Federal Reserve
Faster Payments

Deep Dive: Weighing The Federal Reserve’s Faster Payments Proposal

Real-time payment systems are quickly cropping up across the globe. Twenty-five of them were operational worldwide in 2017, and that number had swelled to 40 by September 2018, with 16 more expected to debut by 2020. This rapid expansion is fueling predictions that the global real-time payments market will rise from a value of $6.8 billion in 2018 to $26.9 billion by 2023 — a CAGR of 30.9 percent, according to a Markets and Markets Research report. 

Numerous payments schemes have rolled out since the U.K. launched its own Faster Payments Service in 2008. Australia introduced its New Payments Platform (NPP) in February 2018, and Hong Kong’s Faster Payment System launched in November of that year. Demand for these services is high. NPP’s CEO, Adrian Lovney, told PYMNTS that nearly 1.5 million Australian consumers — more than 5 percent of the population — registered with the service within its first month. 

The U.S. is still scrambling to catch up, however, and major financial players are hoping it can achieve its own ubiquitous real-time payments system by next year. The Federal Reserve’s Faster Payments Task Force established a goal in July 2017 that any consumer or business with a U.S. bank account would be able to securely receive real-time payments by 2020. 

State of U.S. Payments: Consumer Preferences

U.S. consumers currently favor paying via credit card. This is a growing trend, with 60 percent of American households using them in 2017. That share rose to 62 percent in 2018, according to the Mercator Advisory Group’s “U.S. Consumer Credit: Rising Usage” report. The report also found that credit cards appear to be the most popular payment medium for online retail, travel bill payments and digital content purchases. 

Card payments in general — including those made by credit, debit and prepaid cards — have had strong showings in the U.S. The number of card payments was up 10.1 percent year over year in 2017, and the value of card transactions increased 8.4 percent, according to Federal Reserve data. Consumers may find it easy to pull out cards, but this system doesn’t work as well for retailers, who must wait one to three days for those payments to process. 

Faster Rails

FIs and FinTechs are offering additional solutions to handle B2B, payroll and other corporate or governmental payments. Use of Same Day ACH (SDA) — overseen by NACHA (The Electronic Payments Association) and the Federal Reserve — has risen. PYMNTS found that 59 percent of corporates plan to boost their use of the service, while 40 percent aim to rely more on SDA credits instead of paper checks. SDA credit funds were required to be made available to depositors by 5 p.m. in the time zone of the receiving depository financial institution beginning in March 2018. 

Another solution is designed to accelerate payments beyond even same-day offerings. TCH, which is co-owned by 25 banks, launched Real-Time Payments (RTP) in November 2017. The new rail facilitates 24/7 payment clearing and settlement in real time.

The Federal Approach

Against this backdrop, the Federal Reserve proposed creating its own real-time payments service in October 2018. The system would facilitate 24/7 year-round interbank settlements of faster payments and also provide a liquidity management tool to support transfers between Federal Reserve accounts. The Fed sought feedback on the system, which brought in more than 380 responses. Many who favored the proposal said it was necessary for achieving real-time payments ubiquity.

Major retailers such as Walmart and Target were among those who voiced support. A letter from Walmart claimed that the Federal Reserve’s relationships with FIs, experience in providing payment and settlement services and reputation for impartiality made it well-positioned to deliver the service. 

Community banks and credit unions also offered their backing. They stated that major banks have too much control over the RTP system and that they regarded the Fed as a compelling and more equitable alternative to achieving payments ubiquity. The Independent Community Bankers of America and the CUNA requested that the Fed system be interoperable with the private sector’s real-time payment rails. 

Tech companies such as Amazon, Apple, PayPal, Google, Intuit, Square and Stripe submitted joint comments via a trade group called Financial Innovation Now that supported the move. The group claimed that “ubiquity is unlikely to be achieved without a [real-time gross settlement system] offered by the Federal Reserve.”

Dissenting Views

There were some who opposed the plan, however. A research fellow in financial regulations at the Heritage Foundation’s Roe Institute for Economic Policy Studies asserted that private companies were better positioned to provide “more goods and services to more people.” He said that the payments industry is sufficiently served by the private sector and suggested that innovations such as RTP and blockchain demonstrated this. 

Many big banks also disagreed with the Federal Reserve’s proposal to create its own real-time payments system. The Clearing House (TCH), for instance, has voiced its opposition. Steve Ledford, senior vice president of product and strategy at TCH — which provides a real-time payments system through the private sector — stated that he believes the provider is fulfilling the market’s needs and asked why the Fed would become involved. In a comment letter, TCH also claimed the Fed’s system would likely not be interoperable with RTP nor be implementable by 2020. It further asserted that it would be costlier if depository institutions were required to connect to both the RTP and Fed networks.

Meanwhile, NACHA called for continued attention on faster ACH’s value. It stated that the Fed’s proposal “departs from a policy of offering settlement services that are payment-channel agnostic” by focusing exclusively on instant payments support. NACHA also said that batch payment processing services are still effective and that investing in these services gives users more choice in payment types. 

The Fed’s feedback period ended in December 2018, and it must now review responses and weigh arguments. While respondents expressed their opinions on the proposal’s impact, many also emphasized that the Federal Reserve should quickly determine what it will do next.

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Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out our April 2019 Unattended Retail Report. 

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