The battle for real-time payments dominance in the U.S.

Since Fed catalysed the private sector to deliver real-time payment capabilities, there has been advocacy for the central bank backed, real-time payments (RTP) scheme. Many feel the lack of a ubiquitous RTP infrastructure has become a road block to innovation in financial technology and even created a competitive disadvantage for the U.S. economy.

But could this be about to change? In October 2018, the Federal Reserve (Fed) re-ignited the issue by releasing a request for comment around its plans for a unified RTP system. Challenger and community banks, tech giants, fintechs and major U.S. retailers all strongly and publicly backed the proposal.

Unsurprisingly the private sector solution providers and the banks that already use them have taken the opposition position.

One system to rule them all? And should it be the Fed?

In the wake of the recent request for information from the Fed, the argument seems to centre on two choices:

1. 1.     Should the US have (default) national utility to ensure that all solutions run efficiently and fairly?

Although not common, it has been tried in a couple of countries (e.g. Mexico over a decade ago, and most recently by ECB in EU). The historical precedents in US are mixed: Fed offers Wire, ACH and Check clearing services in competition with private sector utilities but doesn’t offer competitive services in the card space.

1. 2.     Should there be multiple competing purely private sector operators on the basis that market competition will ensure efficiency and fairness?

The challenge here is that with the Fed self-nominating itself for the “second operator” role, it can hardly be viewed as “just another market competitor” (although the same could be said about bank-backed TCH). It could be argued that the arrival of such a formidable entrant may in fact prevent new players from entering.

In the blue corner

Tech giants such as Amazon, Apple and Google have all made their position very clear – within a responding letter from the Financial Innovation Now (FIN).  

Within the letter FIN applaud the board for thinking boldly to driving the United States towards a modern payments infrastructure that serves the needs of all Americans, stating “Given the urgent need and growing demand for real-time payment options, we urge the Board to move expeditiously and consider ways to make any future RTGS system a platform for payment innovation”..

These tech giants have already been offering solutions in this area (Facebook cash, Google Pay, etc.), relying on bank settlement rails to complete the transaction and absorb the association costs. They will be better able to maintain their “free” model if those costs go down (if Fed follows the EU-TIPS model) and if they can bypass bank processes altogether (eg Transferwise in the UK). They can shave off those layers of costs while keeping the valuable data to themselves and not with others in the value chain, such as banks.

However, it is true that with pure market competition those objectives will take longer to achieve, and they may not ever happen.

In addition to the big tech giants joining the fray, major retailers like Walmart and Target are also applying pressure on the Fed.

For retailers, this type of offering could facilitate the launch of another payment platform that would allow customers to pay directly from their checking accounts at the point-of-sale, entirely bypassing card rails and shake up the popularity and reliance on cards – and enable them to avoid the levy card suppliers are pushing to the retail chain.  

In a letter addressed from Walmart, it states “Walmart believes that the Federal Reserve is uniquely positioned in the market to deliver this service...The Federal Reserve has relationships with every financial institution in the country, a long track record of delivering world-class payments and settlement services, and a reputation in the marketplace as an honest broker of interests among the various stakeholder groups”.

The smaller banks who traditionally view the Fed as the counterweight to the interests of the larger FIs have taken their customary position as well.

In the red corner

It sounds all pretty convincing, however the opposing side isn’t holding back any punches.

In a letter from Lipis Advisors (advisors to top tier FIs and infrastructures), Leo Lipis shared his thoughts with the board, stating that “If the system is developed as proposed, the results will be contrary to the Fed’s intentions and diminish the effectiveness of faster payment solutions already in the market”. He fears that the system will “delay ubiquitous adoption, complicate and inhibit interoperability, and result in lower volumes but higher costs to the industry and end-users”. Something that is echoed throughout the money centre bank’s replies. 

Mastercard and Visa also oppose the move. Both players already have connectivity to the same pool of banks as the Fed. They’re further ahead of the Fed and TCH in the core integration – since the Visa OTC and Mastercard Send products already offer real-time funds availability to the recipient. The market has seen further moves from these players to hedge against the impact of their core card business – e.g. Mastercard bought VocaLink and Visa recently won the bid for Earthport, signalling their ambition to expand their capabilities in domestic and cross-border account to account money movements. 

Should the Fed provide a RTP scheme?

Obviously, Fed’s role as a central bank makes it uniquely positioned to shift the payment landscape in the U.S.

• As the only provider of central bank settlement services, it can smooth the way for existing rails to improve their speed and availability and to enable the creation of competing rails or bilateral arrangements where economical. This is why the Fed’s liquidity management tool proposal seems to find deep support from the stakeholders in both blue and red corners
• Since cross border RTP will require coordinated central bank settlement, the Fed is again in the unique position to drive that dialogue. Equally – since some level of regulatory harmonisation may be required, the Fed is again in a better position to drive that than a private entity

The real risk of a Fed centralised real-time payments architecture (in view of the red corner and my own view) is that it won’t add anything new to the current competitive landscape with bank utilities, and private companies providing both fast and real time rails. TCH, Paypal, Venmo, Zelle, Visa Direct and Mastercard Send and others already serve all push use cases: P2P, Disbursements, Bill Pay and Cross border. And they are all formidable competitors. According to Steve Ledford who leads the RTP initiative for TCH, “We see MasterCard and Visa as very direct and formidable competitors already. We compete head to head for disbursement and P2P fulfilment volume with both card networks. We also consider same-day ACH to be competitive with RTP across a range of use cases.” So, it seems there is already a developing and growing ecosystem centred around three types of rails – RTP, Same Day ACH and Cards.

In addition, by virtue of being a “super-competitor”, Fed RTGS entry may do the opposite - delay adoption (as other FIs wait for its offering) and reduce competition by making the business case for RTP much less attractive for private sector alternatives. 

What happens in the U.S. with regards to central bank involvement and scheme multiplicity will provide important context to the precedent set by the ECB (through introduction of TIPS) and will play a key role in how RTP systems in other countries play out. The lobbying efforts of big tech and fintech, the reaction of FIs, and the Fed’s final path forward will have massive ramifications for financial services across the globe.

The world is watching.