A real-time payments network for individuals and corporations is being implemented by the The Clearing House (TCH) a private firm owned by 24 of the largest banks. It will be the first major upgrade in electronic payments since the Automated Clearing House (ACH) was created 40 years ago and Check 21 launched in 2001.
Commercial real-time payments began in the U.S. in November 2017 and by the end of 2018 had reached 11 large banks of the 24 that are owners of TCH. Together they account for about 50 percent of the deposit base in the country, although only a small percentage of the approximately 10,000 financial institutions in the U.S. when you include community banks and credit unions. Individuals can make real-time payments through Zelle, a service developed by large banks.
The banks participating in real time payments can all receive payments and some can also send. So far they are working with corporate payments.
Steve Ledford, senior vice president of product strategy and development at The Clearing House said the real-time payments project has generated a lot of interest from corporate users.
“One of the things we hear is a big drive for customer satisfaction or employee satisfaction. “When you have a payment which is immediately paid and you get immediate confirmation, that can really help reducing back office costs and customer service calls. Banks with large cash management have been eager to get on the system, earlier rather than later.”
It is still early days for RTP, the registered trademark for TCH’s real-time gross settlement system, added Ledford and the payment types being processed are nothing unusual, so far.
“We do know that banks and the tech providers are developing products that are not just your typical one-way payments,” he added. “A good example is consumer bill pay that would use a Request For Payment, which could be used to send the bill or a reminder, deliver it to a mobile device and the customer could immediately pay it. We came up with a design for this, tested it with some consumer panels and it proved very popular.”
He expects to see it operational this year.
For supply chain payments, companies could provide immediate delivery of invoices.
Banks can connect to TCH through a gateway or hub, or through third party services providers such as FIS, Fiserv, Jack Henry Finastra and other third party processors who offer payment services.
Many banks that are not part of TCH are waiting to see what the Federal Reserve does. In October it issued a request for comments on whether the Fed should develop its own real-time payments (real-time gross settlement or RTGS) network and whether it should offer a liquidity management service.
“It would be a full blown faster payments service, in the same market as we are,” said Ledford.
A liquidity management tool that would enable transfers between Federal Reserve accounts 24/7/365 to support real-time interbank settlement of faster payments, regardless of whether those payment services are provided by the private sector or the Federal Reserve Banks, has won general approval.
As for Fed-operated RTGS, TCH and member banks are not in favor.
“We don’t believe there is a need for the Fed to enter the game as a processor of faster payments,” Ledford said. “The market is being well served, we have ramped up considerably and have plans by 2020 to be able to get to all of the country, every financial institutions in the U.S. Not only are we open to them, we are encouraging participation. We have programs to make it easy to connect to the RTP network. We don’t think there is an unmet need and we are happy to fulfill that.” And do it faster than the Fed could.
Some community bankers are skeptical. TCH began operations of RTP at the end of 2017 and still has less than half of its members operational, so what’s the chance they can reach the thousands of community banks and credit unions across the country?
Ledford said “It is misleading and a bit disingenuous to extrapolate the number of early implementations to an implementation rate for all financial institutions. It is important to remember that the 11 banks currently on the RTP network represent nearly half of all transaction deposits, providing solid foundation for future growth.”
Each direct connection, such as those with members of the clearing house or regional banks is customized, he added.
Smaller banks will typically connect through a third party aggregator, such as a core banking provider or a correspondent bank.
“In the case if third-party connections, the onboarding process is engineered to serve a large number of financial institutions. There is a great deal of planning and process integration needed to prepare for the first implementation…but subsequent implementations can be done through a standardized, streamlined process.”
Smaller banks and merchants also just don’t trust TCH to operate a neutral, accessible payments platform.
On Jan. 22 Finextra reported that Mastercard, whose Vocalink technology powers TCH RTP, was fined EUR 570 million “for obstructing merchant access to low-cost cross-border payment services.”
A year ago, MarketWatch reported a KBW list which showed 11 the largest banks, all of them members of TCH, had paid $243 billion in fines since the end of the financial crisis. At least one commenter to the Fed asked if the TCH banks were morally qualified to run the national real-time payments system.
Both sides agreed the Fed should act quickly to end uncertainty over the payment system.
TCH, its member banks and bankers from around the country are concerned about delay; TCH would like the Fed to quickly announce it won’t launch a system. Those who favor a Fed RTGS also want it to decide quickly, and get moving on implementation.
Brian Damman, legal counsel for Dwolla, attended a Federal Reserve Town Hall in Cedar Rapids, Iowa.
“The representatives from the Federal Reserve seemed surprised by how quickly the attending bankers hoped the [faster payments] system would be in place,” Damman says. “The representatives did well to temper expectations, and clarified that a determination had not yet been made whether such a system would be adopted, or how the system would operate.”
If a Fed system couldn’t be implemented with 18 to 24 months, it might “forego a lot of early adopters based on time to market,” said Adam Steenhard, Dwolla’s director of professional services, who also attended.
Ledford said the Fed could get in the way of faster payment adoption.
“They [the Fed] will be coming to the market after there has been a lot of work done by ourselves and others, and they won’t be able to bring it to market immediately. They have to go through comments and then build out the network, and that will take a few years. If folks wait for the Fed to be in place it will delay the goals we all have to implement true nationwide faster payment. This will just slow down the movement to get to faster payments.”
However the Fed already runs an ACH network and Fedwire, so it might be able to get up and running faster than that.
Two RTGS systems could fragment the market, Ledford added.
The Fed’s request for comments suggests that two separate RTGS systems could interoperate as the ACH networks do, but, said Ledford that has never been done with real time payments.