the touch of a button on a smartphone. That ability – to do business on a real-time basis, right here, right now – has dramatically changed consumer expectations. When you couple that reality with the ability of FinTech firms to operate outside of the same regulatory environment as community banks, the question for me is whether banks (and particularly smaller community banks) are going to continue to be relevant in today’s marketplace.”

The notice for comment can be read by going to this link: https://www.federalreserve.gov/newsevents/pressreleases/files/other20181003a1.pdf.

Banks – and particularly community banks – are encouraged to comment on this proposal, particularly as it relates to the elements of cost and urgency of whether this proposal is important.
Comments are due by Dec. 14, 2018.

As a practical matter, it’s important to recognize this real-time system already exists. The Clearing House Interbank Payments System is a privately owned system created by 25 of the largest banks in the United States. CHIPS is one of three systems that has developed new and faster payments network processes. The other two are NACHA (National Automated Clearing House Association) and the Zelle P2P network.

Assuming the Federal Reserve goes ahead and builds its own system for clearing and settlement purposes, these other entities would compete directly with the Fed’s effort to operate a “real-time” (24 x 7 x 365) settlement mechanism for clearing checks and other forms of payment.

CHIPS is the primary network in the country today for clearing large-value domestic and international payment. It’s less expensive (both by charges and by funds required) and it’s available right now.

According to their website, NACHA tells us “mobile technology and digital commerce are driving the need for a safer and faster payments system in the U.S. The Clearing House responds with Real-Time Payments, a new real-time system for all U.S. financial institutions to use as a platform for payments innovation.”

Zelle’s P2P network is another “real-time” payments alternative that’s enhancing the ability of FinTech firms to compete directly for “banking” business at the speed of “right here, right now” technology.
“In today’s commercial marketplace, mobile and speed are mandatory,” Beverage said. “Almost 80 percent of Americans own a smartphone, and the number of those consumers who are choosing to use their phones to ‘bank,’ purchase, sell and conduct other forms of commercial activity is growing rapidly.

“In my opinion, it’s imperative for banks – particularly community banks – to think about what their particular bank will look like in the next three to five years. Once the bank’s ownership and management team do that, they will have to adjust their current business model accordingly, and that means offering the bank’s many products and services at the speed of now.”

Will there be enough demand for faster payments and settlements to support developing this service? What will it cost, and how will that cost impact smaller community banks operating in smaller communities outside of major metropolitan areas in particular? What’s the ideal, realistic, time to market?

These are just some of the questions to be considered in thinking through the ultimate question of whether the Fed should proceed, according to Beverage.

“The end-user (consumer) has already answered these questions, for the most part,” Beverage said. “Most observers also believe the Fed does have at least a supervisory responsibility to proceed and move from a deferred payments system – which we have now – to what is referred to as a ‘real time gross settlement’ process? Or is the solution to simply purchase what already exists? Is it better to have competition or create what amounts to a new government monopoly?

“I don’t know the answers to these questions. But I think the ultimate survival of the community bank model as we have known it depends on what bankers believe those answer to be.”