Why Is It Necessary For the Fed to Jump Into Real-Time Payments?
The Senate Banking Committee’s Sept. 25 hearing on real-time payments will be the first opportunity for congressional feedback since the Federal Reserve’s announcement, published in the Aug. 9 edition of the Federal Register, that it will create an interbank real-time gross settlement service. There are some key questions the senators should ask before this plan can move forward.
First and foremost, why is it necessary for the Fed to jump into this business? Under the 40-year-old Monetary Control Act, the Fed is only allowed to intervene in the nation’s payments systems where it identifies services that “other providers alone cannot be expected to provide with reasonable effectiveness, scope and equity.” The Fed hasn’t made the case that real-time payments is one of those areas and it is Congress’ duty to ensure the central bank upholds the law.
Nearly 60 percent of the nation’s depository accounts are already connected to the commercial real-time payment system created in November 2017 by The Clearing House Payment Co. (TCH), which allows payments to clear almost instantaneously. According to TCH, whose executive managing director and deputy general counsel will testify before the committee, more than 90 percent of U.S. banks will be able to connect to the system by year’s end.
No one disagrees about the need for faster payments networks, particularly for consumers who live paycheck-to-paycheck. But that’s exactly why Congress should exercise its oversight authority to ensure the proposed FedNow system doesn’t do more harm than good.
To serve all consumers, it is essential that the Fed’s system must be fully interoperable with TCH. But there is no guarantee that will happen, and the Fed has yet to answer the hard questions about how they intend to make it happen. Federal Reserve Bank of Kansas City President Esther George, another panelist who will appear before the committee, should be pressed on who, exactly, would build such connections and who will pay for the work to be done. The United States does not want to recreate the situation in Europe, where the RT1 real-time payment network operated by private banks and the European Central Bank’s TARGET Instant Payment Settlement are balkanized and unable to communicate.
Even if the FedNow and TCH systems can be made interoperable, it will take the Fed years to build its system, potentially delaying the rollout of real-time payments to more depositories and their customers. That might be worth the wait if there were any identifiable need for the Fed to enter the space. But the reasons given to date for such a move – to provide competition or to better serve the interests of smaller institutions – do not hold up.
The U.S. Department of Justice already has conducted an antitrust review of TCH’s structure and found it passed muster. Indeed, the TCH faces competition already, from Mastercard’s Mastercard Send personal payments platform; from PayPal’s Venmo mobile payments system; from Visa’s Visa Direct real-time payments network; and from the Zelle digital payments network owned by several major banks, including some that also participate in TCH. Other competition comes in the form of digital platforms like those offered by Amazon, Apple and Google, which partner with chartered banks. Among the open questions are whether such services would have direct access to FedNow and, if so, what entity would ensure consumers’ financial data remains secure.
The notion that FedNow would uphold the interests of smaller depository institutions also isn’t supported by the Fed’s own history providing check-clearing services for automated clearing house (ACH) transactions. The Fed provides more favorable ACH pricing to larger institutions, as much as 80 percent less than is charged to smaller depositories. TCH, in contrast, has pledged to provide equal access and flat pricing for real-time payments to all institutions regardless of size. TCH also has reserved two seats on its board for small banks and two others for credit unions.
There absolutely is a role for the Fed to play in real-time payments, which is to facilitate collaboration and support innovation and competition in the private sector. It is not to serve as both regulator and competitor. Congress made clear when it passed the Monetary Control Act of 1980 that it expected the Fed to be exceedingly cautious about where it can become a private sector actor, given the enormous potential that it could underprice the competition with support from taxpayers.
Many consider the independence of the Federal Reserve to set monetary policy free of political interference to be sacrosanct. But where the Fed is exercising its power as a regulator, it absolutely must respond to the people’s representatives in Congress. If the central bank insists on violating the guidance Congress has laid out explicitly, it is incumbent on the First Branch to respond.