PayThink

The Federal Reserve must develop a real-time payments rail

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Customer experience throughout one’s shopping experience is a priority for merchants. Competition, transparency, choice, security, safety, and balanced liability all play an important role in merchants’ payments considerations as they seek to make the customer’s payment experience fast and easy.

The Federal Reserve Bank recently solicited comments regarding their efforts to develop faster payments through a real-time gross settlement. As evidenced by the Merchant Advisory Group’s comments to the Fed, merchants support the Fed’s efforts and believe that their involvement will inject competition into the market and offer merchants choice as they weigh their payments acceptance options.

Many Americans may not be aware of this, but for decades the Fed has moved trillions of dollars through its current ACH system. Moving to RTGS is nothing more than a technology upgrade in which the existing operator and system can accommodate faster movement of funds and information to help make the economy more efficient. The Fed is in a unique position to provide this service at a reasonable cost in the marketplace and is one of the few entities that has connections to the thousands of depository institutions.
The Fed’s development of RTGS, and the resulting competition will spur innovation in payments, which is critical during this time of disruptive technological advances. This service will create competition, provide a meaningful option for merchants and banks to settle transactions quickly. Consumers interact with merchants 24 hours a day, seven days a week, 365 days a year and they expect to send and receive payments instantly. The Fed’s involvement in RTGS is an important component of meeting these expectations.

The benefits of adding the Fed as an RTGS operator aren’t just about competition, though. A new RTGS would increase reliability for industry stakeholders and their customers because, in addition to increasing speed, it will also help create resilience in the payments system. As electronic transactions increase, it critically important to the U.S. economy that electronic payments work 100% of the time. Unfortunately, between human error and system malfunctions, a 100% success rate for any single system is not a reality. The best defense to these inevitable system failures is to provide redundant and diversified paths to consumer accounts so the payment can be completed. Merchants and their customers depend on payments continuing to process regardless of times of uncertainty; and trusted third parties that create system redundancy will ensure payments continue to process despite unplanned outages or disastrous events.

The Fed is one of the few institutions that has the ability to reach every depository account in the country, making its involvement as an RTGS operator necessary. Therefore, it is imperative that the Fed become the key operator to create this redundancy and promote competition.

In the background to the Fed’s deliberations about RTGS, is an ever-present issue in payments —barriers to entry. New players very rarely enter the market, and when they do, they typically end up relying on the incumbent global networks and dominant banks. Moreover, when alternative services or products are introduced by new players they are often copied or bought by incumbent stakeholders with the infrastructure and scale to bring it to market more quickly. According to The Clearing House, their real-time payments network reaches over 50% of U.S. transaction accounts. The Fed is the only stakeholder with ubiquity and the ability to compete in real-time gross settlement services. There can never be true innovation, competition, transparency, and choice in the market as long as these barriers remain.

Merchants support the Fed developing a real-time payments infrastructure that provides access to all financial institutions. Payments in the U.S. are evolving more slowly than the rest of the world and introducing RTGS is a unique opportunity for the Fed, along with the private sector, to promote innovation and earn a responsible rate of return. The existing players have failed to demonstrate these priorities over the last 60 years, and merchants believe it is imperative that the Fed develops a new real-time payments service.

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