Was anyone surprised when the Fed announced August 5 it would create a real-time payment and settlement service? The Fed has been the backstop clearing house for payments for more than a century; the evolution of those payments to digital is no reason for the Fed to back away from the crucial work of facilitating payments and settlement.
Whenever government provides essential infrastructure, private sector providers of similar infrastructure cry foul. Investors don’t want competitors, especially ones with the real or perceived advantages of government backing. While I am a free-market advocate who likes private sector solutions, I accept that certain things should be handled collectively – things like roads, mail delivery, and yes, payments. That doesn’t mean I don’t believe there’s a place for toll roads, private-sector delivery companies, and payment options, but I wouldn’t solely count on them to equitably provide ubiquitous services.
The RTP network developed by the big bank-owned The Clearing House is a private sector marvel but it would be naive at best, reckless at worst, to exclusively rely on it for all electronic payments and settlement. The FedNow service will create options and redundancy, which will further strengthen and stabilize our economy.
We are fortunate in the United States to have a diverse banking system with large and small banks. Asking the numerous smaller players to entrust their business to the largest banks is unrealistic. Smaller banks, which already feel a lot of competitive pressure from larger banks, simply don’t want to share customer payment information with The Clearing House, which many bankers see as a conduit to the largest financial institutions.
The existence of two systems for handling electronic payments is another manifestation of a divided banking system, a reality that is increasingly recognized by lawmakers and regulators who, during the last decade, have adopted many laws and rules differentiating the largest banks from the smallest. Tailored regulation is the way to go and more policymakers than ever seem to embrace the concept. RTP and FedNow will not be identical so there will be perceived benefits and deficiencies associated with each. Pricing will also vary, with the Fed mandated to cover its costs, presumably including initial development expenses.
The RTP network is running now and will have more than a half-decade of experience by the time FedNow is operable. Bankers in smaller institutions surely lament the pokey timeline, but at least by 2023 they can fully participate in payments without feeling as if they are leaving their customers susceptible to poaching.