Tom Curry

The Clearing House (TCH) last month released business principles outlining the operation of its real-time payments network, which it launched in November 2017. The network, TCH’s real–time clearing and interbank settlement provider, currently is the only real-time payments system in the United States. 

The recently released principles come amidst the Federal Reserve’s and non-TCH stakeholders’ ongoing consideration of more regulatory involvement in the real-time payments space, including the possibility of the Federal Reserve establishing its own competing real-time payments system as part of its own payments system initiative. 

 Debate Over Fed’s Involvement 

In October 2018, the Federal Reserve requested comment on two potential actions that could support development of faster payments in the U.S. while also strengthening the security of the real-time payment services offered: the development of a service for real-time gross settlement of faster payments available to conduct settlement on a 24/7/365 basis; and the development of a liquidity management tool that would operate on a 24/7/365 basis in support of services for real-time interbank settlement of faster payments, whether those services are provided by the private sector or the Federal Reserve Banks.  

Subsequent to the Federal Reserve’s request for comment and in response to feedback from community banks, credit unions and other stakeholders, TCH released the principles for its real-time payments network, including its pricing and ongoing governance. Among other things, the principles provide that:  

• Every FDIC-insured U.S. depository institution is eligible to participate directly in the network.  
• There will be a flat-fee structure for all participating institutions regardless of size, and with no volume discounts or volume minimums.  
• The network’s rules and resources will be publicly available.  

Coinciding with their release, TCH also announced the expansion of its RTP Business Committee, which oversees and governs the operation of the network, to include four additional seats for community banks and credit unions. 

Jason J. Cabral

There has been both significant support for and opposition to the Federal Reserve’s involvement in the real-time payments space.  

On the one hand, community banks, credit unions and other payments operators support an increased role for the Federal Reserve in real-time faster payments. Supporters of an increased role for the Federal Reserve cite a myriad of reasons, including increased competition and efficiency and continued stability to the financial system during times of crisis. 

On the other hand, TCH and other commentators oppose more Federal Reserve involvement in real-time faster payments (it should be noted TCH has publicly supported the Federal Reserve’s liquidity management tool proposal).  

Opponents cite, among other things, the potential for market fragmentation in the event the Federal Reserve’s proposed real-time gross settlement service is not interoperable with TCH’s network, as well as increased costs should industry participants be required to join more than one network. Those in opposition also have argued that the Federal Reserve’s public consideration has caused other institutions to delay enabling real-time payments capabilities through TCH’s network while they wait for the Federal Reserve to act. 

Level Playing Field a Must 

Leaving aside the pros and cons of the Federal Reserve’s involvement in the real-time payments space, it is critical that all sides not lose sight of the principal issue: access for all. Whether the ultimate resolution is a one- or multiple-network solution, all institutions, regardless of size or significance, must have access to real-time payments networks to avoid households, small businesses and small institutions from being left behind. 

Dan Hartman

Of most concern to community banks, credit unions and other payments operators in support of greater Federal Reserve involvement is TCH’s caveat that its principles will apply so long as its real-time payments network is the country’s only real-time payments provider. This uncertainty around flat-fee pricing – and, more importantly, access – raises significant concerns for smaller community institutions, who are already facing steep competition from larger financial institutions, increased compliance and other costs, and declining profit margins. 

TCH’s principles are now a part of the larger debate over the future of the payments system in the United States. Control over and access to the payments system are critical to consumers, small businesses, community banks, credit unions and new entrants, and should be scrutinized by policymakers and regulators as they assess the potential competitive and financial stability impacts of real-time payments systems.  

Whether or not the Federal Reserve ultimately decides to proceed with either or both of its proposed real-time gross settlement service or liquidity management tool, all sides must act in a way that ensures, without question, unfettered access – on a level playing field – to all. 

Thomas J. Curry and Jason J. Cabral are partners in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate, pending admission to the Massachusetts Bar, in Nutter’s litigation department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.