Real-time-payments monopoly puts financial system at risk
The U.S. payments system is about to dramatically change how our money deposits are held and transferred among banks, credit unions and other depository institutions. The headline for consumers is that we are finally catching up to the rest of the world in terms of being able to send and receive funds practically immediately, and fully replace check writing. The less sexy, but fundamental, question is who will operate this new system.
At issue is whether the Federal Reserve should continue to play a competitive, operational role as a payments processor. Or, whether it should stand back and award the payments services network to The Clearing House — an advocacy group and bank services provider that is, in its own words, “owned by the world’s largest banks.”
Last week, The Clearing House issued business principles to guide its role as sole provider for immediate payment services, called RTP network. We take note that these new business principles broadly correspond to the public policy criteria cited in responses to the Federal Reserve Board’s recent request for comment, including: operating as a utility; prioritizing safety, efficiency and “other relevant public interest considerations”; and transparency for much of its operating information (but not including operating costs).
However, we are struck most by the overarching principle that “[t]hese principles apply so long as the RTP network is the only provider of faster real-time clearing and interbank settlement.” Which is to say that any competition, whether from the Federal Reserve or from a consortium of depository institutions, would cause The Clearing House to go dark and abandon these principles.
Such an insinuation that only the consortium should provide such services highlights the value of having the Federal Reserve continue its operational role in payments, offering an alternative, competitive interbank transaction processing service for immediate payment to all depository institutions.
In addition to this, however, there are other just as important reasons for the Federal Reserve to play a role in an immediate payments system. It serves the public purpose as the one final protection against payment breakdown during crises. The world, including The Clearing House, learned this truth beyond doubt from crises such as the tragic 9/11 attacks, the near financial meltdown during the Great Recession and catastrophic natural disasters. At times like these, the largest banks turned not to one another but to the Federal Reserve for liquidity and operational continuity and to assure payments are completed as promised.
This new immediate payments system will in every sense be a public utility and support payment innovations by banks and non-bank financial technology companies worldwide. The U.S. Treasury understands this and has taken steps to stimulate financial innovation that is accessible to all but especially to smaller financial institutions, including community banks and credit unions, and to avoid concentrations of ownership and control that lead to too-big-to-fail problems. Treasury has encouraged the Federal Reserve to move quickly to develop an interbank settlement service that supports immediate payments. For its part, the Federal Reserve convened a “faster payments” task force which has produced a template for rapid adoption of immediate payments.
The role for the Federal Reserve would be a straightforward extension of its current payments services, which include check clearing and large wholesale and small retail electronic transfers. Just as with these payments services, the Federal Reserve would be required to: stand on its own as a viable business providing interbank immediate payments services, recovering its costs plus a return on investment comparable to that of a private sector operator; be managed as a public good, like a utility, that opens its books to the public and transparently reveals its cost-based prices; and provide access to all depository institutions, largest to smallest. Indeed, a 2016 GAO report concluded that the Fed has favored competition over regulation as the best means of inducing good outcomes for customers, as competitors are given an incentive to keep operating costs and prices low and customer satisfaction high.
The Federal Reserve Board is considering a decision about the future of digital banking that goes well beyond the narrow question of whether now is the time to transition to immediate payments. The board will decide whether the Federal Reserve will continue to play an operation role in digital payments.
We believe that the needs of consumers and businesses, and the depository institutions nationwide that provide them services, will be best served by the Federal Reserve continuing to play its role as a payments processor. The alternative, we believe, is to award The Clearing House a de facto monopoly, resulting in a less competitive and less efficient market for immediate payments. More worrisome, handing the entirety of country’s crucial payments system to the industry’s Clearing House organization would mean the Federal Reserve would not be operationally prepared to help maintain payment and financial system stability when the nation confronts its next crisis.