Comments are in on the Federal Reserve’s proposal to build a service for the settlement of real-time interbank payments. While most responses were positive, some institutions expressed concern, noting that it was not appropriate for the Federal Reserve to take on this type of role.
This month, we examine responses on both sides of the fence to the Fed’s recent proposal to develop real-time gross settlement and liquidity management tools, starting with NEACH’s response to the proposal.
NEACH RESPONDS TO THE FED’S PROPOSAL
In its ongoing commitment to represent and advocate for its members, NEACH convened numerous meetings and discussions with various groups within its membership and staff. These common themes arose:
- There is a demand for a real-time gross settlement (RTGS) service in the industry.
- This service should be developed as soon as possible and preferably go live by 2020 or shortly thereafter.
- The feature set should be sufficient enough to offer robust service to all participants.
- Just as Same-Day ACH was ubiquitous for all ACH-receiving institutions the day it went live, RTGS should enable all institutions to be receiving institutions on the date of implementation.
- The proposal’s idea of developing a liquidity tool should be initiated, and the Federal Reserve should explore additional uses of the tool beyond the RTGS solution.
The discussion of auxiliary services inspired the deepest discussions and brought underlying industry issues to the surface. At our August member meeting, a long discussion about fraud, fraud prevention, and security ensued. Meeting participants encouraged NEACH to ask the Federal Reserve to include fraud detection and prevention tools as part of its solution, with a particular focus on preventing fraud at smaller institutions.
In addition to security, other topics that arose included developing a payments directory, operating rules, and regulatory guidance.
COMMUNITY BANKS AND CREDIT UNIONS WEIGH IN
Generally speaking, community banks, credit unions and associations representing them offered their backing of the proposal.
Specifically, the Independent Community Bankers of America has come out in favor of the Federal Reserve taking a significant role in developing and operating a real-time gross settlement system (RTGS). As stated in its comment letter:
ICBA strongly supports the development of ubiquitous, real-time payment systems and the need for ubiquitous access for every financial institution and their customers. Such a system would give customers/end-users (consumers and businesses) the ability to make last-minute payments and receive good funds in a safe and secure manner.
ICBA supports the Fed serving as:
- Operator of a real-time gross settlement service
- Operator of liquidity management tools
- Operator of a payments directory switch or hub linking financial institutions to other payments directories
The Credit Union National Association (CUNA) also supports the Fed’s proposal and expressed concerns over big banks having more control over the RTP system, viewing the Fed’s involvement as a more equitable alternative. In its letter submitted during the open comment period, wrote:
We encourage the Fed to move forward as soon as possible on the development of a real-time payments rail and liquidity management tools. Quick action by the Fed will help credit unions plan for the future as they explore offering real-time payments to members. Furthermore, looming decisions by the Fed are likely to adversely impact the nascent market by slowing development.
CUNA made additional recommendations:
- The Fed should require all financial institutions to develop the capability to receive payments from the Fed’s real-time payments network.
- The Fed should communicate a decision quickly on whether it will develop a real-time payments system and interoperability, as a lack of clarity risks freezing the market.
NACHA
NACHA, on the other hand, fell somewhere in the middle. While overall supportive of the Fed’s proposal, NACHA called for continued attention on faster ACH’s value. Specifically, it stated that the Fed’s proposal “departs from a policy offering settlement services that are payment-channel agnostic,” focusing exclusively on instant payments.
Further, NACHA asked the Fed to renew its commitment to enhancements and efficiencies in all their payment channels as outlined in their 2015 report, Strategies for Improving the Payments System (SIPS), noting that the industry’s need for payment systems modernization are not limited to RTGS: "The Fed should consider its options to support all types of payments improvement in the U.S., some of which may be achievable sooner than that proposed. A renewed commitment by the Fed to all the strategies it outlined in the 2015 SIPS Report would therefore bring broad and more immediate benefits and improvements to the U.S. payment system, beyond improved support for instant payments."
Lastly, The Clearing House (TCH) expressed their support of the Federal Reserve supporting faster payments by providing a Liquidity Service, which would provide a way for banks to transfer liquidity between Federal Reserve accounts outside of normal business hours. TCH believes the liquidity services could be implemented by expanding the Fedwire Funds Service operating hours.
Also, TCH does not support the Fed RTGS Services, believing it is unnecessary because its RTP network is able to provide a ubiquitous, safe, efficient, and equitable faster payments system by 2020. Also, TCH believes the Fed RTGS Services has the potential to harm the faster payments environment---unless the service is fully functional and interoperable by 2020.
ADDITIONAL RESPONSES TO THE FED’S PROPOSAL
TCH was not alone in its opposing view.
As reported in PYMNTS.com January 2019 Faster Payments Tracker:
The Heritage Foundation’s Roe Institute of Economic Policy Studies expressed the belief that the private sector is better able to provide these services to a wide range of people, and that having to compete with the federal government would hamper private sector participation in the payments industry.
RETAILERS
On the other hand, the retail sector reacted positively to the Fed’s proposal and other actions that would enable businesses to receive payment faster. Walmart and Target went so far as to ask the Federal Reserve to develop a system that would enable 24/7 settlement of interbank transfers in real time, the implications being that when customers make payments with debit cards, retailers receive the funds faster.
WHAT’S NEXT
The feedback period closed in December 2018. The Fed is now in the process of reviewing responses.
NEACH feels strongly, as do a number of other respondents, that once the Federal Reserve reviews all of the responses, it should move swiftly to implement the identified solutions.
NEACH will continue to watch this issue closely and apprise its members of new developments as they become available.
For more on these and other faster payments news stories, visit NEACH’s Pacing Payments website.