Executive News: Some thoughts on Fed’s proposed RTP system

Every August, like clockwork, Congress goes home for five weeks to campaign, travel their district or the state, read, do interviews – something other than doing the work of the people.

A lot of folks think this is a good thing because it holds any action they might take in abeyance in terms of trying to make news or otherwise enact laws that may not be what bankers would like to see.

Even though it’s “quiet” from a legislative perspective in Washington right now, the Fed’s decision to create its version of a real-time settlement network and payments system has captured the attention of community bankers across the country. As well it should.

Photo of Roger M. Beverage
Roger Beverage, OBA President and CEO

Earlier this month we learned that “FedNow” will be developed over the next three to four years. FedNow is the Federal Reserve’s version of a second Real Time Payments System network. When finished, the Fed will have built a modern clearing and payments system that (everyone assumes) will be able to compete with The Clearing House.

Launched in 2017, TCH is a clearing and settling of payments in real time. It’s a private-sector network, built and owned by the nation’s 25 largest banks. It conducts payment-by-payment, final settlement of interbank obligations through debits and credits to bank balances in accounts at the Federal Reserve banks across the nation. And it does that in real time.

The Fed does not expect FedNow to be available until at least 2023 or 2024. As a practical matter then, TCH is the only other RTP network that’s available in the marketplace today. Assuming your bank needs access to a real-time network before FedNow is tested, is up and running and found to be working as intended, then TCH is your only option. Not an endorsement.

I’ve visited with several community bankers in Oklahoma and elsewhere about whether this is a “big deal” to their banks or their customers right now. In a nutshell, not so much. But that also depends on where a bank is located or does business.

The reality is outside of a handful of interested parties, like the OBA and its sister organizations across the country, most people couldn’t tell you what a RTPS network is, what it looks like, what it does or why it’s important. In most traditional community bank communities, there doesn’t seem to be any urgency to getting a new system up and running any time soon.

My friend, Esther George who’s president of the Kansas City Fed, has had concerns about this issue for some time. I’ve attended at least one major program focused on the Fed’s decision-making process on this topic and have had numerous conversations with her about the importance of having such a system that’s under the Fed’s supervision and control.

There are a couple of things that concern me at this early juncture in the process. Based on the Fed’s announcement, it’s not clear to me “interoperability” is among the Fed’s priorities. I think it’s imperative that FedNow be able to seamlessly interact and work with TCH or any other real-time payments network. Interoperability was mentioned only as a “desirable outcome” in the Fed’s announcement this month, but that doesn’t mean it’s a priority.

I wonder what that means.

Some bankers have asked me what I think about this issue. Generally speaking, I think competition is a good thing.

When I was a little kid, we were winning ball games because we were better than our “competition.” I really didn’t think much about it. I didn’t practice very much. Didn’t have to. After all, we won. So that meant we were better. Yay for us.

Soon I found myself in high school. Where we weren’t better than many of our competit

ors. We didn’t practice hard at all. That was our fault, not the coaches’ fault. We got our backside handed to us time and again, going 0-9 in football, and 1-16 in basketball.

Even though I scored a lot, I didn’t like getting blown out by 50 points or more. Which happened more than once. Ugh. But that experience forced me to deal with reality. These other teams – our “competition” – were just better than we were. Oh yeah, I also learned that there’s no “I” in “team.”

I learned if you don’t practice, if you don’t run, you’ll never get to the next level. If my teammates and I didn’t play our very best at every opportunity and work together, we would continue to lose. So, we ran and began to practice more intently. And the next year we were better, and we were much better the following year. And the year after that.

That’s what competition does – it makes you work harder. It makes you better. It enables you to be as good as you can be when you get the ball.

Most community banks today are being forced to confront, think about and deal with the idea of what a RTPS network will mean to them. Most are not doing any of these things because they want to; they do it so they can stay in business. Many of these banks know that at some point they’re going to have to adapt and get “better” if they want to stay in the financial services game.

It’s my opinion that eventually all banks and their customers will benefit from what should be a seamless payments and settlement system that’s available anytime, anywhere. But I learned a long time ago that getting better is a process, not an event.

The Fed’s decision should end up being a good one. Yes, it will take some time to build. But that time can be used to help bankers and bank customers understand and get comfortable with the “right here, right now” demands of today’s changing marketplace.

One more thing that’s bothering me about the Fed’s comment process on this issue and its recent announcement: Will FedNow be accessible only by banks? Or will non-banks have access to this new system as well?

Why is that bothering me? Well, because the request for comments was open to FinTech firms and retailers, and a number of them actually filed written comments – including technology leaders like Amazon, Apple, Google, Intuit, PayPal, Square, Stripe and Quicken. All of these firms are currently operating outside the existing payments system and they want access to FedNow. That’s not good for community banks, in my opinion.

The Fed’s system should be accessible only to federally insured financial institutions. It should also be available through all core processing companies and should have no volume discounts because that disadvantages traditional community banks.

But that’s just me. What do you think?

We have some time to fashion a comment letter on this new proposal, but I’d like to know what you think. What would you like to see? Let me know – roger@oba.com – or 405-850-0695.