The Federal Reserve’s decision this month to develop a new real-time payment system has left the financiers behind The Clearing House — which already formed an RTP network two years ago — scratching their heads.
On Aug. 5, the Federal Reserve Board announced the 12 Federal Reserve Banks will, by 2023 or 2024, develop a new round-the-clock, real-time payment and settlement platform, called the FedNow Service, to support “faster payment services” in the U.S.
“Everyone deserves the same ability to make and receive payments immediately and securely, and every bank deserves the same opportunity to offer that service to its community,” said Lael Brainard, Federal Reserve Board governor.
Brainard said the Fed is a provider of payment and settlement services to more than 10,000 financial institutions across the country.
“That reach will help the FedNow Service support a nationwide infrastructure on which the financial services industry may develop innovative faster payment services for the benefit of all Americans,” he said.
But the 25 banks that own and run the New York-based payment infrastructure company The Clearing House (TCH) — including institutions with a West Michigan presence such as Fifth Third Bank, Huntington, PNC, Comerica and Bank of America — in late 2017 already launched the RTP Network, a real-time payments platform that all federally insured U.S. depository institutions are eligible to use.
The RTP Network “works in the background, underpinning a financial institution’s customer-facing systems for services such as bill payment, cash management, P2P (peer-to-peer) and emergency disbursements” by using third-party core processing and payment services, according to TCH.
It operates on an “equitable flat pricing model” whereby there are no discounts for certain volumes of transactions or any volume commitments or monthly minimums, which contrasts with existing payment networks like Automated Clearing House (ACH), not affiliated with The Clearing House.
Currently, ACH transfers — which involve money getting pulled from one account or pushed to another — can take a couple of business days because the transactions are processed by a network operator in batches only a few times a day, according to articles by NerdWallet and The Balance.
In a statement responding to the Fed’s announcement that it is proceeding with the development of its own RTP system, TCH noted that its RTP Network already reaches over 51% of the demand deposit accounts in the country and expects to grow that reach even more in the coming year.
Jed Scala — executive vice president, head of payments and commerce solutions for Cincinnati-based Fifth Third Bank, which has its third-largest market in West Michigan — said the Fed creating its own competing system will introduce unnecessary complications.
“Our perspective is it’s going to slow down adoption (of the technology) because it creates uncertainty. It also creates greater costs for each one of the banks now figuring out, ‘How do I implement across both of these?’ And it creates an incredibly complex element, which is the ability to (be) interoperable between the two, which the Fed sort of believes that they don’t need,” Scala said.
“There’s debate on ‘Should these two networks be interoperable?’ And it’s not clear that that capability could be developed. So, would banks have to join both and operate in both or not?”
He said he believes it is in the consumers’ best interests for the U.S. financial system to adopt an RTP system that is already up and running and widely available.
Steve Ledford, senior vice president of products and strategy at TCH, agreed with Scala that the Fed’s plan to develop an RTP system is unnecessary.
“We’re well on our way to being able to reach everyone (through the RTP Network). We believe that by the time the Federal Reserve’s RTP system would be up and running, the market will already be served,” he said.
Ledford said TCH currently has 16 of the largest banks in the country on its network and plans in the next couple of years to begin serving the thousands of smaller community banks and credit unions that aren’t yet offering RTPs.
Most of those institutions currently work with third-party processors to link into payment networks including ACH, wire transfers, debit card networks and ATM transactions.
TCH uses similar types of processors to enable RTPs, but the difference is the money is sent and received instantly through a faster payment system, instead of in two to three business days.
There are many nonbank apps that already allow users to move money back and forth instantaneously, such as Zelle, Venmo and PayPal, but Ledford said the advantage of using the RTP Network is the money is coming directly out of and into a consumer’s bank account without the need to open a separate account with a separate entity.
The RTP Network also provides immediate confirmation, offers a messaging platform, and delivers bills and invoices in addition to the payments.
Ledford said TCH is not waiting around to see what the Fed does.
“We’re moving forward and working to continue to grow,” he said. “It’s not a huge concern of ours other than we’re trying to just make sure folks don’t wait and see what the Fed has to offer to start moving forward on the benefits of real-time payments.”