On November 15, 2018, the Board of Governors of the Federal Reserve System (Board) published in the Federal Register its request for public comment on potential actions the Federal Reserve could take to “promote ubiquitous, safe, and efficient faster payments in the United States by facilitating real-time interbank settlement of faster payments” (Notice). The comment period closed on December 14, 2018. More than 400 comments and form letters were submitted in response to the Notice. The Board will use this feedback to assess what steps, if any, it should take related to the actions discussed in the Notice or alternative approaches offered by the payment industry or other stakeholders. Summarized below are the Board’s Notice, as well as a few notable comments, including some from entities apparently concerned that the Board’s initiatives could lead to a “public option” that could threaten the development of a private oligopoly in faster payments.
I. Summary of Notice
The Board specifically sought input on two potential actions:
- development of a service for real-time gross settlement (RTGS) of faster payments that is available on a 24x7x365 basis (RTGS Settlement Service); and
- development of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support RTGS services, whether those services are provided by the private sector or the Federal Reserve Banks (Liquidity Management Tool).
The Board also requested comment on whether other approaches aside from the RTGS Settlement Service or Liquidity Management Tool would help achieve the long run goals of “ubiquitous, nationwide access to safe and efficient faster payments.”
A. RTGS Settlement Service
The Board requested comment on whether RTGS is the appropriate strategic foundation for interbank settlement of faster payments and whether the Federal Reserve Banks should develop an RTGS Settlement Service.
The Board proposed for comment certain potential characteristics of an RTGS Settlement Service, including:
- Provision of payment-by-payment interbank settlement in real time and at any time, on any day, including weekends and holidays.
- Settlement of interbank obligations through debits and credits to balances in banks’ accounts at the Federal Reserve Banks, constituting settlement in central bank money.
- Interbank messaging functionality, which could receive and deliver the entire payment message, including bank routing information needed for interbank settlement and customer information needed by receiving banks to update their customers’ accounts (which traditionally is considered part of the clearing level).
- Submission of settlement instructions by agents on behalf of participating banks that hold accounts at the Federal Reserve Banks.
- Recording of end-of-day balances in the account and provision of balance reports for each calendar day of the week during which payment activity occurs, including weekends and holidays (i.e., a seven-day accounting regime).
- Utilization of the same account-monitoring regime that is in place for other payment services provided by the Federal Reserve Banks.
The Board also requested comment on whether certain auxiliary services or other service options are necessary to support an effective RTGS Settlement Service; for example:
- a proxy database or directory that allows banks to route end-user payments using the recipient’s alias (such as an email address or phone number), rather than their bank routing and account information;
- fraud prevention services that provide tools to detect fraudulent transfers;
- transaction limits to manage risk; or
- payment-by-payment offsetting functionality to conserve liquidity.
The Board listed a number of potential benefits that could be presented by the Federal Reserve’s development of an RTGS Settlement Service. For example, because of the Federal Reserve’s electronic access network and customer relationships, such a Service could increase banks’ accessibility to RTGS. The Service could also further support the Federal Reserve’s ability to provide payment system stability in moments of financial crisis or natural disaster, as it has done in the past with its cash, check, ACH, and wire transfer services.
However, the Board also acknowledged that an RTGS Settlement Service presents certain risks and operational and technical challenges. Specifically, the Board recognized that introduction of such a Service could disrupt and actually lower the prospects for ubiquitous, nationwide access to faster payments because industry stakeholders have already made certain initial investments in faster payment services and would need to assess how, or if, to connect to a new settlement service. The Board also recognized that the cost of investing in new technology for the banking industry, its customers, and service providers could be significant, and it could take many years to achieve full participation across the banking system. The Board requested comment on whether the risks and challenges are outweighed by the potential benefits of an RTGS Settlement Service.
B. Liquidity Management Tool
The Board requested comment on whether the Federal Reserve should develop a Liquidity Management Tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support RTGS services, and what type of tool would be preferable.
In order to develop this Tool, the Board proposed that the Federal Reserve Banks could either enhance an existing service or develop a new service. At its core, the Liquidity Management Tool would provide “around-the-clock” service that would allow banks to move liquidity as needed to support settlement outside standard business hours. In particular, the Board sought input on the level of involvement that individual banks would have in establishing the timing of liquidity transfers and in initiating specific transfers.
The Board discussed the potential benefits of a Liquidity Management Tool developed by the Federal Reserve, including that it could be “an efficient and economical way to close potential gaps in account funding times for existing and potential future private-sector 24x7x365 real-time interbank settlement systems” and could improve the level of participation by banks in real-time settlement infrastructure for faster payments.
II. Summary of Select Comments
In Mastercard’s view, the Board should not take any of the potential actions described in the Notice because such actions would “result in far-reaching changes to the retail payment system in the United States that, if undertaken, likely would distort competition, thwart innovation and slow progress toward faster payments in the United States.” Mastercard noted that private industry faster payment efforts on a national scale are well underway and that the appropriate role for the Federal Reserve would be to continue to support those efforts by facilitating industry dialogue, collaboration and problem solving. Mastercard challenged the Board’s conclusion that an RTGS service is preferable to deferred net settlement (DNS) for settlement of faster payments and also highlighted the potential risks and technical and operational challenges the Board acknowledged in its Notice, namely that development of an RTGS Settlement Service by the Federal Reserve “would cost hundreds of millions of dollars, take years to build and result in a marked delay in bank adoption of faster payments.”
Visa generally supports efforts by the Federal Reserve to pursue ubiquitous real-time payments in the U.S. and provided input on how the Federal Reserve might undertake such efforts “in a manner that adds efficiency to the payments ecosystem and avoids unintentional inefficiencies.” In particular, Visa recommended that a real-time payments infrastructure “be optimized for particular use cases” that will generate the most demand in order to avoid duplicative investment and support banks’ ability to recuperate costs involved in connecting to new infrastructure and handling new or different rules, processes and procedures. Visa also stated that any decision to build new real-time infrastructure should leverage existing private sector infrastructure and expertise in faster payments, risk, fraud, and end point solutions, adapting technology developed for other payment platforms where possible.
C. The Clearing House Payments Company, LLC (TCH)
TCH does not support development of an RTGS Settlement Service by the Federal Reserve because, given the current private sector market, it believes the Service is not needed to achieve ubiquitous, nationwide access to safe and efficient faster payments. Indeed, TCH claimed that its RTP network, which offers 24×7 real time clearing and settlement, “on its own, can provide equitable access to banks and achieve near universal access by 2020.” In contrast, TCH supports development of the Liquidity Management Tool because it believes such a tool would be beneficial to faster payment efforts in the U.S. and “very well suited to the Federal Reserve’s role as the central bank.” To develop the Tool, TCH recommended expanding the operating hours of the Fedwire Funds Service and the National Settlement Service (for payments services provided via ACH).