[Senate Hearing 116-93]
[From the U.S. Government Publishing Office]
S. Hrg. 116-93
FACILITATING FASTER PAYMENTS IN THE UNITED STATES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE CURRENT STATE AND EVOLUTION OF THE U.S. PAYMENTS
ECOSYSTEM AND HOW THE CURRENT PAYMENTS SYSTEM WORKS OR COULD BE
IMPROVED
__________
SEPTEMBER 25, 2019
__________
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
38-550 PDF WASHINGTON : 2020
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Catherine Fuchs, Counsel
Corey Frayer, Democratic Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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WEDNESDAY, SEPTEMBER 25, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 36
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
Prepared statement....................................... 37
WITNESSES
Esther George, President, Federal Reserve Bank of Kansas City, on
behalf of the Federal Reserve System........................... 5
Prepared statement........................................... 38
Responses to written questions of:
Senator Brown............................................ 71
Senator Toomey........................................... 75
Senator Warren........................................... 77
Senator Sinema........................................... 80
Robert Hunter, Executive Managing Director and Deputy General
Counsel, The Clearing House Payments Company................... 6
Prepared statement........................................... 44
Responses to written questions of:
Senator Brown............................................ 81
Senator Warren........................................... 82
Robert A. Steen, Chairman and CEO, Bridge Community Bank, on
behalf of the Independent Community Bankers of America......... 8
Prepared statement........................................... 53
Responses to written questions of:
Chairman Crapo........................................... 84
Senator Brown............................................ 85
Senator Warren........................................... 85
George Selgin, Senior Fellow and Director, Center for Monetary
and Financial Alternatives, Cato Institute..................... 9
Prepared statement........................................... 56
Sheila C. Bair, Former Chair, Federal Deposit Insurance
Corporation.................................................... 11
Prepared statement........................................... 62
Responses to written questions of:
Senator Brown............................................ 87
Senator Warren........................................... 90
Additional Material Supplied for the Record
Revised Statement of George Selgin............................... 92
Statement of The American Bankers Association.................... 98
Statement of The Credit Union National Association............... 103
Statement of Financial Innovation Now............................ 106
Statement of Food Marketing Institute............................ 107
Statement of Nacha............................................... 110
Statement of The National Association of Federally-Insured Credit
Unions......................................................... 114
Statement of The Retail Industry Leaders Association............. 116
(iii)
FACILITATING FASTER PAYMENTS IN THE UNITED STATES
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WEDNESDAY, SEPTEMBER 25, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. The Committee will come to order.
Today the Committee will turn its focus to facilitating
faster payments in the United States. Faster payments are
important and yield economic benefits for both consumers and
businesses by providing them with greater flexibility when
managing money and making time-sensitive payments on demand.
Real-time payments offer efficiency and convenience,
helping consumers to better manage their spending and avoid
unnecessary fees and penalties, and helping businesses pay for
goods and avoid other costly sources of funding.
Unfortunately, the U.S. has lagged behind other countries
in the development of real-time faster payments for retail.
Recognizing this shortcoming, in 2015, the Federal Reserve
organized a Faster Payments Task Force, made up of a diverse
group of stakeholders, to encourage the development of a real-
time payment system in the United States.
The Fed stated in its report on strategies for improving
the U.S. payment system that it ``would not consider expanding
its service provider role unless it determines that doing so is
necessary to bring about significant improvements to the
payment system and that actions of the private sector alone
will likely not achieve the desired outcomes for speed,
efficiency, and safety in a timely manner.''
Responding to the mission of the Faster Payments Task
Force, The Clearing House announced in 2016 its intent to
launch a real-time payments system, which it officially
launched in November 2017.
Just prior to The Clearing House launching that system, the
Faster Payments Task Force in July of 2017 issued a final
report, which offered several recommendations for achieving a
safe, ubiquitous, and efficient faster payments system in the
United States.
One of those recommendations was for the Federal Reserve to
develop its own 24x7x365 real-time gross settlement system for
retail payments and to assess whether there were other
operational roles the Fed should play in faster payments.
After determining the Federal Reserve Banks should develop
a new real-time gross settlement service, on August 2, 2019,
the Federal Reserve Board voted on the Fed's proposal. The lone
dissenter was Vice Chairman for Supervision Randy Quarles.
The Federal Reserve then issued a notice and request for
comment on Federal Reserve Actions to Support Interbank
Settlement of Faster Payments--a system referred to as FedNow.
In Vice Chairman Quarles' dissent, he noted that, ``The
U.S. private sector has a long history of providing efficient
payment solutions to consumers and businesses.'' He added that,
``The public sector should provide its own capacity only when
the evidence of market failure is clear and alternative means
to achieve public goals are not feasible. He added that he
``does not see a strong justification for the Federal Reserve
to move into this area and crowd out innovation when viable
private sector alternatives are available.''
Additionally, when providing a new payment service, the
Federal Reserve is required to meet certain obligations and
criteria before moving forward. Those criteria are: the Federal
Reserve must expect that its providing the service will yield a
clear public benefit; the service should be one that other
providers alone cannot be expected to provide with reasonable
effectiveness, scope, and equity; and the Federal Reserve must
expect to achieve full recovery of costs over the long run.
Throughout the Fed's process, some financial institutions
have raised concerns about the Fed's analysis and its process,
the cost and amount of time it would take to develop its own
real-time payment system, its prospects for achieving
interoperability, inherent conflicts of the Fed operating its
own system, and prospects for negatively affecting existing
real-time payment systems.
Still, other financial institutions urged the Fed to move
forward due to their concerns surrounding pricing, power, and
competition in the marketplace.
I strongly support better, safer, and faster payments in
the U.S., including the work already done on existing solutions
in the private market.
I look forward to learning more about numerous issues
during this hearing, including: clear demonstration of the
market failure or problem that the Fed believes it must solve
through the development of its own real-time payments system;
how the existing real-time payments platform works, how it has
been impacted by the Fed so far, and the consequences of the
Fed developing a competing system; and how the Fed believes its
proposed system could achieve interoperability, minimize
negative effects to existing private sector participants, and
fully recover its costs quickly.
I look forward to hearing from each of you on your views on
these payments in the U.S. and more about the existing and
proposed platforms.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thanks, Mr. Chairman. Thank you to the very
distinguished panel with us today.
Whether it is Facebook thinking it can run its own currency
or big banks wanting a monopoly over our payment system, we
cannot allow corporations to take over critical public
infrastructure so they can squeeze more profits out of working
families.
Whether you punch a clock or swipe a badge, every working
American knows how important payday is. It is often the day you
know you can pay your bills and make rent. But sometimes payday
does not line up with the day your bills are due. If that means
a delay in paying the bills, banks will pile on late fees and
overdraft charges, so it is even harder for people to make ends
meet.
Recently, the Federal Reserve Board announced that it will
develop a system to provide payments in real time. This is
great news for millions of Americans who live paycheck to
paycheck--for anyone who has waited for a check to clear or had
to resort to a payday lender on Friday to tide them over until
Monday. Faster payments will allow Americans to actually use
more of the money they have already earned.
But while some of us see a problem to solve for working
families, the biggest Wall Street and foreign banks see
opportunity. They see what they always do, and that is dollar
signs. They see another way to squeeze more profits out of the
rest of us.
That is why they do not want the Fed to be involved. They
built their own real-time payment system on top of existing
Federal Reserve infrastructure, but we really do not know how
it is governed, how much it will cost, or how they plan to skim
more profits off the top.
We cannot trust that the big banks will not charge more to
community banks and credit unions. They have already changed
their mind on their prices once, and there is no guarantee they
will not change their minds again.
Big banks oppose the Fed's efforts because they want to be
the only game in town.
We know what happens when we trust Wall Street.
Eleven years ago this month, Lehman Brothers failed,
sparking the worst financial crisis since the Great Depression.
Many of the big banks now asking for this monopoly over the
real-time payments system are the same Wall Street banks that
wrecked our financial system and came begging for billions of
dollars in taxpayer money to save them.
They have not exactly cleaned up their act.
These same banks, like Wells Fargo, Bank of America, and
the President's favorite, Deutsche Bank, have been involved in
scandal after scandal, creating fake accounts for customers,
illegally foreclosing on servicemembers' homes, violating U.S.
sanctions laws--on and on and on. It seems like there is a new
scandal every day. Capital One just suffered a huge data
breach, exposing millions of customers' personal data.
Remember those overdraft fees and late fees and transfer
fees that we are trying to protect workers from? It is these
same big banks that slap on those fees. They created this
problem; now they want to charge people to solve it.
To make matters worse, the Administration is rolling back
the safeguards that we put in place to protect working families
from the risky Wall Street activities that crashed our economy.
It was another financial crisis over 100 years ago that led
us to create the Federal Reserve to clear payments and govern
our currency. Congress recognized the high fees and abuses
going on in our payment system and understood that we needed a
publicly run--a publicly run--central bank to provide financial
stability and fair access to the payment system. In the words
of Representative Glass--later to be the Senator Glass of
Glass-Steagall--they ``sought to tear down these tollgates upon
the highways of commerce.''
That is how we should think about the payment system--as
the highways of commerce that support every dollar that fuels
our economy. Just like roads and bridges, the payment system is
critical public infrastructure, something that everyone--
everyone--should be able to use. We cannot let profit-motivated
big banks--banks whose mission is to serve shareholders, not
ordinary Americans--we cannot let them have a monopoly over it.
This Committee has heard a lot this year about big
corporations taking advantage of us through the smoke screen of
new technology and innovation.
In our data privacy hearings, we heard about big tech
companies and financial firms manipulating us into sharing our
personal data so they can profit.
At our hearing, Facebook dodged our questions about its
plan to run its own digital currency out of a Swiss bank
account--showing yet again that we cannot trust them.
We cannot allow big corporations to take over critical
public infrastructure. You would think we should know that by
now. The largest banks and tech companies are not acting in the
interest of working Americans. Their interest is to turn a
profit for themselves and their investors. I understand that.
But the Fed's interest is not to make a profit. It is to
make sure everyone, that all people can pay their bills on time
and transfer money when they need it, whether they live in
rural America or in a metro area.
The Fed's real-time payment system will benefit working
families, small banks and credit unions, small businesses, and
the public as a whole. Everyone except Wall Street agrees.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown.
Today's witnesses are: Ms. Esther George, president and
chief executive officer of the Federal Reserve Bank of Kansas;
Mr. Robert Hunter, executive managing director and deputy
general counsel of The Clearing House; Mr. Bob Steen, president
and chief executive officer of Bridge Community Bank, on behalf
of the Independent Community Bankers of America; Mr. George
Selgin, senior fellow and director of the Cato Institute; and
the Honorable Sheila Bair, former Chair of the Federal Deposit
Insurance Corporation.
Again, I want to thank all of our witnesses for being here
and sharing with us your expertise today. Your written
testimony has been entered into the record. We will take your
testimony in the order I introduced you, and you may start, Ms.
George.
STATEMENT OF ESTHER GEORGE, PRESIDENT, FEDERAL RESERVE BANK OF
KANSAS CITY, ON BEHALF OF THE FEDERAL RESERVE SYSTEM
Ms. George. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, thank you for this opportunity.
Chair Powell has asked me to speak to you today in my role
as the Federal Reserve Bank leader responsible for our payments
improvement initiative since its beginning and as Chair of the
Financial Services Policy Committee, which oversees the
provision of payment services to depository institutions and
the United States Treasury by the 12 Federal Reserve Banks. I
am pleased to offer my statement for the record as well as an
in-depth statement on the role of the Federal Reserve in the
payments system and the recently announced proposal to support
faster payments through the development of a new service called
``the FedNow Service.''
Since the Federal Reserve's founding more than a century
ago, it has provided payment and settlement services as part of
its core function of promoting an accessible, safe, and
efficient payment system. Today the Federal Reserve is
continuing this important operational role and preparing to
support the modernization of our Nation's payment system with
capabilities that allow payments to move quickly through a safe
and efficient foundation, on top of which innovation and
competition can flourish.
This decision was made only after three established
criteria were met.
The first of these criteria is that other providers alone
cannot be expected to provide the service with reasonable
effectiveness, scope, and equity.
Of notable importance related to this criterion is the
Federal Reserve's ability to connect to more than 10,000
financial institutions. Through these connections, our existing
payment services allow banks of every size to serve the needs
of thousands of communities across the United States with
competitive, fair, and transparent access. Providing
comprehensive nationwide reach is something that we believe
will present significant challenges to other providers in the
current market landscape. Coming from a region of the country
with a significant number of small community banks serving
rural areas of the central United States, I can tell you the
Board's decision to provide this new service has been very well
received.
The second criterion is that there will be a clear public
benefit, including promoting the integrity of the payments
system and reducing payments system risk.
The Federal Reserve must continue to play an important role
in promoting the safety of the U.S. payment system by providing
liquidity and operational continuity in response to financial
turmoil, terrorist attacks, natural disasters, and other
crises. The FedNow Service will allow the Federal Reserve to
retain its ability to provide stability and support to the
banking system, as well as promote the development and
implementation of industrywide fraud mitigation standards.
Development of the service will also enhance safety of the U.S.
payment system by promoting resiliency through redundancy.
The third and final criterion is that the Fed be able to
fully recover its cost over the long run. The U.S. payments
infrastructure today includes alternative payment choices and
providers. The Federal Reserve and The Clearing House currently
operate competing and interoperable services, which bring
important benefits for resiliency and competition. In all of
our services, we have been able to meet the requirements of the
Monetary Control Act for cost recovery that ensures competitive
fairness while fulfilling our public policy goals. We fully
expect this will be the case with the FedNow Service.
As was explained in a 2016 GAO study, the Federal Reserve's
role as an operator has long been judged as effective in
promoting accessibility, safety, and efficiency for the
Nation's payment system and its customers.
Last summer, the U.S. Treasury recommended that ``the
Federal Reserve move quickly to facilitate a faster retail
payments system.'' We are engaging now with stakeholders for
their input on features of the FedNow Service through the
Federal Register notice issued last month, and I am confident
that together we can achieve our public policy objectives for
broadly accessible, safe, and efficient faster payments.
Thank you. I am happy to respond to your questions.
Chairman Crapo. Thank you.
Mr. Hunter.
STATEMENT OF ROBERT HUNTER, EXECUTIVE MANAGING DIRECTOR AND
DEPUTY GENERAL COUNSEL, THE CLEARING HOUSE PAYMENTS COMPANY
Mr. Hunter. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Committee, my name is Rob Hunter,
and I am the deputy general counsel of The Clearing House,
based in our North Carolina facility. I have worked at The
Clearing House for more than 10 years providing senior legal
support to our payments systems, including our focus today, the
RTP network, which I was privileged to be involved in
developing. I am also the past Chair of the Subcommittee on
Electronic Payments of the American Bar Association and have
been involved in payments throughout my career.
The RTP network is a new and exciting part of our national
payment infrastructure. It was launched in 2017 by The Clearing
House, is fully operational, and today reaches over 50 percent
of the transaction accounts in the U.S. One of the most
distinguishing features of the RTP network is that it operates
in real time and all the time. There are no ``bankers' hours.''
It functions 24x7. The RTP network also delivers on the vision
of faster, more efficient, and more secure payments that will
benefit every American consumer and business.
This innovation is consistent with The Clearing House's
long history of providing core payments infrastructure that is
efficient, safe, and reliable. Founded in 1853, for over a
century-and-a-half The Clearing House has served as the leading
private sector operator of payments infrastructure in the
United States. On an average business day, The Clearing House
clears and settles nearly $2 trillion over its wire transfer,
automated clearing house, and check-clearing networks.
Created to provide the payment services required by the
Nation's economy, The Clearing House exists to serve depository
institutions of all sizes. In fact, more than 80 percent of the
participants in our ACH and check-clearing services are
institutions under $10 billion in assets.
The Clearing House prices its services on a cost recovery
basis, and there is no special pricing for owner banks. The
Clearing House also has a remarkable history of operational
resiliency, clearing and settling payments every day without
fail, through world wars, financial crises, and natural and
manmade disasters, including 9/11 and the Great Recession.
This morning, I would like to briefly focus on the
Committee's request that I describe the RTP network and in
doing so will focus on the Fed's Faster Payments Task Force as
well as touch on FedNow. My written comments expand on these
topics as well as other questions posed in your invitation
letter.
The payments landscape in the United States is highly
competitive. Although there has been tremendous innovation in
end-user products during the last decade, what has been lacking
is modernization of what we often refer to as ``the payments
rails that undergird the system.'' The Federal Reserve
recognized the need for faster payments, used its convening
power to urge the private sector to make real-time payments a
reality, and established a Faster Payments Task Force. Not only
did the industry respond by designing, building, and bringing
to market the RTP network, investing over $1 billion to do so,
but according to the ratings it received from the task force,
it did so extremely well.
Of the 16 different private sector proposals submitted to
the task force, the RTP network was rated the highest,
including in such key areas as accessibility and path to
ubiquity or nationwide reach.
As I speak to you today, the RTP network is operating,
delivering the real-time capabilities that Americans want and
need. Payment recipients receive final good funds immediately,
and payment senders receive real-time confirmation that the
funds have been received. The benefits to consumers, small
businesses, and the Nation's economy are transformational.
The Committee has requested our views on the Fed's decision
to enter the real-time payments market. As provided in my
written testimony, The Clearing House is concerned that the
Fed's actions may hinder The Clearing House in achieving the
full potential of the RTP network. When the Fed competes with
the private sector, it must do so in a manner that minimizes
the competitive advantages that a Government system would have,
both inherently and as a direct byproduct of the Fed's role as
supervisor, the supplier of liquidity to the financial system,
and the central bank.
This is not the usual competitive question of impact on
profitability because The Clearing House does not seek to
operate at a profit. Rather, it is a question of The Clearing
House's ability to provide the most effective and efficient
real-time payment system to consumers and businesses to the
ultimate benefit of the overall economy.
To help The Clearing House achieve this objective, we
believe there are several actions that the Fed could take now
before launching its FedNow Service that would help to create
competitive equality between the private sector and the
Government. These are detailed in my written statement.
In conclusion, The Clearing House RTP network is the most
advanced payment system in the world, and we are working hard
to extend its benefits to banks and credit unions of all sizes
so consumers and businesses across America can realize the
benefits of faster, more efficient, and more secure real-time
payments.
We appreciate your interest in this topic, and I look
forward to answering your questions.
Chairman Crapo. Thank you.
Mr. Steen.
STATEMENT OF ROBERT A. STEEN, CHAIRMAN AND CEO, BRIDGE
COMMUNITY BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS
OF AMERICA
Mr. Steen. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, I am Bob Steen, chairman and CEO of
Bridge Community Bank in Mount Vernon, Iowa.
I testify today on behalf of the Independent Community
Bankers of America, where I have played an active role over the
years, including serving on the Payment Committee. Thank you
for the opportunity to testify today.
I believe it is imperative that the U.S. develop a robust
real-time payments system to meet consumer and business demand
and stay competitive with the rest of the world. This system
must create access for customers of all financial institutions,
regardless of size, in every American community.
How we achieve this goal is critical. A real-time payments
system is too important to be entrusted to a private monopoly.
The two dozen largest banks simply cannot own and operate the
U.S. payments system. ICBA strongly supports the Federal
Reserve's decision to build FedNow, a real-time payments system
that will give direct access to all financial institutions and
their customers.
Bridge Community Bank is a $96 million community bank
founded in 1903 and is owned by our 20 employees. We serve
rural communities in growth markets in and around Cedar Rapids
and Iowa City with small business, agricultural, and consumer
banking. Our business model is relationship banking in which we
serve the totality of a family's business and personal banking
needs, both deposits and lending. The transaction account is
the key to the customer relationship, and it is at the heart of
community banking. We have long recognized that payment
innovation is critical to the long-term prosperity and
independence of our bank and community banking. This is why I
have invested so much of my career in payment innovation and
developed multiple payment projects in our small bank.
Only the Fed can guarantee competition and choice. The U.S.
does not need another closed-loop payment system in which some
financial institutions participate and others are excluded. All
financial institutions and all customers must have access to
real-time payments, even those that live in small and rural
communities exclusively served by community banks. I firmly
believe this simply cannot happen without the Fed's role in
real-time settlement.
The Fed is uniquely positioned to provide access to all
11,000 financial institutions because these institutions have
access to a settlement account and a service connection with
the Fed. The Fed already operates a universally accessible
check, ACH, and wire transfer service.
If history is any guide, the Fed will maintain affordable
as well as universal access to faster payments. The Fed offers
a fair and affordable pricing structure today, even to the
smallest of the small financial institutions like our small
bank.
The Fed is trusted among community banks. Each community
bank has a relationship manager and the opportunity for direct
access to the payment system. I know our representative's name,
I know his cell number, and he answers the phone. As a
community bank, I know that I have direct and easy access to
Fed support services even after our banking hours, and I place
a high value on that access.
As I stated at the outset, payments innovation, offering
customers what they want when they want it, is critical to the
prosperity and continued independence of our community banks.
As a neutral real-time settlement network, FedNow will be
critical in our ability to continue to innovate. For example,
my bank, in partnership with another community banks, developed
a mobile app called ``ExcheQ'' which allows a user to send
money to anyone in the U.S. that has an account at any other
financial institution without a payment application on the
receiver's mobile device. Once FedNow is fully operational,
ExcheQ will allow real-time transactions without being
dependent on our core banking. That by itself is
transformational. Once ubiquity is achieved through FedNow, new
use cases and opportunities for innovation will emerge.
The Fed's entry into real-time payments is part of a
natural evolution from its involvement in check clearing, ACH
payments, and wire transfers. The Fed has strengthened the
payment system by providing safety, integrity, choice, and
equitable access to all financial institutions. I am confident
the Fed will bring the same critical benefits to real-time
payments.
Thank you again for convening the hearing, and I will try
to answer any questions.
Chairman Crapo. Thank you.
Mr. Selgin.
STATEMENT OF GEORGE SELGIN, SENIOR FELLOW AND DIRECTOR, CENTER
FOR MONETARY AND FINANCIAL ALTERNATIVES, CATO INSTITUTE
Mr. Selgin. Thank you, Chairman Crapo, Ranking Member
Brown, and distinguished Committee Members. I am the director
of Cato's Center for Monetary and Financial Alternatives, but
before I came to Cato, I was for 30 years an academic economist
specializing in monetary and payments theory and history.
The slow pace of payments in this country is a disgrace
that is taking a large toll on U.S. citizens and particularly
on those who live paycheck to paycheck, so I very much
appreciate this opportunity to address you and offer
suggestions for helping to speed payments up in this country. I
particularly want to discuss steps that Congress might take to
assure that outcome.
The Fed claims that the best way to solve the problem of
expediting payments is for it to compete directly with existing
retail payments networks and RTP, The Clearing House fast
payments system, by establishing its own fast payments system,
FedNow. And competition from the Fed certainly could help to
promote faster payments, but it only will do so if the Fed
competes on an even or level playing field with existing
private sector service providers. However, the Fed enjoys many
very special privileges that can allow it to slant the playing
field in its favor, and when it does that, the outcome can be
not to facilitate the achievement of faster payments but to
hinder its achievement.
I want to talk about several ways in which the Fed can
slant the playing field in its favor that can harm progress
toward faster payments. One of them is by failing to offer 24/
7/365 interbank settlement services. You have heard before and
you heard from Senator Brown how many persons live paycheck to
paycheck, and when their checks do not clear quickly or their
payments do not clear quickly, then they wait days in order for
funds to be made available to them, and many resort to payday
lenders for that reason.
Real-time payments can, of course, help solve that problem,
but, actually, they are not necessary. Those workers would
benefit just from having payments available on the same day,
that is, having funds released on the same day. The problem
they face is not that their funds are not released instantly.
It is that they take several days sometimes to be released.
Now, why is that? It is not because we do not have a real-
time payments system. It is because the Fed's own net
settlement services, Fedwire and the National Settlement
Service, do not operate on weekends, and do not operate on
holidays.
Now, the Fed has known about this problem and has talked
about fixing it for years, and NACHA has encouraged it to do
so, but it has been dragging its feet. And that means that it
is making it harder for existing payment systems to compete
effectively with it. I ask Congress to take the crucial step of
making sure that the Fed fixes this problem.
By the way, when it decided to launch FedNow, it amazingly
decided not to proceed with 24/7 settlement services on its
existing networks, and there is no excuse for that because
support for that reform is unanimous.
A second point--in my written testimony, I talk about
four--concerns the pricing of settlement of faster payment
services. You have all been told that the Fed needs to compete
because it is worried that The Clearing House will abuse its
monopoly, but, in fact, the facts are otherwise. The Clearing
House, as it said--and I know this from studying its history--
does not charge in order to make profits. It is providing a
service to its members through the payment facilities it
administers for them. It does not pay dividends, and this has
been true throughout its history. It is verifiable.
The problem is that the Fed can charge volume discounts,
and the TCH is planning to charge flat fees. Now, why does the
TCH want to allow itself to go to volume discounts if it needs
to? It is because in competing with the Fed in ACH services, it
found the Fed resorted to steep volume fees in the 1990s, and
it had to follow suit. The only reason it has a loophole in its
pricing policy is that the Fed might resort to volume payments
itself. Congress can prevent the Fed from doing that by making
it make the same commitment to flat fees that are equitable to
small banks as The Clearing House has made.
I will stop there. There is more in my testimony along the
same lines. Thank you.
Chairman Crapo. Thank you.
Ms. Bair.
STATEMENT OF SHEILA C. BAIR, FORMER CHAIR, FEDERAL DEPOSIT
INSURANCE CORPORATION
Ms. Bair. Mr. Chairman, Members of the Committee, thank you
so much. It has been a while since I have been before this
Committee. It is nice to be back.
I am here in a personal capacity as someone who has spent
most of my career in financial services, most of that time as a
regulator, and as you know, who had led the FDIC during the
financial crisis. And I saw firsthand how concentrations of
financial power in a handful of so-called too-big-to-fail
institutions almost ran our economy into a ditch and forced
trillions of dollars in Government support.
To be sure, megabanks are safer now, but I do not think
they are safe enough, and postcrisis reforms have been untested
so far. We do not know how well they are going to work, and
even now they are subject to unrelenting challenge by industry
groups, including, I might add, TCH.
The sector remains heavily concentrated. Over half of
deposits are in the largest 15 institutions. Nearly half of all
assets are concentrated in the top five. Given the continued
dominance of megabanks in our financial system, do we also
really want to cede to them control of the infrastructure
supporting the next generation of payment services?
You will be hearing competing arguments today about whether
FedNow will promote or hinder competition, whether it will
foster or inhibit innovation to meet demand for real-time
payments, whether it will broaden access and equitable pricing
or result in additional unnecessary costs. In evaluating these
arguments, I hope we can all apply some basic common sense.
Which kind of payment infrastructure is more likely to promote
competition--a single system controlled by an entity that is
owned by already dominant for-profit banks, or one that is
supported by two parallel systems, one of which is operated by
a Government agency whose mandate is to ensure equity and
fairness in the provision of payment services?
Which payments infrastructure will better promote
innovation--one dominated by a single monopoly or one resting
on two systems from which financial institutions and their
FinTech partners can choose in offering their customer-facing
platforms and services?
Which payments infrastructure is most likely to promote
resiliency--one solely built on the stability and operational
integrity of large banks, behemoths which still operate with
high levels of leverage and have failed in the past in times of
stress, or one that can also rely on a system operated by a
Government entity like the Fed with a proven track record of
success in managing through the most distressed of economic
conditions?
And, finally, which payments infrastructure is most likely
to achieve ubiquity in reach and access among all depository
institutions, regardless of size or geographic location--one
run by an organization whose owners are heavily located in east
coast urban areas, or one which includes a second system, like
the Fed, that has preexisting trust relationships with
virtually every depository institution in the country?
Some have tried to portray the Fed as a bureaucratic heavy,
interfering with private sector innovations to provide real-
time payments, motivated not by public interest but self-
interest and preserving their power in the payment system. I
frankly think that is nonsense. The truth is that the Fed had
taken a measured, deliberative approach to whether they should
build their own real-time interbank settlement system. They
have waited for the private sector. They have let the private
sector try to innovate to meet market demand for faster
payments, and indeed, the U.S. has fallen behind.
So while I congratulate TCH on developing the RTP system,
the truth is it has not gained significant traction, and the
overwhelming majority of public commenters who the Fed
solicited said the Fed should build its own system. The Fed has
worked hard to support TCH's efforts. It is not that the TCH
RTP system is going to go away. And they are committed to use a
process in building FedNow that will incorporate the views of
TCH and others and hopefully eventually achieve
interoperability. But, again, the Fed has determined based on a
consensus that pretty much include everyone other than the big
banks that their operational participation is required to
ensure a next-generation payment system that is ubiquitous,
fair, inclusive, and resilient.
We saw in 2008 what happens when a handful of very large
institutions are allowed to dominate basic financial
infrastructure, and I for one never again want to see a gun
placed against the head of taxpayers--bail the banks out or
watch your economy go down. 2008 was bad enough. I shudder to
think if those same banks had sole control of our payment
system of the future. When it comes to payments infrastructure,
two is definitely better than one. I think the Fed is right to
step in, and I hope that the Congress will support them.
Thank you.
Chairman Crapo. Thank you.
I am going to focus my questions on Ms. George and Mr.
Hunter and just ask you each to respond to the concerns that
have been raised by those who are worried about your particular
approach. For example, Ms. George, first, what do you say to
those who say that the Fed has an unfair advantage and would
actually operate from an unbalanced playing field in a way that
would reduce the effectiveness of both payment systems?
Ms. George. I would point to the Federal Reserve's history
in operating payment services across a variety of rails. There
has been no instance when the Federal Reserve has not operated
alongside with the private sector and we have been very
transparent in meeting the requirements that we offer
competitive and transparent pricing on our transactions.
That history was confirmed with the GAO report which looked
at this very issue of what the Fed's role has been, what has
happened to innovation in the economy and consumer prices
related to those payment services, and concluded that the Fed's
role has been beneficial in operating in that space. So the
history would support our intent, even with this new FedNow
service, to continue in that tradition.
Chairman Crapo. All right. Thank you.
Mr. Hunter, what do you say to those who indicate that they
do not understand why there would be a concern about having a
competitive alternative in the payment system?
Mr. Hunter. Thank you, Mr. Chairman. We are not against
competition in the payment system, but if there is going to be
competition in the payment system between us and the Fed, we
want to make sure that that is a level playing field between
the private sector and the Government.
There are two particular issues that the Fed could address
to ensure that there is a level playing field between the
private sector and the Government. One was briefly touched upon
by Mr. Selgin. The Fed has architected FedNow, what little we
know about it, to effectuate settlement through master accounts
at the Federal Reserve, which only the Fed can offer. Those
accounts count toward reserve balances and they bear interest.
The Fed could accord this same treatment to the RTP account
that we use for settlement that is sitting at the Federal
Reserve Bank of New York. So that is one issue.
The other issue deals with the potential liquidity that is
needed by the system on nights and weekends. The Federal
Reserve has indicated that it is architecting its system so
that the system itself will not enforce net debit caps on
nights and weekends when the Federal Reserve--Fedwire Service
is not available and NSS is not available. That can put banks
in credit positions. It is an architecture that, frankly, the
Federal Reserve under the requirements that we have for
establishing the account is not available to us. We wouldn't
probably do it anyway because we consider it unsafe and unsound
for banks to get into large credit positions or potentially
large credit positions during times when Fedwire and NSS are
not available.
As Mr. Selgin noted, the one recommendation that came out
of the Faster Payments Task Force that was unequivocal and upon
which everyone agreed in the comment letter process was for the
Fed to extend the operating hours for Fedwire and NSS. It is
the single most important thing that the Fed can do to
encourage private sector competition, and we would urge the Fed
to do that.
In addition to that, we are committed to level pricing for
banks of all sizes. We have made that commitment publicly. We
understand the history of the ACH where we had a level pricing
structure, but the Fed came in and offered steep volume
discounts in order to try to lure banks away from The Clearing
House's ACH service. That is the source of the caveat that we
have made, and we wanted to be transparent with the market and
indicate that we are committed to a level pricing structure.
Whether you are the JPMorgan Chase or you are the little bank
of Oak Ridge, North Carolina, where I live, you will pay
exactly the same. But I think we need a commitment from the
Federal Reserve to engage in that same level pricing structure
so that community banks and banks of all sizes can pay the same
amount regardless of the service.
Chairman Crapo. All right. Thank you.
Senator Brown.
Senator Brown. Thanks, Mr. Chairman.
Mr. Hunter, thank you for those last comments. Your website
says The Clearing House is owned by 25 of the world's largest
commercial banks. As we all know, painfully, 10 years ago a lot
of those banks needed to be rescued by taxpayers. Do you know
how much taxpayer money your member banks needed to stay
afloat?
Mr. Hunter. I do not, Ranking Member Brown, but I will tell
you one sector of the economy that functioned flawlessly
throughout the----
Senator Brown. I know what----
Mr. Hunter. ----clearing and settlement----
Senator Brown. The answer to my question is $194 billion,
and to think that you then want a monopoly on the payment
system just does not seem wise.
President George, let me start with you. Thanks for your
work on this question. Does part of the Fed's proposal
specifically benefit The Clearing House's real-time payment
system?
Ms. George. At the start of our work on looking at faster
payments, we were very interested in making sure the private
sector was able to participate in this effort and created a
special account that would allow for them to operate their
real-time payment system.
Senator Brown. So, logically, then it is fair to say The
Clearing House wants the Fed to support real-time payments but
only in a way that helps their private payment systems owned by
the big banks?
Ms. George. We have worked alongside The Clearing House in
many payment services, and it would be unusual for us not to
work alongside them even in this new rail.
Senator Brown. OK. Ms. Bair, sorry I missed the beginning
of your statement. I heard people describe it behind me. I am
in and out of--I apologize. I do not usually do this, but we
are doing Agent Orange and burn pit, and it is a hearing that I
asked Chairman Isakson to hold, and so I need to return. I
apologize.
As FDIC Chair during the crisis, you saw firsthand the big
bank failures and the havoc they wreaked on our financial
system and economy. How does the concentration of critical
public infrastructure--and that is what this is--in the hands
of the biggest banks pose a risk to our economy? What would
happen to small banks, and what would happen to working
families during a crisis if large banks controlled the payment
system?
Ms. Bair. Well, I think, first of all, I would like to say
that if you count all Government support, including FDIC debt
guarantees and Fed lending, we are well into the trillions. The
taxpayer number was what you cited, but it was quite a
massive----
Senator Brown. Being conservative.
Ms. Bair. Yes, you are being very conservative. Look, I
think you have centralization of risk. You have a single point
of failure. We have operational risk with just having one
system. You also have--the system is backed by a joint account
which is funded by these large banks, so if one or more of the
large banks could no longer fund into the joint account, we do
not know what will happen.
I think eventually if there is a disruption to--if we have
this monopoly payments provider and there is a disruption, the
Fed is going to have to come in anyway, and it will probably be
a lot more difficult and costly and potentially disruptive if
they have to take two or three steps to come in to support and
bail out the monopoly system that the large banks are running.
So we need two systems. Nobody is saying that we should not
have RTP. That is fine. But we need two systems, and it is much
more than protecting, the public coffers. There are the equity
issues in terms of the Fed's willingness to work with all
parties and be accessible and priced fairly with all parties.
That is also a significant policy benefit of having two
systems.
Senator Brown. Thank you.
Mr. Steen, thanks for being here. I admire that you run an
employee-owned bank where workers have a stake in the company.
Thank you for that.
With increasing consolidation in the industry and the
growing number of nonbanks and FinTechs engaged in traditional
banking, it seems to be harder--getting harder for community
banks to compete. Why is the Fed's decision to operate a faster
payment system so critical for community banks like yours,
employee-owned, but obviously other community banks as part of
the ICBA?
Mr. Steen. Well, Senator, thank you. As I indicated in my
statement, we believe that transaction accounts are the basic
core relationship with our customers, and we believe we have to
provide them the technology and the faster payment that they
need. Many of our customers do need money sooner than they are
getting it today. We provide availability early, as early as we
possibly can. On Thursday night at midnight, they get their
Friday pay. We do everything we can do to get them the money.
But we can make it better, and we believe FedNow will do that.
Senator Brown. Thank you to all of you.
Chairman Crapo. Thank you.
Senator Moran.
Senator Moran. Mr. Chairman, thank you. Thank you for
hosting this hearing, you and the Ranking Member. When you
introduced Ms. George, you introduced her as the president and
CEO of the Federal Reserve Bank of Kansas, and I appreciate
your thriftiness in choice of words.
[Laughter.]
Senator Moran. I also would like to pay tribute to Ms.
Bair, a highly respected Kansan, a native, and who is highly
regarded. She had the benefit of working for a highly regarded
Senator, and I appreciate your work throughout your life.
Let me start with Ms. George. Generally, I would say in
Kansas this proposal is popular with Kansas bankers.
Interoperability is important in addition to prompt payment,
and I want to see if you can assure me that whether a bank
chooses FedNow or the RTP system to provide those faster
payments, their business will flow to any institution in either
network. Today both institutions run retail and wholesale
payment services that are inoperable. Is the Fed committed and
confident that it will be able to continue the same with these
faster payments?
Ms. George. Senator Moran, having interoperability will be
a desirable outcome of this effort. We are focused on gaining
nationwide reach. We think it is important that every financial
institution gain access to real-time payment services, and then
we can begin, as we design the system, to look at what the
nature of interoperability will be. We are now asking for
comments on features and design, including interoperability,
and getting feedback on how that would work today relative to
how it works with our other payment services.
Senator Moran. Mr. Hunter, how do you see this issue?
Mr. Hunter. Thank you, Senator. I appreciate the question.
We do not envision that the systems will be interoperable.
Real-time payments are fundamentally different in terms of how
they work than the ACH or the wire transfer system, and if you
look at Europe, for example, where the central bank came out
with its own real-time payment system, it is not interoperable
with TIPS, which is the private sector's real-time payment
system. In a real-time payment system, clearing, which is the
transmission of the payment message, happens alongside
settlement. They are not bifurcated at all. They happen at the
same time, and they happen instantaneously. So from the time I
hit ``Send'' to send you money, Senator Moran, to the time that
money is in your account and you have got access to it, it is
literally milliseconds. Because of that architecture, which is
architected in the way that the Federal Reserve's Faster
Payments Task Force sort of set out the criteria, it wanted a
real-time payment system, you cannot bifurcate those processes.
So it is not like the ACH, which is interoperable for
transmission of the message only, but settlement happens at a
later time. Because clearing and settlement, transmission of
the message, and final payment happen immediately, those two
things are not separated. And you cannot interoperate in that
regard. Both the sending bank and the receiving bank have to be
on the same system. They have to be able to talk to each other
instantaneously, and they have to work in such a way that those
funds are transferred and available immediately. So we are not
optimistic that these two systems will be interoperable.
Senator Moran. Thank you for your comments.
Again, Ms. George, Mr. Selgin's comments about holidays,
weekends, and 24/7 caught my attention. What is the Fed
response in that regard?
Ms. George. So a real-time payment system will be operating
24x7x365, and that will include holidays and weekends. The
question that Mr. Selgin raised is one of how expanding hours
for funds transfer might facilitate the private sector service
in providing real-time payments. Because that is a systemically
important system, we will have to look at and do the
operational analysis on what it means to provide real-time
expanded hours, and we have committed to do that in the public
notice that we have put out to see what issues that raises,
recognizing that there would be benefits to the private
solution.
Senator Moran. Mr. Hunter, let me return to you quickly. I
think the RTP system has been up and running for about a year-
and-a-half. What benefits are consumers and businesses seeing
as a result of that? And what can we expect in the future those
benefits to then be?
Mr. Hunter. Thank you, Senator. Let me start with consumers
first and then go to businesses.
For consumers, it really fundamentally is a safer, more
efficient way to make payments. From the sender's side, they
can get immediate confirmation that the recipient of that
payment actually has the funds. So think about if you're paying
your power bill and you are late and you want to make sure that
payment gets there today, you have got immediate confirmation
that you have been able to do so.
We also have extensive rules in place so that consumers who
use alias, so if you type in a phone number or you are using a
directory of some kind, the consumer gets confirmation of the
real name. So if somebody types in or fat fingers my email
address, they are going to get a message back that says, ``Did
you want to send that payment to Rob Smith?'' ``Well, no, I did
not.'' So very, very important.
In terms of folks who are being paid and have to go to
payday lenders or check-cashing services, if their employers
are using the RTP system to make payment, they will have
immediate access to those funds. They will not have to go to
those services anymore.
On the business side, also incredibly transformational.
They can get payments into the hands of a supplier, for
example, for real-time inventory. They do not have to rely on
credit anymore, and that supplier can ship those goods with
confidence that they have been paid. They can attach just about
anything that you can send over the Internet, an invoice, a
picture showing that work has been done. So if you are a
plumber and you want to convince your customer that, ``Hey, I
have installed this faucet and it works. Here is the video.
Here is the photo.''
If you attach the invoice to what is called a ``request for
payment,'' you can automatically associate that payment with
the invoice and you do not have to do reconciliation on the
back end.
Senator Moran. Thank you. My time has expired. I will ask
some other witnesses questions for the record.
And I, too, need to join the Ranking Member in the Veterans
Committee. I will try to return, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Thank you, Mr. Chairman. And thank you to
our panelists for being here.
Ms. George, I would kind of like to focus a question here
on timing. Frankly, it is a little embarrassing, I think, that
we are so far behind, and the Fed's payment obviously is going
to be a complicated, really technical endeavor, and I believe
your deadline is like 2024, which is in technological terms
seemingly a lifetime away. It is only short if you are planning
on one of the legions who are running for President and you are
already making your plans.
What are you going to do, what is the Fed going to do--you
know, benchmarks, do you have benchmarks already in place that
you are going to be setting, that you are also going to deliver
to Congress to keep us apprised of what is going on between
2024 to make sure that you are on track? Do you have those?
Ms. George. So we are beginning now to define what the
features and design of this system could be, which will guide
our delivery times, and we do intend to be very transparent
with how that plan comes together, making available to the
public our intentions, and we will certainly be coming back
with future public comment as we design that system, and that
will include our delivery and planned implementation.
Senator Jones. I take it that you really do not--and I am
not being critical, but the benchmarks have not been set yet.
You have not set that timeline just yet but you plan on doing
that sometime after the comments within the next, what, 6
months maybe?
Ms. George. We are working on that immediately, so we are
beginning that phase even now. And as the comment period ends
in November, we will be compiling the input that we get from
the industry on how that system should look. That will inform
our delivery.
Senator Jones. All right, fine. Thank you.
For the panel, anybody that can answer this, we have
obviously seen these kind of payment systems in other
countries. They have been up and running, and there has been
the good, the bad, the ugly, I assume, with these. What lessons
are we learning from examining those? What lessons are we
taking that we can incorporate? What lessons are we learning
where mistakes have been made, mistakes that we want to avoid?
I will just kind of open that up to the panel.
Ms. George. So I would be happy to start. Core to this work
we have been doing has been looking at what other countries
have done and their experiences, and we have learned from
those.
One thing that makes it challenging to compare is that we
have a very complex and diverse financial system. Some
countries have a smaller number of institutions, and so the
issues have varied. I think one thing we have taken away from
this is the importance of getting input from the financial
institutions themselves to understand their ability to adopt
the technology, to connect to it, and to think about security
around that. Those have been the areas of our focus throughout
this work.
Senator Jones. OK. Mr. Hunter.
Mr. Hunter. Yes, Senator, so we have had extensive dialogue
with the payment system operators of real-time payments around
the globe. One of the benefits of coming late to the market
actually is the ability to learn from other countries and their
experience.
The design and operation of our payment system is
absolutely informed by lessons learned around the globe. One of
the things that you will see in our payment system is that it
is credit-push system only, and let me explain what that means.
There are no debit pulls, so if somebody gets a hold of your
account credentials, sometimes they can try to defeat bank
fraud systems and draw money out of your account. With the RTP
system, the only way that you can send a payment is you have to
authenticate into your banking platform and you have to
affirmatively tell the bank, once you have been authenticated
by the bank, that you want to push money out to somebody else,
so nobody can pull money out of your account.
We have incorporated what is called ``ISO 20022
messaging''. That is a little bit technical. But it is a global
messaging standard that at some point in time in the future, if
we want to, you know, connect these real-time payment systems
around the globe, it is a messaging standard that allows us to
try to do that.
Also, the way that we settle, in terms of the settlement
account that we use at the Federal Reserve Bank of New York and
the prefunding of that account eliminates credit risk from any
institutions. So to Ms. Bair's point, if an institution fails
to fund that account, their payments do not flow. There is
absolutely no credit risk to the system or any other financial
institution as a result of the failure of any bank.
Senator Jones. All right. Anybody else want to take a shot
at that or respond?
Mr. Steen. I would just use an example of our small bank.
We have leveraged real-time payment over the SPEI network in
Mexico, where a family member could arrange for a payment in
Mexico from having lunch in Solon, Iowa, from a mobile device
to an ATM withdrawal in real time. So we learned that things
are possible, and those funds are prefunded in Mexico, so there
is no credit risk. But it would be much better if we could link
up our real-time capability on this side of the border.
Senator Jones. All right. Yes, sir?
Mr. Selgin. The British system, which is often treated as a
model of an early fast payments system, offers an interesting
example of the challenges involved when you do not have central
bank settlement services that are working on weekends. And here
it is a challenge for real-time payments.
What that means is that they can have transactions in real
time all weekend, but they do not actually finally settle up
until the CHAP system, which is their equivalent to Fedwire, is
open again on Monday. Now, that means that for banks that are
releasing funds, funds are made available instantly, but there
is credit risk assumed. The way they solved that problem in
England is through something called the ``liquidity and
loan''--pardon me, ``liquidity and loan-sharing agreement,''
and all the banks contribute collateral to a fund so that if
any bank were to fail over the weekend, there is this fund that
they can draw on.
In the U.S., you could not do that with all the banks
involved. You could not possibly get them all on an agreement
like this, and that is a reason why 24/7 settlement on Fedwire
really is important to avoid risk. In our case, what the Fed
would do if it did not have those facilities for Fedwire with
its FedNow system, is incur the risk, which means we would
incur the risk of these overdrafts that essentially would be
taking place sometimes for long weekends.
Chairman Crapo. Thank you.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And thank you to
the witnesses.
I just want to see if we can get a little bit more clarity
about something that has come up. Mr. Hunter, my understanding
is that the RTP has made an explicit commitment to provide flat
fees on the transactions. As I understand it, that means
regardless of the size of the transaction, the volume of the
transaction, the size of the institution, all transactions
would be treated the same, with one caveat, and that caveat is,
if the Fed operates a parallel system and starts to offer a
discriminatory pricing structure, that the RTP may have to move
in that direction under that--is that about right?
Mr. Hunter. That is correct, Senator. It is similar to what
happened in the ACH.
Senator Toomey. OK. So, Ms. George, let me ask you a
question. Has the Fed made an explicit commitment that its
system will, guaranteed, offer only a flat fee payment--fee
structure?
Ms. George. We are in the process of designing the system.
We have not identified the pricing that will be associated with
it, although once we do, we will make that public.
I would just say on the issue of pricing, volume pricing is
common in the marketplace today, and it is often a way to take
high fixed costs and make sure that you are able to maintain
the adequacy of the system. Pricing today has allowed for
market share to expand with private sector operators and has
been viewed as being a fair pricing structure through numerous
reviews.
Senator Toomey. Thanks. This is very interesting because
what we have is the existing system is committing to not
introducing a discriminatory pricing mechanism. The Fed is not
making that commitment at this point, and, in fact, our
representative from the Fed is observing that sometimes there
are benefits in having pricing discrimination, which I
acknowledge that is entirely possible. But for those who are
concerned about which of these two is going to have
discriminatory pricing, it is a little bit ironic. It is the
RTP that is committed not to doing so.
Another concern that I have is interoperability. Mr.
Hunter, I am going to give an example that I think of--and
maybe I have got this wrong, so maybe you could help me, make
it clear. Let us say an Allentown manufacturer has 1,000
employees, and they are scattered around the country. They
inevitably have different banks that they use for their
personal banking. The Allentown manufacturer has a bank that
they use to process their payroll, and the Allentown
manufacturer would like to be able to deliver payroll in real
time so that their employees get the money instantaneously when
it is available.
If some of the employees use banks that are part of a Fed
system while the Allentown manufacturer has a bank that is
plugged into the RTP system and the two systems are not
interoperable, is it still possible for everybody to get their
paycheck in real time on time? Or does that create a problem?
Mr. Hunter. So it is certainly not easy, Senator. What the
manufacturer would have to do is they would have to work
through two different banks, and it would have to format the
payroll according to the specifications of either system. So it
will have to work through a FedNow bank to reach the endpoints
on FedNow and their customers, and it will have to work through
an RTP bank to reach the endpoints on that system, those banks
and their customers. So it creates a lot of inefficiency and
probably added expense.
Senator Toomey. Added cost, added inefficiency to have a
second bank playing this role. One of the things I hear from
time to time is that the RTP has not achieved ubiquity yet.
With the likelihood that there will be a Fed-run alternative in
the not too distant future, could that be contributing to the
reason that some banks are holding back in participating with
the RTP system?
Mr. Hunter. So, Senator, we certainly saw a chilling effect
of the original Fed proposal, which came out 11 months after we
launched. So I think the initial reaction to that was we do not
know what the Fed is going to be doing, we need to wait and
figure that out.
Since the Fed has come out with the FedNow proposal and
indicated that they will not be in the market for another 4 or
5 years, I think it is really sort of splitting the market, and
it remains to be seen how financial institutions are going to
react. There are certainly some financial institutions who have
indicated that they do not feel that they can or should wait 4
or 5 years to bring the benefits of real-time payments to their
customers. There are others who may wait.
Senator Toomey. One last quick question. This is for Mr.
Selgin. Back in 2013, as I understand it, the Fed launched what
they called the ``Strategies for Improving the U.S. Payment
Systems'' and stood up the Faster Payment Task Force. And,
effectively, the Fed, it seems to me, was calling out the
private sector to improve the payment infrastructure.
The private sector responds, spends over a billion dollars
on this project, more money individually to integrate with this
system, and went live in 2017. And then 2 years later, the Fed
announces it is going to stand up a competitor.
Given that sequence of events, do you think that has a
chilling effect on the private sector's willingness to invest
in the future and innovation certainly in the payment space but
perhaps in other spaces as well?
Mr. Selgin. I should think so, Senator. Mr. Hunter can
answer better than I can, but I cannot see how it could have
but a chilling effect. This effort by The Clearing House was
undertaken entirely in response to that initiative and with the
Federal Reserve's blessing and ultimately with its complete
approval of the scheme that The Clearing House had come up
with. Then only after that and after the system was up and
running did the Fed decide it was going to compete head on in
this same payment service.
I want to add, since it is relevant, that the idea that
what is happening with what The Clearing House is doing is
taking over an infrastructure that belongs to the public
sector, that is a complete misunderstanding of the history of
payments in this country. The Clearing House is much older than
the Federal Reserve, and in many countries, not just the United
States, most payments services are provided by the private
sector, many of them at least, sometimes in combination with
central banks but often alone. Central banks have their
specialty, which is providing cash and also the ultimate
settlement services. And as I said earlier, the Fed is not
doing that last job very well because it is limiting--after
years of being asked to do otherwise, still limiting the
availability of final settlement services. And by doing that--
and this is extremely important--it is not the case that you
need fast payments, in the sense of instantaneous payments, to
solve the problem of it taking days for workers to have their
checks clear, et cetera. That problem can be solved just by
making the existing Fed wholesale settlement systems 24/7/365.
The plan that would solve that problem that the Fed is now
pursuing will take 5 years. That is all those people waiting
for those checks to clear or those payments to clear will have
to wait for at least that many years, except to the extent that
they can turn to RTP. And that should not be the case. That is
a terrible dereliction of the Federal Reserve's duties to the
public.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chairman. And thank
you all for being here this morning.
President George, let me start with you. I want to follow
up on the questions that Senator Brown had asked. Do you think
it is important to consider the possibility that the Fed would
have to bail out one or more of the TCH banks if they were the
only real-time payment system?
Ms. George. I think our experience is that we do not, for
the smooth functioning of the U.S. payment system, want a
single point of failure. And history has shown during times of
stress that having the central bank as a provider of payments
has served the country well.
Senator Cortez Masto. OK. And as we talked about cost
recovery, because that is part of the conversation as well, and
because of your concern, because you do not want that single
point of failure, should that factor into the Fed's cost
recovery estimate?
Ms. George. It will factor into--any cost of our system is
required under the Monetary Control Act to be fully recovered,
and we intend to do that with FedNow Service.
Senator Cortez Masto. Thank you. And so, Ms. Bair, Chair
Bair, can you add your thoughts on the potential risk of a
bailout in the conversation we are having today?
Ms. Bair. Yes. I think as President George said, you have a
single point of failure if you have just one system. Payments,
it is kind of important. You disrupt payments, you get a
catastrophic situation with commercial activity and consumer
activity as well. It is not clear to me--the RTP system is
untested. They have designed it to prevent credit risk. I give
them that. But they maintain a centralized ledger, and we have
got to have confidence that that centralized ledger will
prevent negative balances in their joint account.
It is possible, as acknowledged, it is possible for a large
bank to lose the capacity to continue to fund the joint
account, so maybe the other banks participating in the joint
account are still OK. My question is: What happens to the
customers at that bank who are using it?
So I think there are a lot of unanswered questions about
how resilient it will be during a crisis, and so nobody is
saying we should not have RTP. Good. I am glad we have RTP. But
we should have another system, too. Competition is always good,
and the Fed is much better equipped to continue to function and
its track record is such to operate in good times and bad under
extremely stressed conditions. And if we just had this one
system, if it does disrupt, the Fed is going to have to come in
anyway with a much messier and inefficient way of trying to
stabilize the system again.
Senator Cortez Masto. Thank you. While I have you here, we
have been have conversations here in this Committee on this
issue, and, Chair Bair, in your testimony you urge the Fed to
fully explore the use of digital currency.
Ms. Bair. Right.
Senator Cortez Masto. Including cryptocurrency based on a
distributed ledger technology and effectuating real-time
settlement between banks. Why do you think the Fed should
consider developing a central bank digital currency that could
eventually be used by members of the public to transfer money
directly between----
Ms. Bair. Well, it is still a maturing technology, but it
is maturing rapidly. And, clearly, having a distributed ledger
that all banks would have access to, you do not need an
intermediary. You do not need a TCH. You do not need a
centralized ledger in that single point of failure. The digital
transfer is directly from one--the sending bank to the
recipient bank. So, yes, I think it needs to be explored. It is
still maturing. No other central banks have done it, but a lot
of other central banks are looking at it, and I hope that is
something that the Fed will continue to explore as they build
this system.
It also helps address some of the interoperability issues
that we were discussing earlier, but I would like to just--you
know, Mr. Hunter has insisted that RTP cannot be interoperable,
and I would just note that that kind of reinforces their
monopoly position if his view is that their system--real-time
payments is somehow incompatible with interoperability. And
interoperability is a two-way street, and I would hope that TCH
would sit down with the Fed and try to agree on common
standards and figure out a way these systems can most
efficiently interact. If he wants to say, no, nobody else can
play, then, you know, if you do not have the Fed, then that
just solidifies their monopoly position as a single provider of
this crucial function.
Senator Cortez Masto. Thank you.
President George, to what extent is digital currency and
the future of it being--are you considering that as you move
forward with this payment system?
Ms. George. The Federal Reserve and other central banks are
looking closely at how this evolving technology is affecting
the financial system and will continue to do so.
Senator Cortez Masto. Are you watching what is going on
with Libra?
Ms. George. We are watching that also, so the full range
from distributed ledger to digital currency is very much under
study as we see how those unfold.
Senator Cortez Masto. Thank you. Thank you all again for
being here.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman, for holding this
hearing, and thank you all for being here.
Mr. Steen, I want to let you know that I joined with a
group of Republicans and Democrats that recognize that small
banks and community banks have regulatory burdens on them that
we thought were inappropriate. That is why we joined together
against the objections of the Ranking Member of this Committee
to provide you all with regulatory relief. This may be an issue
where you and I want the same ends, but maybe achieve it
through a different means, and that is really what I want to
talk about.
Ms. Bair, you mentioned in your opening statement that this
was a measured and deliberative approach to decide to come up
with a payment system. I understand that a part of that is
engaging an outside firm to try and figure out what is wrong
with RTP and The Clearing House, and that the conclusion that
those outside consultants made was that most of it is working
right, some of it needed to be addressed.
And so I am wondering why we seem to be going with this
alla prima approach versus trying to address some of the
legitimate concerns Mr. Steen and others would have with using
RTP.
Mr. Hunter, Ms. Bair also mentioned in her opening
statement about the private sector approach could subject--in a
future crisis subject us to bailouts. Under what scenario would
The Clearing House or RTP be in a position to where it would
need to get--I understand the investing--I know the banks that
stood this up, and I understand them. But I am trying to
understand under what scenario--I understand that you performed
very well during the crisis. I do not think that you required a
bailout. I do not think that there were any outages. I do
believe that Fedwire has experienced some outages and does have
some resiliency challenges that they need to deal with, and
availability. But under what scenario would you actually be
subject to a bailout request?
Mr. Hunter. Senator, there is no circumstance where we
would be subject to a bailout request. I mean, we have detailed
processes in place to deal with banks that are on our systems
that have been worked out with the FDIC for resolution of those
banks, and Ms. Bair may not be aware of those given her
position at the FDIC. But we worked very, very closely on bank
resolutions, and there is no risk to the system. They are
architected in such a way that that just does not happen. So
those circumstances, Senator, simply do not exist.
Senator Tillis. Another question really going back to the
measured and deliberative approach. It is my understanding--
and, Ms. George and Mr. Hunter, maybe you can illuminate, but
under--the Bank Service Company Act of 1999 provides fairly
significant or broad authority but for some reason it appears
as though the Fed does not think that it has the authority to
engage with the private sector, to engage with The Clearing
House or RTP to address some of the concerns you may have,
maybe concerns that Mr. Steen has.
So why wouldn't a part of that deliberative approach be a
discussion about expanding the regulatory perimeter so that you
could address those concerns with a private sector solution? I
will start with you, Ms. George.
Ms. George. Thank you, Senator. The Board of Governors
explored this issue and highlights it in the Federal Register
notice that they believe those authorities were not adequate.
And, clearly, the Federal Reserve----
Senator Tillis. OK, but why not a discussion about
expanding the authorities to the extent that you could address
what we are now thinking about a major undertaking that will
take 5 to 7 years. I am a technology person. I think it is
probably plus 5, closer to 7, and a lot of cost. So why
wouldn't there have been a discussion of if you have concluded
that you do not have sufficient regulatory authority to come
back and come to Congress and ask what that may be?
Ms. George. I think because our experience under our
existing authorities of Congress of providing these services as
an operator have been so effective throughout history that it
led us to rely on those existing authorities and provide the
competition that has served the country well, and that was the
conclusion I think that you see in the Board of Governors'
analysis.
Senator Tillis. Mr. Hunter.
Mr. Hunter. Senator, thank you for the question. The
Federal Reserve--not only the Federal Reserve but, frankly, the
OCC and the FDIC have broad regulatory authority over The
Clearing House. Basically any regulatory authority they have
over a bank that they supervise is the same regulatory
authority that they have over The Clearing House, and I quote
extensively from the Bank Service Company Act in my written
testimony, and I would direct you to those statements.
But in addition to that, as Congress has enacted in this
country, we have detailed competition laws that we are subject
to and the Federal Reserve is not, but the private sector is
subject to, and the Department of Justice stands ready to
enforce. So when you talk about anything related to pricing or
monopoly power or acting in an anticompetitive way, which the
Federal Reserve speculates that the private sector could
potentially do at some point in time, those are illegal
activities under the laws of this country. We have never
engaged in those activities. But if we ever did or if any other
private sector ever did, there are laws in this country that
protect against that.
Senator Tillis. I have a number of questions. I, too, have
to go to the Veterans Committee. This is very important to me
because I think in some respects--I view the current Fed
proposal as a $100 saddle on a $10 horse. I think there are
some things that we may be able to do to address some of the
concerns and make sure community banks are treated properly to
avoid potential future discriminatory practices on pricing,
resiliency questions, interoperability questions, the kinds of
things that you are going to have to get into. So I will be
submitting a number of questions for the record for you all,
and I appreciate you all being here.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today.
Moving as fast as possible to real-time payments has been a
priority of mine. I have talked to lots of witnesses that have
come before this Committee on this matter because the lack of a
real-time payment system is costing millions of Americans
billions of dollars every year. So, President George, I commend
you for your leadership in this issue. I know it is an issue
you have thought about a lot, and you have been very thoughtful
in developing these proposals.
I have listened to the testimony. A lot of ground has been
covered. I do think the fundamental question gets down to this
issue of competition, and I realize that The Clearing House
says it welcomes competition on the one hand, but on the other
hand, all the testimony here today is let us not have a
separate FedNow system. And it seems to me that keeping that
monopoly position in the hands of the 15 biggest banks is not
necessarily in the long run the best deal for consumers. And a
little competition is a good thing, in my view.
Mr. Steen, you represent lots of financial institutions,
and you are obviously looking out for your consumers and your
customers here, and you have expressed a real fear in your
testimony and earlier statements about handing over this kind
of monopoly power to this kind of monopoly. And you actually
raised before this hearing the same issue that Senator Toomey
raised here, which is when the Fed said it might get into this
space, The Clearing House then said, well, you know, we made
this promise about not engaging in--you know, not changing
pricing in a discriminatory way, but, you know, we are going to
have to reconsider that, which, in fact, in my view just
underscored the need to have an alternative here.
You are someone who is working this issue on the ground
every day. If you can just--you know, how would you explain to
one of your customers coming into your bank why you think it is
important for the FedNow system to be put into operation?
Mr. Steen. Well, Senator, thank you. You know, my customers
are looking to us to provide them the fastest payment possible,
and I need to ride that train. And the one constant in my
career has been the Federal Reserve. From a pricing standpoint,
they have demonstrated when technology improves, they lower my
cost, and they explained that to us and we understand it.
So I just know that we cannot lose that, and I know
accessibility to every small financial institution is just so
critical, and we are one of those. And so I am absolutely
confident the Fed is doing the right thing, and we have been
asking them to do it. I was on the task force. I was on a
steering committee. I was in the directive work group, and I
have been pounding the table for them to do this all the way
along the way. And they are, and I am confident it will move
along very quickly. I saw what they did in Check 21 and how
fast that revolution took place, and I was part of that. So I
am confident we can accomplish this.
Senator Van Hollen. Thank you. And I would point out, as
the Chairman knows it was a 4-1 vote on the Board of the
Federal Reserve.
Ms. Bair, you have been in the middle of this during really
tough times in terms of, you know, financial institution in our
country. In response to a question, you just pointed out that
this suggestion that we could not make these systems
interoperable was kind of like the statement on monopoly and
discriminatory pricing, another example actually of why it is
important to have an alternative, right? Because, otherwise,
the system with monopoly power can use that leverage in certain
ways. Can you expand upon your concern there?
Ms. Bair. Yeah, because I think it is important to
understand we are talking about interbank settlement. So there
are a lot of banks working with financial technology companies
trying to come up with new, innovative ways to help people send
and manage payments that are customer-facing, but you still
have the problem of getting the money from one bank to another.
And so if you have a monopoly provider for that piece of it,
all these other innovators that are working on customer
interfacing services and applications will have to go to that
single provider. This is why--you know, I know the big banks
love this, but pretty much nobody else does. There is no trust.
The small banks do not trust them. The financial technology
companies do not trust them because this will be giving them
monopoly pricing power. And they may say today, ``We will not
do it. We will be fair and equitable.'' But the Fed has no
authority to regulate rates.
I also agree with President George that the best way to
address this is through competition and giving smaller
institutions, giving financial technology innovators working
with those institutions an alternative, giving them two places
to work with, to deal with, to support their innovations.
And I would also say that the problem of trust is one of
the reasons why I do not think RTP has gotten traction. If
there was trust, if it was a great service, who cares whether
the Fed is going to come in anyway? People will be jumping for
it. But that is not happening. The public comment process has
overwhelmingly said that pretty much everybody outside the big
banks who own TCH want an alternative system.
Senator Van Hollen. Thank you. Look, I think the history
shows that competition actually spurs innovation, not stifles
innovation.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
This debate--and I have not made up my mind on this. This
debate reminds me a lot of the debate we are having in health
care about whether the U.S. Government should set up its own
health insurance program to compete with the private sector.
That is just an observation.
The second observation, Mr. Steen, I have great respect for
the Fed, and I would remind you, though, that it was the Fed,
or at least people influencing the Fed who decided in 2008 that
the community banks were just as responsible as the too-big-to-
fail banks for the meltdown, which was patently untrue, and
some people around here decided to try to regulate you and your
colleagues half to death, which I think hurt the banking
system. So I would just caution you, up here in Washington do
not trust anybody pretty much.
President George, let me ask you this, and this is honestly
a question. I do not mean the question to suggest an answer.
Tell me what is wrong with RTP. Is it not working? Can it not
work? What is your concern?
Ms. George. So I have no insight to the functioning of RTP,
but we have encouraged private sector innovation in this space,
and for many years----
Senator Kennedy. May I stop you a second? If you have no
insight into RTP, then why do you want to set up something to
compete with it?
Ms. George. Because our interest in making sure under our
public policy goal that access is broadly achieved for this
service and extends to some 10,000 institutions in this
country, and we have an existing network, reach, and
relationship with those institutions.
Senator Kennedy. I get that, and I am sorry to interrupt
you. But what I want to understand--I mean, doesn't the Fed
have enough to do? It would just seem to me that if RTP can
work--if you want to compete with it, that may be the right
approach. But what I am trying to understand is why. I
understand you have the power to do it, but why does it make
sense to spend taxpayer money for the Fed to go set up a
competitor for something that may be working? Unless it is not.
If it is not working, tell me.
Ms. George. The information we received from the faster
payments task force came to the Fed and said we need the Fed to
get into providing real-time payments with the private sector.
Senator Kennedy. Why?
Ms. George. The reason was to achieve broad reach. We have
many community banks in this country that are in rural and
remote areas that would not otherwise be profitable places to
provide services. They need these services for their
communities. They need to be able to attach to systems that
might otherwise be out of their reach.
Senator Kennedy. OK. May I stop you a minute? I am not
trying to be rude. Our time goes so fast.
Ms. George. Yes, sir.
Senator Kennedy. So why don't--I mean, the Fed has the
power to punish banks the rest of their natural lives. You and
I both know that. I know you do not put it in those terms, and
I am not suggesting anything untoward. So why don't you turn to
RTP and say, ``Look, here are some changes we would like to
respectfully ask you to make? You do not have to make them, but
our advice is you should.'' They are not going to ignore you,
are they?
Ms. George. I think our experience is operating alongside
the private sector has produced the best outcomes for the
payment system.
Senator Kennedy. But my question is if you see a way to
improve--I am trying to understand. If you see a way to improve
RTP, why don't you just sit down with them and say, ``Folks, we
want you to extend your reach. We want you to give us
jurisdiction over the prices you are going to charge, and we
want to make sure that you make your service available to
everybody''? Boom, problem solved.
Ms. George. The Board of Governors----
Senator Kennedy. Then you save a bunch of time and money,
and you do not have to set up a competing system, because
taxpayers are going to pay for what you are going to set up.
And I know you have enough to do.
Ms. George. We certainly have enough to do, and we are
intent on fulfilling our public policy authorities as Congress
has granted us in this arena, which is to make sure that that
system is accessible, that it is provided equitably, and that
it is safe. And we will continue to operate alongside the
private sector in achieving those outcomes for the public.
Senator Kennedy. OK. Can I ask one more, Mr. Chairman,
since it is just--oh, I am sorry. I do not want to cut in
Senator Smith's time.
Senator Smith. Go ahead, Senator Kennedy. One more. Just
one more.
[Laughter.]
Senator Kennedy. Well, Ms. Bair is raising her hand.
Ms. Bair. Well, I did. I just wanted to strongly support
what President George said and indicate that I hear what you
are saying about--so, first of all, you do not have regulatory
authority, I think, so there is no direct authority to do rate
regulation and access controls and all the kinds of things----
Senator Kennedy. Yeah, but then--the banks are not----
Ms. Bair. If I could just----
Senator Kennedy. ----ask them to do something.
Ms. Bair. I wish that was true. But as a Republican, as
somebody who considers herself market oriented, I think
competition is a much better discipline on pricing equity and
efficiency and broadening customer bases than trying to
prescriptively regulate this, so----
Senator Kennedy. Well, that is one point of view. Another
point of view is you just want to expand Government.
Ms. Bair. No, I do not think that is what the Fed--look, I
worked with the Fed for a long time, and I criticized, you
know, other parts of the Fed. I advocated for limits on the
Fed's bailout authority. They probably were not happy with me.
Chairman Crapo remembers that in Dodd-Frank. So another
context, you know, sure, the Fed has got a lot of power. But
this is like the bread and butter of what they do, and they are
the only ones who can come in with an alternative parallel
system because of the costs and the resources that are required
to do this. If you just rely on private enterprise, there will
be a single monopoly provider without the regulatory authority
to impose pricing and access controls. So I do think the Fed is
absolutely--this is in the public interest to do, and it will
be more efficient than just trying to regulate it with
authority they do not have. And I think big banks push back
quite a bit against the Fed and the FDIC, so I would not say
that they always do what the regulator asks them to.
Senator Kennedy. Thank you, Mr. Chairman. I am sorry,
Senator.
Chairman Crapo. Senator Smith.
Senator Smith. Thank you, Mr. Chairman. I just realized I
might have accidentally taken some of your authority by ceding
time to Senator Kennedy without your permission.
Chairman Crapo. No problem. You are welcome.
Senator Kennedy. You are on double-secret probation.
[Laughter.]
Senator Smith. I want to thank all the panelists for being
here today, and I am sorry I missed the back-and-forth with my
colleagues, because, as you have no doubt heard, we have lots
of committee hearings today. I am sure the ground has been well
plowed here.
Let me just ask a question of President George. President
George, the Fed operates several payment systems already, and I
am wondering what you have learned about fraud prevention from
that experience. You know, there are many upsides to real-time
payments, but, of course, one of the possible downsides is
real-time fraud. So could you just share a little bit about
what you have learned about that?
Ms. George. The security of the payment system is essential
and I think, as you have noted, in particular when payments are
moving this quickly. We would see as part of our initiative--
and as we did with the faster payments task force--thinking
about security and what fraud mitigation standards will be
important. And I think that will include education efforts, the
banking system making sure that their customers understand what
role they play in that.
Senator Smith. Thank you.
Would anybody else like to comment on that fraud question?
Mr. Hunter. Absolutely, Senator. So we take consumer
protection very seriously. We worked closely with the CFPB in
our design and establishment of this system, and we have
learned a lot about fraud from our interactions with other
real-time payment systems around the world.
Fundamentally, the way we have architected this system is a
much better, much more safe, much more secure experience for
consumers and businesses because these are credit-push payments
only, so the consumer or the business have to actually
authenticate into their banking system, and the only way that
they can make a payment is to push those funds out. There are
no debit pulls where, if somebody gets a hold of your account
information and they can defeat the fraud control systems of
the bank, they can get money out of your account. So,
fundamentally, this is a much more safe, much more efficient,
much more sound way for consumers to make payments.
And if I can, Senator, I just want to say that, you know,
we will certainly work and have discussions with the Fed about
interoperability. I do not mean to imply to anyone that we are
not concerned and would not want to get there. When we talked
about designing the system, we had hoped that interoperability
could be achieved. We are not optimistic. But we are certainly
willing to do everything possible to discuss with the Fed and
try to reach that result.
Senator Smith. Thank you.
Just another question that is very specific. It was raised
to me specifically from Minnesota credit unions, of which we
have many, and they are very important to communities in
Minnesota. Small credit unions are trying to figure out--you
know, they do not have staff available 24 hours a day to
monitor transactions and troubleshoot problems. And so my
question to the panel is: How can small institutions prepare to
handle a payment system that would be on 24 hours a day? What
would be the solutions, just the operability solutions for
small institutions?
Mr. Hunter. Senator, if I may, we have worked very, very
closely with third-party service providers, and one of the
things that we have recognized is that they are going to need--
banks like Mr. Steen's bank, other community banks, we want all
of those banks to be on the RTP network because the network is
only as valuable as the banks that it can reach. So third-party
service providers, bankers' banks, corporate credit unions,
other institutions that provide critical services, back-office
services to small community banks and credit unions have been
on our radar ever since we designed the system.
What you have seen are large banks who handle their own
technology coming onto the system to date. What you have not
seen but is equally important and was maturing is the work that
we have done with those third-party service providers to bring
small financial institutions onto the system. They have begun
to be in a position to activate those core back-office systems,
and they are going to start bringing on small community banks
and credit unions in the next several months.
Senator Smith. Thank you.
President George, would you like to respond?
Ms. George. This is a real issue for small institutions,
credit unions, small banks, and we will be working carefully
around standards, which I think help them in adhering to things
that protect them and protect their customers.
Senator Smith. Thank you. And just one last question. Let
us say I am just a person--which I am--and I am trying to--and
I can see that real-time payments, you know, whether I am a
small business--you know, this is going to be helpful to me. So
can anybody explain to me, what is the harm of more
competition? To me, how am I harmed as an individual if there
is more competition rather than less competition in this
market?
Mr. Hunter. So, Senator----
Senator Smith. I am going to just ask Ms. Bair about this.
Ms. Bair. Well, I think consumers are helped. It will
result in more innovation, more competition, better pricing,
wider access. I think absolutely two systems will support
consumers and their ability to have a choice of real-time
payment services and for all banks of all sizes and depository
institutions, including credit unions of all sizes, to be able
to participate. And this is the future. We will have real-time
payments, and so the challenge is to make sure everybody is
included. Having these two systems is the best way to do that.
Mr. Hunter. Senator, if I may, we----
Senator Smith. I am sorry, but I think Mr. Selgin was going
to speak; then I will let you----
Mr. Selgin. Yes, I was going to say I am not one of those
who opposes competition between the Fed and the private sector,
including The Clearing House. What I am concerned with is that
the competition has to be fair. If any of the players can cheat
or can compete unfairly, to put it a little bit more mildly,
that can upset the competitive process that normally leads to
good results. That is why we have the Antitrust Division, for
example, to make sure private firms do not compete. In the
Fed's case, we have to take--there are other precautions that
are needed. Some are taken already, but there are many ways in
which presently the Fed can compete unfairly, and a few have
been mentioned. One of them is not paying interest on reserves
held in joint accounts that serve the same purposes as other
reserves--not classifying funds in those accounts as reserves.
They should be classified that way.
Another is by not making its essential clearing services,
settlement services on Fedwire and on NSS available 24/7. That
allows other non- real-time payments systems to compete more
effectively by having faster payments, but not necessarily non-
real-time payments, and there is competition on that margin,
too.
So there are a lot of steps Congress can take to assure
that competition is played on a level playing field between the
Fed and the private sector. That is the key, not preventing
competition.
Mr. Hunter. And, Senator, if I may, we are not against
competition. Let me make that perfectly clear. What we are
concerned about is an unlevel playing field between the private
sector and the Government.
We are also concerned that if we cannot figure out
interoperability--and no systems worldwide interoperate in
real-time gross settlement payments like we have set up here.
Nobody has figured out how to do that yet. That will lead to a
very suboptimal result in this country for consumers and
businesses where the participants and their customers on one
system are not going to be able to complete payments to the
participants and their customers on another system.
Senator Smith. Thank you, Mr. Chair.
Chairman Crapo. Thank you. And that completes the
questioning, although I am going to ask for a brief response
from all of you on an issue that Senator Cortez Masto raised.
But first let me thank you all for bringing this perspective
here.
We had the obvious divergence of opinions on the Committee
here about this issue. I find it interesting. I think Senator
Kennedy probably focused on the dichotomy of we all believe in
competition; we also all talk about how we believe in not
having the Government be too large and having the Government
step in. Here what we are talking about is the Government
competing with the private sector, and that kind of puts an
interesting twist on the competition discussion.
And then the reverse of that is the discussion about, well,
you have a monopoly if you only have one provider in the
private sector, and so how do we deal with that? These are
difficult questions, and as you can see, we have different
perspectives on that on the Committee. I encourage the Fed as
it moves forward here, which apparently it is doing, to take
these kinds of considerations carefully into mind, and
hopefully we will be able to work this out.
The question I want to address, however, is the one of
digital currencies. As you are all aware, this Committee right
now is dealing with the Libra proposal from Facebook, which is
only one of the more recent utilizations of blockchain
technology on the Internet but in the context of creating a
digital currency, and we have many examples of this
technological development on the Internet, Bitcoin and many
others. But they raise the question, as I understand it, of
whether we are moving technologically to a whole different
world than the one which we spent this entire hearing
discussing, and that world is digital currency-related
technology, which perhaps our central banks as well as all of
our financial institutions, small banks and large banks alike,
credit card companies, every kind of transaction, need to be
more focused on. And I would just a very huge question and ask
you all to respond very briefly, and I really mean--perhaps
what you could do is respond to me on this, just your thoughts
about this issue in general, in writing following the hearing.
But am I correct that we need to start looking at this
entire transition to--or whether there really is a transition.
Is this a technological change that we should consider as being
transformative in the way that we deal with currency and with
financial transactions? Why don't we just go down the line? Ms.
George.
Ms. George. Thank you, Senator. It is a very important
issue, I think, because it is hard to forecast where this is
going, and it is one of the reasons that we study carefully
what it means, because one thing we know is we have invested
heavily in trying to have a banking system that is sound, that
serves the economy, that serves the American public. And, of
course, with that has come safety nets, consumer protections,
thinking about access to credit, many of those things.
As we look at what disruption may come to the existing
framework, I think that is why it is important we study, to see
how will any of those safeguards be disrupted, how will they
apply in a new world with different technologies. At this
stage, it requires us to be very cautious and look carefully to
make sure that we gain the benefits of innovation, gain the
benefits that can come from new technological approaches
without undermining, I think, what has been hard- earned-and-
won safeties for the economy.
Chairman Crapo. Thank you.
Anybody else want to comment?
Mr. Hunter. Senator, Mr. Chairman, I appreciate the
question. We certainly share Ms. Bair's and other folks'
concern about unregulated and largely unsupervised social media
companies getting into setting up de jure currencies that could
threaten the prominence and the value of the U.S. dollar.
That said, we have looked at digital currencies or
blockchain as a technology throughout its development and
deployment across the U.S., and it really is not terribly fit
for purpose when you think about using it as a payment system.
It takes an enormous amount of processing power. It is
relatively slow. It does not sort of process the number of
transactions that you need to process and the speed and the
volume that you need to really serve the country.
I think it is one of the reasons why--I mean, this concept
has been around for a long time. You do not really see it being
deployed and used a lot for a payment system, and it is sort of
deployed around the edges. It has not really caught on.
Blockchain is a great solution for the Register of Deeds Office
where you want records that go back until the beginning of time
and you can create lots of information. But it is not terribly
fit for purpose in the payment space.
Chairman Crapo. All right. Anyone else?
Mr. Steen. I do have some thoughts on that, and I would
like to submit them to you.
Chairman Crapo. I would appreciate that.
Ms. Bair. I appreciate the question. I think you are right
to focus on it. And something like Facebook's Libra would take
payments completely outside of the banking system. We would
lose substantial control. So whether it is technologically
feasible or not, I mean, Facebook is a pretty smart company and
has spent a lot of time on it. They seem to think it would. I
think the lack of any kind of regulatory structure around that,
you know, I would encourage the Committee to continue looking
at that because the last thing we want is to lose control of
our fiat currency, which is why I think ultimately central
banks, including the Fed, need to get ahead of this technology
and capture it themselves so that they cannot be disrupted by a
large nonbank entity like a Facebook.
Mr. Selgin. Yes, I would add, Senator, we have all been
talking about the benefits of competition in the payments
system, and these digital currencies are part of that potential
competition, and they are a particularly important part because
they represent some very intriguing innovations that have not
come from Government, but have come from the private sector. We
do not know the full potential benefits that may be had from
these technologies ultimately.
Mr. Hunter is quite correct that so far they have not been
particularly useful for payments, although people think of them
as being used in that connection. They have a lot of
disadvantages. But I think it is desirable that they, too, be
part of the process.
As for central banks providing digital currencies
themselves, well, it must be said that the paper notes that the
Federal Reserve issues are the horse and buggies of the modern
payments system and that digital substitutes for these could
well be an improvement. But there once again we would want the
Fed to be competing with private sector providers and not
monopolizing the provision of these substitutes. And there is
no reason why you could not have some private digital monies
that are dollar-based, and we have things that are close to
that so far. The main thing is that competition has to be
allowed to work itself out amongst parties participating on a
level playing field.
Chairman Crapo. Well, thank you, and I appreciate these
insights. I would welcome any further insights that you would
like to share with me on this issue. It seems to me that this
is--unless it becomes clear that it is such a cumbersome
innovation that just cannot be utilized in the payments system
or in the currency systems of the world, it seems to me that
this could be truly a disruptive influence in--and I do not say
that in a negative sense. I mean in the context of its impact
on literally currency transactions of all types in the world.
And some of those impacts could be very positive impacts; some
could be very dangerous impacts. You think of things from
eliminating cost to consumers in the system to expanding
opportunity for money laundering and all kinds of other
different potential impacts of the expansion of this new type
of innovation. So I would love your thoughts on it as we move
forward. This is obviously another issue that the Committee is
currently struggling with.
With that, I want to conclude this hearing. Again, I thank
you for all of your input and welcome your further input on
this.
For Senators who wish to submit questions for the record,
those questions are due to the Committee by Wednesday, October
2nd. I would ask the witnesses if you would all respond to
those questions as promptly as you can, we would appreciate it.
And, again, thank you for being here.
This hearing is adjourned.
[Whereupon, at 11:49 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today, the Committee will turn its focus to facilitating faster
payments in the United States.
Faster payments are important and yield economic benefits for both
consumers and businesses by providing them with greater flexibility
when managing money and making time-sensitive payments on demand.
Real-time payments offer efficiency and convenience, helping
consumers to better manage their spending and avoid unnecessary fees
and penalties, and helping businesses pay for goods and avoid other
costly sources of funding.
Unfortunately, the U.S. has lagged behind other countries in the
development of real-time faster payments for retail payments.
Recognizing this shortcoming, in 2015, the Federal Reserve
organized a Faster Payments Task Force, made up of a diverse group of
stakeholders, to encourage the development of a real-time payment
system in the United States.
The Fed stated in its report on strategies for improving the U.S.
payment system that it ``would not consider expanding its service
provider role unless it determines that doing so is necessary to bring
about significant improvements to the payment system and that actions
of the private sector alone will likely not achieve the desired
outcomes for speed, efficiency, and safety in a timely manner.''
Responding to the mission of the Faster Payments Task Force, The
Clearing House announced in 2016 its intent to launch a real-time
payments system, which it officially launched in November 2017.
Just prior to The Clearing House launching that system, the Faster
Payments Task Force in July 2017 issued a final report, which offered
several recommendations for achieving a safe, ubiquitous, and efficient
faster payment system in the United States.
One of those recommendations was for the Federal Reserve to develop
its own 24x7x365 real-time gross settlement system for retail payments
and to assess whether there were other operational roles the Fed should
play in faster payments.
After determining the Federal Reserve Banks should develop a new
real-time gross settlement service, on August 2, 2019, the Federal
Reserve Board voted on the Fed's proposal. The lone dissenter was Vice
Chairman for Supervision Randy Quarles.
The Federal Reserve then issued a notice and request for comment on
Federal Reserve Actions to Support Interbank Settlement of Faster
Payments--a system referred to as FedNow.
In Vice Chairman Quarles dissent, he noted that ``The U.S. private
sector has a long history of providing efficient payment solutions to
consumers and businesses.''
He added that ``The public sector should provide its own capacity
only when the evidence of market failure is clear and alternative means
to achieve public goals are not feasible. In this case, [Vice Chair
Quarles] does not see a strong justification for the Federal Reserve to
move into this area and crowd out innovation when viable private-sector
alternatives are available.''
Additionally, when providing a new payment service, the Federal
Reserve is required to meet certain obligations and criteria before
moving forward. Those criteria are: the Federal Reserve must expect
that its providing the service will yield a clear public benefit; the
service should be one that other providers alone cannot be expected to
provide with reasonable effectiveness, scope and equity; and the
Federal Reserve must expect to achieve full recovery of costs over the
long run.
Throughout the Fed's process, some financial institutions have
raised concerns about the Fed's analysis and process, the cost and
amount of time it would take to develop its own real-time payment
system, its prospects for achieving interoperability, inherent
conflicts of the Fed operating its own system and its prospects for
negatively affecting existing real-time payment systems.
Still, other financial institutions urged the Fed to move forward
due to their concerns surrounding pricing, power and competition in the
marketplace.
I strongly support better, safer, and faster payments in the U.S.,
including the work already done on existing solutions in the private
market.
I look forward to learning more about numerous issues during this
hearing, including: clear demonstration of the market failure or
problem that the Fed believes it must solve through the development of
its own real-time payments system; how the existing real-time payments
platform works, how it has been impacted by the Fed so far and the
consequences of the Fed developing a competing system; and how the Fed
believes its proposed system could achieve interoperability, minimize
negative effects to existing private sector participants, and fully
recover its costs quickly.
I look forward to hearing from each of you on your views of faster
payments in the U.S., and more about the existing and proposed
platforms.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Chairman Crapo, and thank you to our witnesses.
Whether it's Facebook thinking it can run its own currency, or big
banks wanting a monopoly over our payment system, we can't allow
corporations to take over critical public infrastructure, so they can
squeeze more profits out of working families.
Whether you punch a clock or swipe a badge, every working American
knows how important payday is. It's often the day you know you can pay
your bills and make rent. But sometimes payday doesn't line up with the
day your bills are due. And if that means a delay in paying the bills,
banks will pile on late fees and overdraft charges, so it is even
harder to make ends meet.
Recently, the Federal Reserve Board announced that it will develop
a system to provide payments in real time. This is great news for
millions of Americans who live paycheck to paycheck--for anyone who has
waited for a check to clear or had to resort to a payday lender on
Friday to tide them over until Monday. Faster payments will allow
Americans to actually use more of the money they've already earned.
But while some of us see a problem to solve for working families,
the biggest Wall Street and foreign banks see what they always do--
dollar signs. They see another way to squeeze more profits out of the
rest of us.
That's why they don't want the Fed to be involved. They built their
own real-time payment system on top of existing Federal Reserve
infrastructure, but we really don't know how it's governed, how much it
would cost, or how they plan to skim more profits off the top for
themselves.
We can't trust that the big banks won't charge more to community
banks and credit unions. They've already changed their mind on their
prices once, and there's no guarantee they won't change their minds
again.
These big banks oppose the Fed's efforts because they want to be
the only game in town. They want a monopoly.
We know what happens when we trust Wall Street.
Eleven years ago this month, Lehman Brothers failed, sparking the
worst financial crisis since the Great Depression. Many of the big
banks that are now asking for a monopoly over the real-time payments
system are the same Wall Street banks that wrecked our financial system
and came begging for billions in taxpayer money to save them.
And let's be clear--they haven't exactly cleaned up their act.
These same banks, like Wells Fargo, Bank of America, and Deutsche
Bank, have been involved in scandal after scandal, creating fake
accounts for customers, illegally foreclosing on servicemembers' homes,
violating U.S. sanctions laws--it goes on and on. It seems like there's
a new scandal every day. Capital One just suffered a huge data breach,
exposing millions of customers' personal data.
And remember those overdraft fees and late fees and transfer fees
that we're trying to protect workers from? It's these same big banks
that slap on those fees. They created this problem, now they want to
charge people again to solve it.
To make matters worse, this Administration is rolling back the
safeguards we put in place to protect working families from the risky
Wall Street activities that crashed our economy.
It was another financial crisis over 100 years ago that led us to
create the Federal Reserve, to clear payments and govern our currency.
Congress recognized the high fees and abuses going on in our payment
system and understood that we needed a publicly run central bank to
provide financial stability and fair access to the payment system. In
the words of Representative Carter Glass, they ``sought to tear down
these tollgates upon the highways of commerce.''
That's how we should think about the payment system--as the
highways of commerce that support every dollar that fuels our economy.
Just like roads and bridges, the payment system is critical public
infrastructure--something that everyone should be able to use. We can't
let profit-motivated big banks--banks whose only mission is to serve
their shareholders, not ordinary Americans--have a monopoly over it.
This Committee has heard a lot this year about big corporations
taking advantage of us through the smokescreen of new technology and
innovation.
In our data privacy hearings, we heard about big tech companies and
financial firms manipulating us into sharing our personal data so they
can profit.
Facebook dodged our questions about its plans to run its own
digital currency out of a Swiss bank account--showing yet again that we
can't trust them.
We cannot allow big corporations to take over critical public
infrastructure. The largest banks and tech companies are not acting in
the interest of working Americans. Their only interest is to turn a
profit for themselves and their investors.
But the Fed's interest here is not to make a profit--it's to make
sure everyone can pay their bills on time and transfer money when they
need it, whether they're in a rural town or a big city.
The Fed's real-time payment system will benefit working families,
small banks and credit unions, small businesses, and the public as a
whole--and everyone except Wall Street agrees.
Thank you, and I look forward to hearing from our witnesses.
______
PREPARED STATEMENT OF ESTHER GEORGE
President, Federal Reserve Bank of Kansas City, on behalf of the
Federal Reserve System
September 25, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for this opportunity.
Chair Powell has asked me to speak to you today in my role as the
Federal Reserve Bank leader responsible for the Federal Reserve's
payments improvement initiative since its beginning and as chair of the
Financial Services Policy Committee (FSPC). The FSPC oversees the
provision of payment services to depository institutions and the United
States Treasury by the 12 Federal Reserve Banks. I am pleased to offer
my statement for the record as well as an in-depth statement on the
role of the Federal Reserve in faster payments and the recently
announced proposal by the Federal Reserve to support faster payments.
Over the past decade, cell phones and other online capabilities
have made it more convenient to send and receive payments. Although
these mobile apps appear to provide for an immediate transaction, the
underlying infrastructure is not designed to immediately move money
between banks, creating notable delays between the initiation of a
retail payment and its receipt.
To support the demand for real-time payments in the United States
and to address this gap, last month, the Federal Reserve's Board of
Governors (Board) announced that the Federal Reserve Banks would
develop a new service called the FedNow Service.
Since its founding more than a century ago, the Federal Reserve has
provided payment and settlement services as part of its core function
of promoting an accessible, safe, and efficient payment system for the
Nation. Today, the Federal Reserve is continuing this important
operational role and preparing to support the modernization of our
Nation's payment system with capabilities that allow payments to move
quickly through a safe and efficient foundation, on top of which
innovation and competition can flourish.
This decision was made only after three established criteria were
met.
The first of these criteria is that it is a service that other
providers alone cannot be expected to provide with reasonable
effectiveness, scope and equity.
Of notable importance related to this criterion is the Federal
Reserve's ability to connect to more than 10,000 financial
institutions. Through these connections, the Federal Reserve's existing
payment services allow banks of every size to serve the needs of
thousands of communities across the United States with competitive,
fair, and transparent access. Providing this degree of comprehensive
nationwide reach is something that we believe will present significant
challenges to other providers in the current market landscape. Coming
from a region of the country with a significant number of small
community banks serving rural areas of the central United States, I can
tell you the Board's decision to provide this new service has been well
received.
The second criterion is that there will be a clear public benefit,
including promoting the integrity of the payments system and reducing
payments system risk.
The Federal Reserve must continue to play an important role in
promoting the safety of the U.S. payment system by providing liquidity
and operational continuity in response to financial turmoil, terrorist
attacks, natural disasters, and other crises. The FedNow Service will
allow the Federal Reserve to retain its ability to provide stability
and support to the banking system, as well as promote the development
and implementation of industrywide fraud-mitigation standards.
Development of the service will also enhance safety of the U.S. payment
system by promoting resiliency through redundancy.
The final criterion is that the Federal Reserve be able to fully
recover its cost over the long run. The U.S. payments infrastructure
today includes alternative payment choices and providers. Today, the
Federal Reserve and The Clearing House operate competing and
interoperable services, which bring important benefits for resiliency
and competition. In all of our services, we have been able to meet the
requirements of the Monetary Control Act for cost recovery that ensures
competitive fairness while fulfilling our public policy goals. In this
regard, even as we develop the FedNow Service, the Federal Reserve will
continue to explore ways to support the market's existing private-
sector real-time payment service including through expanded Fedwire
Funds Service and National Settlement Service hours as described in the
recent Federal Register notice.
As was explained in a 2016 GAO study, the Federal Reserve's role as
an operator has long been judged as effective in promoting
accessibility, safety, and efficiency for the Nation's payment system
and its customers.\1\ \2\ Last summer, the U.S. Treasury recommended
that ``the Federal Reserve move quickly to facilitate a faster retail
payments system, such as through the development of a real-time
settlement service, that would also allow for more efficient and
ubiquitous access to innovative payment capabilities.'' \3\ We are
engaging now with stakeholders for their input on features of the
FedNow Service through the Federal Register notice issued last month.
---------------------------------------------------------------------------
\1\ ``Federal Reserve's Competition With Other Providers Benefits
Customers, but Additional Reviews Could Increase Assurance of Cost
Accuracy'', U.S. Government Accountability Office. August 30, 2016.
https://www.gao.gov/products/GAO-16-614
\2\ ``The Federal Reserve in the Payments Mechanism'', Federal
Reserve System. January 1998. https://www.federalreserve.gov/boarddocs/
press/general/1998/19980105/19980105.pdf
\3\ U.S. Treasury, ``A Financial System That Creates Economic
Opportunity: Nonbank Financials, FinTech, and Innovation'', (July 2018)
at 156. Available at https://home.treasury.gov/sites/default/files/
2018-07/A-Financial-System-that-Creates-Economic-Opportunities-Nonbank-
Finance.pdf.
---------------------------------------------------------------------------
Finally, I found it gratifying after the Federal Reserve started
the conversation about faster payments in the U.S. and led 4 years of
stakeholder engagement that culminated in the overwhelming majority of
400 comments from industry, consumer, and small business expressing
support for the Federal Reserve's role as a faster payments provider.
I am confident that by working with all payment system
stakeholders, we can achieve our public policy objectives for broadly
accessible, safe and efficient faster payments.
Thank you. I am happy to respond to your questions.
ADDENDUM
Faster Payments and the U.S. Payment System
The U.S. payment system faces a critical juncture in its evolution.
Services to conduct faster payments, which are available via smart
phones apps or on our computers, have begun to emerge along with the
growth of digital commerce. Faster payments allow individuals and
businesses to send and receive payments within seconds, any time of
day, on any day of the year, such that the receiver can use the funds
almost instantly. The round-the-clock, real-time nature of faster
payments offers convenience that is not available with many traditional
ways of making payments. In addition, faster payments can yield real
economic benefits for individuals and businesses by providing them with
more flexibility to manage their money and allowing them to make time-
sensitive payments whenever needed.
Yet with many of the faster payment services available today, the
underlying infrastructure is not designed to immediately move money
between banks, creating notable delays between the initiation of a
retail payment and its receipt. These shortcomings limit the degree to
which the potential benefits of faster payment services may be widely
enjoyed across our economy in a safe manner. Further expansion of the
interbank infrastructure is needed to serve as the foundation for the
development of faster payment services that are safe, efficient, and
broadly accessible to the American public.
Last month, the Federal Reserve's Board of Governors (Board)
announced that the Federal Reserve Banks (Reserve Banks) would develop
a new service called the FedNowSM Service to support widespread
adoption of faster payments in the United States. The FedNow Service
will provide the necessary infrastructure, alongside similar services
provided by the private sector, to connect banks across the country,
allowing them to offer innovative faster payment services to their
customers.
Since its founding, the Federal Reserve has played a key
operational role in the Nation's payment system by providing interbank
payment infrastructure that is available to banks across the country,
regardless of size or location. This critical role, given by Congress,
stems from the Federal Reserve's unique ability, as the Nation's
central bank, to provide interbank settlement without introducing
liquidity or credit risks. In today's payment infrastructure, whether
in check processing, automated clearinghouse (ACH) services, or funds
transfers, you will see a Federal Reserve service operating in healthy
competition with and in support of similar services provided by the
private sector, all for the benefit of the American public.
The importance of this role has been recognized broadly, with an
independent review by the U.S. Government Accountability Office
concluding that the Federal Reserve's provision of payment services has
benefited the U.S. payment system and its users. \4\ It is important to
point out, however, that Congress did not grant plenary regulatory or
supervisory authority over the U.S. payment system to the Federal
Reserve, and the Federal Reserve does not have regulatory authority
over the pricing set by a private-sector system or to require a
private-sector system to extend the service to banks of all sizes. In
some other countries, central banks have been assigned the
responsibility for regulating payment systems. In the United States,
this is not the case. Thus, the Federal Reserve has historically helped
to promote the accessibility, safety, and efficiency of the Nation's
payment system and advance innovations through its operational role as
provider of payment and settlement services.
---------------------------------------------------------------------------
\4\ See U.S. Government Accountability Office, GAO-16-614,
``Federal Reserve's Competition With Other Providers Benefits
Customers, but Additional Reviews Could Increase Assurance of Cost
Accuracy'' (2016). Available at https://www.gao.gov/products/GAO-16-
614.
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Path to Present
Leading up to the recent FedNow Service decision and announcement
in August, the Federal Reserve took several actions to facilitate the
advancement of faster payments in the United States. In 2013, the
Federal Reserve began a collaborative initiative with industry
stakeholders to foster improvements to the Nation's payment system. As
part of this initiative, the Federal Reserve convened in 2015 the
Faster Payments Task Force (FPTF), comprising a wide range of industry
stakeholders, to identify and evaluate alternative approaches for
implementing safe and ubiquitous faster payment capabilities in the
United States.
The FPTF published in 2017 a set of consensus recommendations
focused on actions to support improvements to the Nation's payment
system. \5\ Among the FPTF's recommendations were requests for the
Federal Reserve (1) to develop a 24x7x365 settlement service to support
faster payments and (2) to explore and assess the need for other
Federal Reserve operational role(s) in faster payments. Subsequently,
the U.S. Department of the Treasury recommended that ``the Federal
Reserve move quickly to facilitate a faster retail payments system,
such as through the development of a real-time settlement service, that
would also allow for more efficient and ubiquitous access to innovative
payment capabilities.'' \6\
---------------------------------------------------------------------------
\5\ These recommendations were intended to help achieve the FPTF's
vision of ubiquitous faster payment capabilities in the United States
that would allow any end user (that is, an individual or business) to
safely, efficiently, and seamlessly send a faster payment to any other
end user, no matter which banks or payment services they use. See
Faster Payments Task Force, ``Final Report Part Two: A Call to
Action'', (July 2017). Available at https://fedpaymentsimprovement.org/
wp-content/uploads/faster-payments-task-force-final-report-part-
two.pdf.
\6\ The U.S. Department of the Treasury also noted that ``[i]n
particular, smaller financial institutions, like community banks and
credit unions, should also have the ability to access the most-
innovative technologies and payment services. While Treasury believes
that a payment system led by the private sector has the potential to be
at the forefront of innovation and allow for the most advanced payments
system in the world, back-end Federal Reserve payment services must
also be appropriately enhanced to enable innovations.'' U.S. Treasury,
``A Financial System That Creates Economic Opportunity: Nonbank
Financials, FinTech, and Innovation'', (July 2018) at 156. Available at
https://home.treasury.gov/sites/default/files/2018-07/A-Financial-
System-that-Creates-Economic-Opportunities-Nonbank-Financi.pdf.
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The Federal Reserve also has directly supported the development of
private-sector real-time gross settlement (RTGS) services for faster
payments. The Board approved in 2017 final guidelines for evaluating
requests for joint accounts at the Reserve Banks intended to facilitate
settlement between and among banks participating in private-sector
payment systems for faster payments. \7\ The impetus for allowing
broader use of joint accounts was to support these private-sector
arrangements.
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\7\ Board of Governors of the Federal Reserve System, ``Guidelines
for Evaluating Joint Account Requests'', (Issued 2017). Available at
https://www.federalreserve.gov/paymentsystems/joint_requests.htm. In
2016, Federal Reserve staff received a request from a private-sector
service provider to open a new joint account for that organization's
proposed faster payment system. The use of a joint account at a Reserve
Bank to support settlement mitigates certain risks by reproducing, as
closely as possible, the risk-free nature of settlement in central bank
money.
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In November 2018, the Board published a Federal Register notice
(2018 Notice) requesting comment on two potential actions that could be
taken by the Federal Reserve consistent with the FPTF recommendations:
(1) a service for 24x7x365 real-time interbank settlement of faster
payments; and (2) a liquidity management tool that would enable
transfers between accounts held at Reserve Banks on a 24x7x365 basis to
support services for real-time interbank settlement of faster payments.
The Board explained that a Federal Reserve RTGS service for faster
payments, alongside private-sector RTGS services, would provide the
infrastructure needed to achieve ubiquitous, safe, and efficient faster
payments in the United States. Other parties, such as banks, payment
processors, and providers of payment services, could utilize this
platform as a basis for innovation to meet the specific needs of the
businesses and households they serve. The Board further explained that
a liquidity management tool, in turn, could help alleviate liquidity
management issues for banks engaged in RTGS-based faster payments,
notably those utilizing settlement services offered by the private
sector. In particular, such a tool would enable movement of funds
between accounts at the Reserve Banks during hours when traditional
payment and settlement services are currently not open to allow
liquidity to be moved, when needed, to an account or accounts used to
support real-time settlement of faster payments. The 2018 Notice
proposed that the tool could be provided by expanding operating hours
of current Federal Reserve services or through a new service.
In the 2018 Notice, the Board requested comment on the
appropriateness of real-time gross settlement as the strategic
foundation for faster payments in the United States and the public
benefits, implications, and challenges of the Federal Reserve taking
either, both, or neither of the potential actions.
Consideration of Comments and Policy Assessment
The Board received over 400 comment letters representing over 800
entities in response to the 2018 Notice. Comments were submitted by a
wide variety of stakeholders in the U.S. payment system, including
community banks, individuals, consumer organizations, merchants,
service providers, private-sector operators, FinTech companies, trade
organizations, and other interested parties. \8\ Consistent with the
diversity of the payment industry, commenters represented a broad range
of viewpoints.
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\8\ Overall, banks were the largest group of respondents, with
community banks (small and midsize banks) comprising approximately 60
percent of the total comments--the largest specific segment--and
representing institutions from 34 States.
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Almost all commenters addressed the question of whether the Federal
Reserve should develop a real-time interbank settlement service for
faster payments. The vast majority of these commenters, representing
nearly every stakeholder segment, supported the Federal Reserve taking
this action. In contrast, large banks, some trade organizations, and
private-sector operators were generally not supportive of the Federal
Reserve developing such a service. \9\
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\9\ Approximately half of the commenters discussed the liquidity
management tool, with almost all supporting the Federal Reserve
offering such a tool.
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In reaching its decision to offer the FedNow Service, the Board was
informed by these public comments and the history of the U.S. payment
system, in which the Federal Reserve has played a role since its
inception. In addition, any decision by the Board to offer a new
payment service is subject to the factors set out in longstanding
Federal Reserve policy, and the pricing of Reserve Bank services is
subject to the requirements of the Monetary Control Act of 1980. \10\
Specifically, in considering new services, the Board assesses three
criteria: whether the service is one that other providers alone cannot
be expected to provide with reasonable effectiveness, scope, and
equity; whether the service will yield a clear public benefit; and
whether the Federal Reserve will achieve full cost recovery over the
long run. \11\
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\10\ In 1984, the Board established criteria for the consideration
of new or enhanced Federal Reserve payment services in its policy ``The
Federal Reserve in the Payment System''. Board of Governors of the
Federal Reserve System, ``The Federal Reserve in the Payment System'',
(Issued 1984; revised 1990). Available at https://
www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
\11\ In addition, the Board performs a competitive impact analysis
when considering an operational or legal change to a Reserve Bank
service or price that would have a direct and material adverse effect
on the ability of other providers of services to compete with the
Reserve Banks.
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Other Providers Criterion
Through this assessment, the Board has concluded that other
providers alone cannot be expected to provide an RTGS infrastructure
for faster payments with reasonable effectiveness, scope, and equity.
So far, only one private-sector RTGS service for faster payments has
been established in the United States. Due to coordination challenges
and the high fixed costs necessary to develop a new payment and
settlement service, this service is expected to remain the sole
private-sector RTGS service for faster payments in the United States.
The ability of a sole private-sector provider to extend access to a few
thousand banks, let alone the more than 10,000 diverse banks necessary
to achieve true nationwide scope, would be costly and time-consuming
given that the existing service has limited relationships with and
connections to these institutions.
In addition, the Board concluded that the private-sector operator
alone cannot be expected to provide the service with reasonable
effectiveness, as viewed through the lenses of safety and efficiency.
From a safety perspective, a sole provider may serve as a single point
of failure in the market for RTGS-based faster payments. From an
efficiency perspective, a market with only a single operator may cause
challenges related to competition, innovation, and market
fragmentation. According to established economic theory and experience
from other markets, a single service provider not facing competition
can yield undesirable outcomes, such as higher prices or lower service
quality. Such undesirable outcomes could limit adoption of faster
payments by end users, which could in turn curtail efficiency benefits
to the broader economy.
Public Benefits Criterion
The Board also determined that the FedNow Service will yield a
clear public benefit. Since its inception, an underlying public policy
rationale for the Federal Reserve's involvement in the payment system
has been to provide services in a safe and efficient manner to banks
nationwide. Because of this long-standing policy commitment, the
Federal Reserve has historically extended access to banks of all sizes,
including smaller banks in rural and remote areas of the country. The
Federal Reserve's relationships with and connections to thousands of
banks across the country provide a solid foundation for the FedNow
Service to facilitate those banks gaining access to an RTGS
infrastructure for faster payments, which would benefit small and
midsize banks and the communities they serve.
In a payment system with multiple operators, banks would have a
choice whether to join a single service or multiple services. An RTGS
infrastructure could, therefore, achieve nationwide reach in two main
ways, either through interoperability via direct exchange of payments
between operators, such as in the U.S. ACH system, or through at least
one service connecting to virtually all banks, such as in the funds
transfer system.
The FedNow Service would promote payment system safety in multiple
ways. As noted by commenters, the Federal Reserve has historically
played an important role in promoting the safety of the U.S. payment
system by providing liquidity and operational continuity in response to
financial turmoil, terrorist attacks, natural disasters, and other
crises. As the prominence of faster payments in the United States
grows, the development of the FedNow Service would allow the Federal
Reserve to retain its ability to provide stability and support to the
banking system and the broader economy in times of crisis. In addition,
as the operator of the service, the Federal Reserve would be in a
position to promote the development and implementation of industrywide
fraud-mitigation standards, which commenters highlighted are especially
important for real-time payments. The development of the service could
also enhance the safety of the U.S. payment system by promoting
resiliency through redundancy.
Finally, the FedNow Service could provide efficiency benefits by
serving as a platform for innovation and the development of end-user
services by the private sector. In addition, an RTGS infrastructure
with nationwide reach would make the development of new faster payment
services based on real-time settlement more attractive, increasing
innovation and competition in the market for end-user faster payment
services. Such competition could yield efficiency benefits by leading
to lower prices and higher service quality.
Cost Recovery Criterion
The Board expects that the FedNow Service will achieve full
recovery of costs over the long run. The MCA requirement to require
cost recovery ``over the long run'' is not associated with a specific
timeframe. Beginning in 1995, the Board adopted a convention of
evaluating long-run cost recovery for existing services using a rolling
10-year period. At that time, Federal Reserve services were in mature
states, characterized by widespread adoption by banks of all sizes
throughout the country, with relatively stable volumes and costs. At
other times, notably as the ACH service was evolving, the Board
considered long run over an extended time period in order to encourage
the adoption of electronic payments for the benefit of the economy.
\12\
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\12\ ACH began as a Federal Reserve service in the 1970s, prior to
the passage of the MCA. In 1981, when the pricing principles were first
applied to ACH, the Board recognized that the ACH service was still
evolving and allowed fees to be set based on mature volume costs rather
than current costs for a number of years and only at the end of that
time began marking 10-year cost recovery. The Board concluded that
doing so would result in a more efficient payment mechanism and was
consistent with the MCA. See 46 FR 1343 (January 6, 1981).
---------------------------------------------------------------------------
Given the timeframe necessary to create a broad network of banks
connecting to the service, the Board determined that a longer timeframe
for cost recovery is consistent with the intent of the MCA to encourage
the adoption of new services that have the potential to bring
widespread economic benefits to the country.
Expanded Hours for Existing Services
The second proposed action in the 2018 Notice entailed the
exploration of the expansion of operating hours for the Fedwire Funds
Service, which is our existing funds transfer service, and National
Settlement Service (NSS) hours, which is our service that supports
private-sector net settlement arrangements, potentially up to 24x7x365,
to facilitate liquidity management, notably for users of private-sector
RTGS services.
As described in the 2018 Notice, RTGS-based faster payment services
require banks to have sufficient liquidity positioned in a specified
account to perform interbank settlement at any time, on any day.
Without sufficient liquidity so available to conduct settlement, a
faster payment cannot be completed in an RTGS-based service where, by
design, interbank settlement occurs before final funds can be made
available to the receiver. At present, the Federal Reserve does not
provide a service that would provide a means to position additional
liquidity in the specified account outside standard business hours. In
light of these considerations, in its 2018 Notice the Board proposed
developing a liquidity management tool that could help address these
needs by facilitating transfers to and from other accounts held by
participants at Federal Reserve Banks.
In response to the 2018 Notice, several large banks and other
commenters indicated that the proposed tool could help with managing
liquidity in the recently established private-sector RTGS service for
faster payments. The private-sector RTGS service is supported by funds
in a joint account at a Reserve Bank, and the proposed liquidity
management tool would enable movement of funds between a joint account
and banks' reserve accounts during hours when existing services are not
currently open. Commenters suggested that the Federal Reserve should
provide this tool through expansion of operating hours for the Fedwire
Funds Service.
Commenters also noted that expanded Fedwire Funds Service hours,
and relatedly, NSS hours, could provide benefits for a variety of
payment activities beyond those related to faster payments. Payment
activity supported by expanded hours could include additional
settlement windows for the ACH service and wholesale payment activity
in global markets. Because of the systemic importance of the Fedwire
Funds Service, in particular, additional risk, operational, and policy
analysis is required for this action, and the draft notice indicates
the Federal Reserve's intention to engage actively with the industry to
conduct this analysis.
The FedNow Service
As explained in the August announcement, the FedNow Service would
conduct real-time, payment-by-payment, settlement of interbank
obligations through debits and credits to banks' balances in accounts
at the Reserve Banks. Real-time settlement in accounts at the Reserve
Banks means that settlement occurs without liquidity or credit risks,
which enhances the safety of these payments. The FedNow Service would
incorporate clearing functionality, allowing banks, in the process of
settling each payment, to exchange information needed to make debits
and credits to the accounts of their customers. The service's
functionality would support banks' (or their agents') provision of end-
to-end faster payments to their customers.
Ultimately, the FedNow Service will provide, alongside similar
private-sector services, core infrastructure to promote ubiquitous,
safe, and efficient faster payments in the United States. In fact, for
all payment systems in our country, no single private-sector provider
has ever achieved nationwide reach on its own. With the FedNow Service,
banks will now have a choice in providers or could choose to use both a
Federal Reserve and private-sector service for back-up purposes, as
some do today for check, ACH, and wire services.
The Federal Reserve recognizes that time-to-market is an important
consideration expressed by many commenters in response to the 2018
Notice. Our objective is to implement the service as soon as
practicably possible. However, the achievement of true nationwide reach
over the long term, as opposed to initial availability of a service, is
the most important measure of success for faster payments.
At the same time as the Board published its decision regarding the
new service, the Board requested public comment on how the FedNow
Service might be designed to most effectively support the full set of
payment system stakeholders and the functioning of the broader U.S.
payment system. In the same notice, the Board also announced its
intention to explore the expansion of Fedwire Funds Service and NSS
hours, up to 24x7x365, to facilitate liquidity management in private-
sector real-time gross settlement services for faster payments and to
support a wide range of payment activities, beyond those related to
faster payments.
The Board's important decision to approve a new payment service
comes over 40 years after the last service, ACH, was approved for
implementation back in the 1970s. The decision to establish ACH came at
a pivotal moment when the industry was overwhelmed by the volume of
paper checks, and the new technology at that time allowed for what is
essentially an electronic version of paper checks. Remarkable new
technology enables the Federal Reserve to support the financial sector
in offering an ever-growing array of options 24x7x365 in a safe and
efficient manner. Providing such payment services is very much
consistent with our historical role in the payment system, one that has
helped banks to meet the needs of business and households in a growing
economy for over a century.
______
PREPARED STATEMENT OF ROBERT HUNTER
Executive Managing Director and Deputy General Counsel, The Clearing
House Payments Company
September 25, 2019
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee, my name is Rob Hunter, and I serve as the Deputy General
Counsel of The Clearing House Payments Company, based in our North
Carolina facilities. I have worked at The Clearing House for more than
10 years providing senior legal support to all of our payments
services. Today, we will be focused on the RTP network, which I was
fortunate to be involved in developing. I am also the past Chairman of
the Subcommittee on Electronic Payments of the Business Law Section of
the American Bar Association and have been involved in a host of
development activities related to payments throughout my career.
The RTP network is a new and exciting part of our national payment
infrastructure. It was launched in 2017 by The Clearing House and is
fully operational today. One of the most distinguishing features of the
RTP network is that it operates in real time and all the time--there
are no ``bankers' hours'' for the RTP network--it functions 24x7. But
that is just one remarkable feature. The RTP network also delivers on
the vision of faster, more efficient and more secure payments that will
benefit every American consumer and business.
This innovation is consistent with The Clearing House's historical
role in delivering to our country core payments infrastructure that is
efficient, safe, and reliable. Founded in 1853, for over a century-and-
a-half The Clearing House has served as the leading private-sector
operator of payments infrastructure in the United States. On an average
business day, The Clearing House clears and settles nearly $2 trillion
over its wire, automated clearing house and check-clearing networks.
The Committee has asked those of us testifying today to focus on
five main issues: (a) the current state and evolution of the U.S.
payment system and how the current system works, (b) the Federal
Reserve Faster Payments Task Force's process, conclusions, and
recommendations, (c) the Federal Reserve's notice and request for
comments on its actions to support interbank settlement of faster
payments through the development of the FedNow system and expanded
operating hours for the Fedwire Funds Service and National Settlement
Service, (d) an in-depth overview of the RTP network and any
similarities to or differences from the proposed FedNow service, and
(e) whether FedNow and a private-sector real-time payment system, such
as the RTP network, could achieve interoperability, while ensuring
efficient, safe and ubiquitous faster payments.
I will address each topic in accordance with the Committee's
request, but before responding specifically to those questions, it may
be helpful to provide a summary of The Clearing House's position. When
the Federal Reserve competes with the private sector, the Federal
Reserve must do so in a manner that minimizes the competitive
advantages that a Government system has, both inherently and as a
direct byproduct of the Federal Reserve's role as a supervisor, the
supplier of liquidity to the financial system and the central bank.
This is not the normal competitive question of impact on profitability
because The Clearing House does not seek to operate at a profit.
Rather, it is a question of The Clearing House's ability to provide the
most effective and efficient real-time payment system to consumers and
businesses, to the ultimate benefit of this country's overall economy.
Current State and Evolution of the Payment System
The payments landscape in the United States is complex and highly
competitive, with tremendous innovation during the last decade spurred
by banks, money services businesses and FinTechs. This innovation has
largely been focused on end-user products. What has been lacking,
however, until the launch of the RTP network, is modernization of what
we often refer to as the payments rails. This lack of modernization has
had important consequences. Consumers and businesses have been left to
choose between payments options that were slower than desired and that
offered conditional forms of payment, or new payment products that sit
outside of the traditional banking system, often with less security and
resiliency. Bank and nonbank financial institutions have been forced to
accept settlement risk, increasing fraud risk and increased operational
complexities due to limitations in the underlying payment rails. The
RTP network, the first new payments rail in over 40 years, is designed
to eliminate these suboptimal choices and risks, to accelerate the
availability of payments, and to serve as a platform for innovation for
all.
Americans don't spend a lot of time thinking about our country's
payments system, which is understandable because so much of it is
hidden from view. But make no mistake--without this infrastructure our
economy would cease to function. Our payments system enables consumers
and businesses to make payments safely, securely and with certainty--
whether you are paying your wireless bill or splitting a restaurant tab
with friends.
Although the U.S. payments system has and continues to work very
well (meaning safely and efficiently), prior to the introduction of the
RTP network, it had become (as noted above) very outdated when compared
to the payments systems in other industrialized parts of the world. I
suspect everyone in this room has been frustrated upon hearing that you
have to wait a day or longer to gain access to funds you have received
or when you don't actually know when a party to whom you have made a
payment will actually receive those funds. These frustrations are due
to the simple fact that our country's payments infrastructure was
designed and built over 40 years ago--well before the dawn of the
Internet and mobile phones.
Launched in November of 2017 and fully operational, the RTP network
addresses the need to modernize the payments infrastructure in the
United States and provides a safer, more secure and more efficient way
to make payments that clear and settle immediately, consistent with the
way American consumers and businesses operate today.
Federal Reserve Faster Payments Task Force
To its credit, the Federal Reserve recognized the need for faster
payments in the United States and leveraged its convening power to urge
the private sector to act. In 2013, the Federal Reserve proposed 5
objectives to improve the U.S. payment system that, according to the
Federal Reserve, would ideally be achieved within 10 years, including
``[a] ubiquitous, safe, faster electronic solution(s) for making a
broad variety of business and personal payments supported by a flexible
and cost-effective means for payment clearing and settlement groups to
settle their positions rapidly and with finality'' (i.e., a real-time
payments system). \1\
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\1\ ``Payment System Improvement--Public Consultation Paper''
(Sept. 10, 2013), available at https://fedpaymentsimprovement.org/wp-
content/uploads/2013/09/Payment-System-Improvement-Public-Consultation-
Paper.pdf.
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After receiving substantial stakeholder comment on the various
objectives, including commentary expressly directed toward the
development of a real-time payments system, the Federal Reserve
published in 2015 its Strategies for Improving the U.S. Payment System.
\2\ In this paper, the Federal Reserve described various strategies for
improving the payments system in the United States, including
``[i]dentify[ing] effective approach(es) for implementing a safe,
ubiquitous, faster payments capability in the United States'', noting
that ``[p]ayment stakeholders will ultimately determine through their
individual and collective actions the extent to which these strategies
are achieved.'' \3\
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\2\ Strategies for Improving the U.S. Payments System (Jan. 26,
2015) available at https://fedpaymentsimprovement.org/wp-content/
uploads/strategies-improving-us-payment-system.pdf.
\3\ Id. at 3.
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In late 2015 and early 2016 and to further the strategies outlined
in its 2015 paper, the Federal Reserve established its Faster Payments
Task Force (FPTF), which was charged with ``evaluating options for
achieving faster payments capabilities with the goal of identifying the
approach(es) that would best achieve the desired outcomes.'' \4\ As
part of this assessment process, the FPTF called on the private sector
to submit proposals for ``a full end-to-end payments solution'' to
achieve the identified strategies. \5\ These proposals were to be
judged against the ``effectiveness criteria'' developed by the FPTF to
determine ``how well solutions can achieve the desired outcomes
associated with improving the U.S. Payments System.'' \6\
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\4\ Id. at 17.
\5\ ``In Pursuit of a Better Payment System'', Federal Reserve
Banks (2016) at 5.
\6\ Id. at 4.
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Of the 16 different private-sector proposals that were submitted to
the FPTF, The Clearing House's RTP network proposal received the very
highest marks, achieving a rating of ``very effective'' (the highest
possible rating) with respect to 31 of the 36 criteria and
``effective'' with respect to the remaining five. \7\ A ``very
effective'' rating meant that ``the solution fully satisfies the[]
criteria.'' \8\
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\7\ Faster Payments QIAT Assessment (Feb. 21, 2017).
\8\ Faster Payments Effectiveness Criteria (Jan. 26, 2016) (FPTF
Effectiveness Criteria) at 6.
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Importantly, the RTP network was given the highest rating possible
with respect to its plan to achieve ubiquity, its approach to
settlement and resiliency as well as the other categories noted below:
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\9\ ``Accessibility'' is defined in the FPTF Effectiveness
Criteria as meaning that the solution would ``enable any entity . . .
to initiate and/or receive payments to/from any Entity'' and that the
solution had a ``credible plan for achieving widespread adoption.''
FPTF Effectiveness Criteria at 6.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Clearing House was well positioned to meet the need identified
by the Federal Reserve for the development of a real-time payments
solution and is proud of the ratings its solution received from the
FPTF.
That The Clearing House would be well-positioned to deliver on the
promise of faster payments for all should not come as a surprise. The
Clearing House, which was created to provide the payment services
required by the Nation's economy, has been in existence for over 165
years and, while owned by a relatively small number of banks, it has
always existed to serve depository institutions of all sizes, and
continues to do so today. In fact, in The Clearing House's Automated
Clearing House (ACH) and check-clearing networks approximately 80
percent of our customers are banks and credit unions with $10 billion
in total assets or less.
The Clearing House has been entrusted with operating an integral
part of the financial system since 1853 because we serve our
participants effectively and ethically. We do not engage in anti-
competitive behavior because such behavior offends our culture and core
values. Our focus on the needs of the industry as a whole has led The
Clearing House to price our services on a ``cost recovery basis''--in
other words, services are priced at a level sufficient to maintain the
ongoing safety and soundness of The Clearing House's systems and to
make necessary investments in research and development. The Clearing
House doesn't have shareholders seeking to maximize profits: it has
never paid a dividend in its history, there is no expectation for any
return on capital and there is no special pricing for owner banks. The
Clearing House instead annually reassesses fees; this cost recovery
model has enabled The Clearing House to continually lower prices over
time. And, if that were not enough, we are subject to antitrust laws
that provide real guardrails on the way we compete, and to multiple
different legal protections that prohibit unfair or deceptive acts and
practices.
The Clearing House maintains a critical and constant emphasis on
the safety, security, reliability, and efficiency of its payment
systems and it has a remarkable 166-year history of resiliency, having
maintained its operations without interruption through multiple world
wars, financial crises and natural and man-made disasters, including 9/
11 and the great recession.
The RTP Network
To meet the needs identified by the Federal Reserve and consistent
with the criteria articulated by the FPTF, The Clearing House led an
initiative to modernize the U.S. payments system by developing the RTP
network. Today, the network represents the culmination of The Clearing
House and the private sector's collective investment of more than $1
billion to design, build, launch, and commercialize a real-time
payments network in this country. Launched in 2017 and fully
operational since that time, the RTP network is the first significant
new payments infrastructure introduced in the United States in over 40
years. The RTP network was designed and built to offer real-time
payments capabilities to every consumer and business in the country via
any and all depository institutions nationwide that want to deliver
this functionality to their customers--what the industry refers to as
``ubiquity''. This means that whether you bank with JPMorgan Chase, or
the community Bank of Oak Ridge, North Carolina, where I live, any
consumer or business can have the benefits of real-time payments
through their depository institution. Today, the RTP network is already
connected to over 50 percent of all U.S. transaction accounts, with the
goal of achieving near-universal reach in the next several years.
In terms of the network's functionality, RTP delivers the real-time
capabilities that Americans want and need, so that payment recipients
receive final, good funds immediately and senders receive confirmation
that the funds have been received. The benefits to consumers, small
businesses, and the Nation's economy are transformational. For example:
Employees who were previously paid by check can be paid
through the RTP system and have immediate access to final good
funds;
Day laborers can be paid immediately at the end of their
shift;
Uber drivers can get money into their bank accounts to buy
gas for the next day;
Consumers can stop worrying about how long a payment may
take to get to their power company, their mortgage lender or
their water company;
Small businesses, like contractors, can be paid immediately
upon completion of a job;
Restaurants can leverage the RTP network to make payments
for ``just-in-time'' inventory instead of relying on credit;
and
Insurance companies can get disaster relief funds
immediately into their policyholders' accounts.
While the immediacy of a payment is an important component of the
RTP network, RTP offers so much more, including the rich data features
of the system, which allow small businesses to easily transmit invoices
and instantly receive payments--streamlining cashflow for businesses
that are the backbone of our economy. In addition to the examples
above, the appended Fact Sheet provides more details on the design of
the RTP network.
In addition to the features of the RTP network that will provide
all Americans with a range of new benefits relating to speed,
convenience, and safety of the payments they make and receive, there
are also societal benefits that will accrue from real-time payments.
Some analysts, for instance, believe that real-time payments are one of
the most immediate ways to benefit Americans who today live paycheck-
to-paycheck but tomorrow can receive immediate, final payment through
the RTP system and therefore have earlier access to funds.
Let me briefly talk about achieving near-universal reach for the
RTP network. The RTP network was designed and built so that the network
has the capacity to reach every depository institution in the country,
either directly or through third-party service providers, so that every
American consumer and business can have the benefit of real-time
payments. To achieve this, The Clearing House not only built out the
technical capabilities to reach the country's 11,000 financial
institutions, but also ensured that the pricing to participate on the
network was the same for all banks and credit unions regardless of
size. In sum, whether you are the country's largest commercial bank or
the smallest, you pay the same, per-transaction fee, to bring these
capabilities to your customers.
But the decision by a bank to join a faster payments network like
the RTP network or, in 4 years, FedNow, is not simply a matter of
having a preexisting connection or paying the per-transaction fee. \10\
Each bank joining a faster payments network needs the right connection,
one that is highly resilient (persistent) and right sized for the
nature of real-time payments, needs a back office with the capacity and
technology to accomplish real-time accounting and availability and
needs employee resources available for 24/7 payments support. This is a
heavy lift for all banks and for most requires the assistance of third
party service providers. The Clearing House has been working with all
types of service providers to help ensure that true access to the RTP
network is within reach.
---------------------------------------------------------------------------
\10\ The Federal Reserve makes a similar observation in its
Federal Register notice where it notes that FedNow participants ``would
need to deploy and test enhanced or upgraded FedLine components'' and
``maintain adequate telecommunications services to support the expected
end-to-end speed of payments.'' Federal Reserve Actions To Support
Interbank Settlement of Faster Payments, 84 FR 39297, 39320 (Aug. 9,
2019).
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The RTP network is also a fundamentally safer and more secure way
to pay. RTP payments are limited to ``credit push'' only, which means
that consumers are always in control of the money that moves from their
accounts. Unlike ``debit pull'' systems, where a payee can pull money
from an account, consumers and businesses using the RTP network must
authenticate into their bank's platform and affirmatively send or
``push'' money to a recipient--no one can ``pull'' money out. This
feature also lays the foundation for securing the message between the
bank and its customer, responding to the need for greater fraud
resistance and better cybersecurity.
Federal Reserve Notice and Request for Comment on Actions To Support
Interbank Settlement
The Committee has explicitly requested our views about the Federal
Reserve's decision to enter the real-time payments playing field. Less
than a year after the RTP network went live, the Federal Reserve issued
a proposal that contemplated entering the market with its own competing
real-time gross settlement (RTGS) system. \11\ (The RTP network is also
a real-time gross settlement system.) In this proposal, the Federal
Reserve cited, as a major justification for potential entry, a
generalized concern that its real-time payment service would be needed
to achieve the ubiquity that could not be achieved by the private
sector. \12\ There was no analysis of The Clearing House's then-
operational RTP network's efforts to achieve ubiquity or the FPTF
findings related to the RTP network.
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\11\ Potential Federal Reserve Actions to Support Interbank
Settlement of Faster Payments, Request for Comments, 83 FR 57351 (Nov.
15, 2018).
\12\ Id. at 57361.
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The 2018 proposal had two other important components. First, the
Federal Reserve noted that accessibility would be greatly enhanced ``if
existing and potential future private-sector RTGS services were able to
interoperate with a Reserve Bank service such that end-user customers
of any bank could send faster payments to end-user customers of any
other bank regardless of the faster-payments services used by the
banks.'' \13\ Second, the Federal Reserve suggested that it might
modernize its own existing Fedwire and National Settlement Service
(NSS) infrastructures, upon which the private sector relies to manage
liquidity, by extending the hours of those services to meet the demands
of a 24x7 economy. The comment process revealed near unanimity of
support for extending Fedwire and NSS hours. \14\
---------------------------------------------------------------------------
\13\ Id.
\14\ 84 FR 39297, 39302 (approximately 225 of 230 commenters
supported the Federal Reserve's liquidity management proposal).
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While The Clearing House was disappointed in the Federal Reserve's
action suggesting it might enter the market with its own solution, and
concerned over the chilling impact that might have on The Clearing
House's plans to bring the benefits of real-time payments to every
American, The Clearing House was also encouraged by statements that the
Federal Reserve might modernize its own existing Fedwire and NSS
infrastructures. If the Federal Reserve took these enhancing actions,
private-sector systems would find it easier to offer 24x7 payments
services, which currently operate during times when the Federal Reserve
is not open or operational to provide liquidity.
In August of 2019, the Federal Reserve issued a Federal Register
notice stating that it would enter the market with its own competing
RTGS system, FedNow. The Federal Reserve acknowledged that FedNow would
not be ready to launch until 2023 or 2024 at the earliest and that
nationwide reach would take more time to establish. \15\ In spite of
near unanimity of support for extending Fedwire and NSS hours, the
notice states only that the Federal Reserve will continue to ``explore
the expansion'' of Fedwire and NSS hours. \16\
---------------------------------------------------------------------------
\15\ Id. at 39301.
\16\ Id. at 39316.
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The announcement stated that the Federal Reserve's FedNow service
will provide a ``clear public benefit'' based on accessibility, safety,
and efficiency. Notwithstanding the FPTF ratings for the RTP network,
the announcement also concluded that the RTGS service is not one that
other providers alone can provide with ``reasonable scope,
effectiveness, and equity.'' \17\ In reaching its decision, the Federal
Reserve stated that the criteria ``require[] a forward-looking
evaluation of the probable or likely future state of the payment system
over the long run, with or without Federal Reserve action'' and that
the Federal Reserve ``focuses on expected, long-term outcomes and does
not require a determination that each of the criteria is satisfied at
present or will be with certainty in the future.'' \18\
---------------------------------------------------------------------------
\17\ Id. at 39306-39309, 39310-39312.
\18\ Id. at 39303.
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The future state described by the Federal Reserve in its Federal
Register notice was one in which The Clearing House would act in ways
that are entirely inconsistent with its 166 year history (i.e., that we
would abandon cost-recovery pricing and instead pursue a profit motive)
and that in some cases would be anticompetitive despite The Clearing
House being subject to antitrust laws. While unintended, the
assumptions that the Federal Reserve made in support of its decision to
enter the market have contributed to misinformation about The Clearing
House and the RTP network and run the risk of impeding The Clearing
House's ability to bring the benefits of real-time payments to every
American.
The FedNow announcement further noted that the Federal Reserve
believes it needs to enter the market with its own competing system
because it lacks ``plenary regulatory or supervisory authority'' over
payments systems and instead has ``traditionally influenced retail
payment markets through its role as an operator.'' \19\ Its authority
over The Clearing House under the Bank Service Company Act, \20\
however, is extremely broad, with The Clearing House being subject to
regulation and examination to the same extent as if the services being
provided were being performed by the depository institution that is
subject to Federal Reserve supervision itself. \21\ In addition, the
Act gives the Federal Reserve broad authority to issue ``such
regulations and orders as may be necessary to enable [it] to administer
and to carry out the purposes of this [Act].'' \22\ Nevertheless, the
Federal Reserve concludes in the Federal Register notice that this
authority is not sufficient to protect against potential future bad
behavior by The Clearing House although this conclusion is made without
reference to antitrust and unfair and deceptive practices laws to which
The Clearing House is subject.
---------------------------------------------------------------------------
\19\ Id. at 39300.
\20\ The Clearing House is also a designated financial market
utility under Title VIII of Dodd-Frank, subjecting The Clearing House
to the highest levels of supervision and regulation by the Federal
Reserve. While The Clearing House's regulation and supervision under
Title VIII relate specifically to its role as the operator of CHIPS,
The Clearing House operates as a single entity in the operation of its
payments systems.
\21\ See, e.g., 12 U.S.C. 1867(c) (``[W]henever a depository
institution that is regularly examined by an appropriate Federal
banking agency, or any subsidiary or affiliate of such a depository
institution that is subject to examination by that agency, causes to be
performed for itself, by contract or otherwise, any services authorized
under this chapter, whether on or off its premises . . . such
performance shall be subject to regulation and examination by such
agency to the same extent as if such services were being performed by
the depository institution itself on its own premises . . . .'').
\22\ 12 U.S.C. 1867(d) (``The Board and the appropriate Federal
banking agencies are authorized to issue such regulations and orders as
may be necessary to enable them to administer and to carry out the
purposes of this chapter . . . .'').
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Despite concerns that the Federal Reserve's announcement may hinder
The Clearing House in achieving the full potential of the RTP network
(see discussion below on the impact of two noninteroperable systems),
The Clearing House is resolute in its goal of bringing real-time
payments to the United States and believes strongly in the value and
integrity of the RTP network, as fully confirmed by the strong ratings
it received from the Federal Reserve's own Faster Payments Task Force.
We are committed to working closely with every financial institution
that is interested in pursuing participation in the RTP network so that
each institution's customers can obtain the benefits of real-time
payments.
Comparison of the RTP Network to FedNow
The Committee has asked for a comparison of the RTP network to
FedNow, which is not easy because one payment system exists and the
other is an aspirational future system. The information that we have
about the design of FedNow is strictly based on the Federal Register
notice, which does not provide many significant details and suggests
that much of the design of the system is still in the planning stage.
While President George is best positioned to speak to the design of
FedNow, we believe that the proposed design will be similar to the RTP
network in the following ways.
Both the RTP network and FedNow are real-time gross
settlement systems
Both are credit push systems that operate 24x7
The RTP network has a current value limit of $25,000 and
the Federal Reserve has indicated FedNow will have a value
limit of $25,000
Both systems will leverage ISO 20022 message standards
Of course the biggest difference between the two systems is that
the RTP network is operational and available in the market today while
FedNow will not be available for at least 4 years. While much has been
made about differences in settlement, the RTP network uses a settlement
model that has been used for decades to settle payments over The
Clearing House's wire payments system, known as CHIPS, a systemically
important payment system designated as such under Dodd-Frank and
supervised and regulated by the Federal Reserve. RTP settlement is
fully supported by a balance in an account at the Federal Reserve Bank
of New York. Funding (or lack of funding) by any one RTP participant
does not affect the ability of other participants to send or receive
funds over the RTP network. Importantly, the RTP network is designed so
that neither The Clearing House nor its participants experience credit
risk. In contrast it appears that the FedNow service will provide
unlimited credit (no real-time monitoring of credit positions) even on
weekends and holidays when the Federal Reserve's discount window is
closed.
The general design of FedNow raises several significant competitive
issues for the private sector that may hamper the private sector's
ability to bring the full benefits of real-time payments to consumers
and businesses in this country. The good news is that the Federal
Reserve could take steps to address these concerns.
First, the Federal Reserve, as the Nation's central bank, has the
ability to clear and settle payments directly through financial
institutions' master accounts, which means the balances being held in
accounts used for FedNow payments will count towards a financial
institution's reserve requirements and bear interest. The Federal
Reserve has the legal authority and operational capacity to accord the
same treatment to financial institution positions in the RTP account
that is held at the Federal Reserve Bank of New York and that is used
to facilitate RTP settlement, but so far has been unwilling to do so.
Second, given the near unanimity of support in response to its
October 2018 Request for Comment that the Federal Reserve should move
forward with making Fedwire and NSS available on a 24x7 basis, the
Federal Reserve should act quickly to implement expanded hours. Because
the private sector is dependent on Fedwire or NSS to manage liquidity
in private-sector systems, this is the single most important action the
Federal Reserve could take to encourage private-sector competition in
real-time payments. This is especially important from a competitive
perspective given that the Federal Reserve appears to have announced
that it will provide unlimited access to liquidity in the FedNow system
even when the discount window is closed.
These two issues must be expeditiously addressed by the Federal
Reserve in order to ensure that the private sector is not impeded in
its ability to bring the benefits of real-time payments to American
consumers and businesses.
Finally, while the Federal Reserve's analysis of its pricing
flexibility under the Monetary Control Act (MCA) comports with our
understanding of the MCA, the Federal Reserve's choices on pricing will
obviously significantly impact competition with the private sector. For
example, the Federal Reserve has indicated that it may be 15+ years
before FedNow achieves cost recovery and that initial fees will be
based on ``mature volumes'' with the Federal Reserve anticipating that
FedNow will become the sole RTGS system with ``nationwide reach'' \23\
To ensure fair competition, The Clearing House would urge that the
Federal Reserve reassess what is meant by ``in the long run'' to take
into account the length of time that a private-sector entity would be
able to wait to recover its operating costs, and calculate ``mature
volumes'' in a manner that does not unrealistically assume volume
moving away from the RTP network and to FedNow.
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\23\ 84 FR 39297, 39313-39314, and 39320.
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Interoperability
The Clearing House does not believe that interoperability between
two RTGS systems is achievable. The Federal Reserve's original proposal
in November of 2018 assumed that the Federal Reserve's RTGS system
would be interoperable with private-sector systems. It appears from the
Federal Reserve's notice, however, that the Federal Reserve has
realized that interoperability is unlikely.
The result in the United States may be a completely bifurcated
market, where, unless each bank in the country joins two systems (a
highly expensive and inefficient proposition, particularly for smaller
banks), the banks and their customers that are transmitting payments on
one system will not be able to reach the banks and their customers that
are on the other. In the place of ubiquity, we will have balkanization.
In our view, that is a highly damaging result for the future of real-
time payments in the United States.
When considering the issue of interoperability, it is important to
understand the differences between real-time payments and other payment
methods, such as the ACH system or wire systems like CHIPS and Fedwire.
With regard to ACH, ACH is interoperable with respect to the exchange
of payment messages (known as ``clearing''), allowing a participant on
one system to send a message to a participant on another system. It is
not, however, interoperable with respect to settlement. Clearing
interoperability is achievable in the ACH network because clearing and
settlement in the ACH are distinct actions that happen at different
times. With real-time clearing and settlement systems like the RTP
network, clearing and settlement happen instantaneously--they cannot be
split without significantly compromising the integrity and
functionality of the system--and unlike the ACH network funds are
immediately available to the recipient and are final and irrevocable.
Similarly, real-time payments cannot function like wire payments,
which rely on a system of intermediary banks to be able to reach all
endpoints. In contrast to systems like Fedwire and CHIPS (The Clearing
House's wire system), an overarching design principle of real-time
payment systems like the RTP network is to ensure that when a payer
(the sender of a payment) instructs payment to a payee (the recipient
of a payment), that payment will be completed instantaneously. To
achieve this goal, payment systems like the RTP network must be
designed so that payment processing will always be completed (meaning
get to the recipient's bank) and will be completed within milliseconds.
While The Clearing House has yet to see how the Federal Reserve will
design FedNow to meet this important objective of real-time payments,
the RTP network accomplishes this by supporting a very simple payment
model. In an RTP payment there is a payer, the payer's bank, the payee
and the payee's bank (no intermediary banks). This design eliminates
the very real possibilities that exist today in wire transfer systems
that a payment will be delayed or stopped at an intermediary bank. This
also means that the RTP network can only be used to make a payment if
the financial institutions holding the payer's and payee's accounts are
both participants on the RTP network. This is in stark contrast to wire
transfer systems like CHIPS which can be used to support payments sent
by anyone to anyone regardless of whether such persons have accounts
with CHIPS participants. This important distinction between wire and
real-time systems like the RTP network means that CHIPS can compete
with Fedwire for each and every dollar wire payment--either system
could be used to help make such payments even though neither CHIPS nor
Fedwire \24\ is ubiquitous. The RTP network (and the FedNow service)
will not enjoy that same opportunity and instead will be strictly
limited to the accounts held at banks that have signed up to use the
service. It is The Clearing House's view that in that type of payments
environment, given the commodity nature of payments, it will be very
hard for two systems to both succeed.
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\24\ The CHIPS system has 44 financial institution participants.
The Fedwire Funds Service has approximately 5,300 participants. (cite
Fed PFMI https://frbservices.org/assets/financial-services/wires/funds-
service-disclosure.pdf p. 8 says over 5,300 and our public website
https://www.theclearinghouse.org/-/media/new/tch/documents/payment-
systems/chips-participants-revised-05-15-2019.pdf.) Yet both systems
can facilitate payments involving all 11,000 U.S. financial
institutions.
---------------------------------------------------------------------------
Conclusion
The Clearing House is extremely proud of its record of providing
essential payments infrastructure for the U.S. financial system for
well over a century-and-a-half. While we are proud of our long service
to the Nation, we are also excited about our country now having the
most advanced payment system in the world. We are working hard to bring
the benefits of the RTP network to all of the banks in this country so
that your constituents, consumers and businesses across America, can
all realize the benefits of faster, more efficient and more secure
real-time payments.
The Clearing House appreciates your interest in this topic and I
look forward to answering your questions.
The RTP Network
The Clearing House launched the RTP network in November 2017 to
bring real-time payments to the United States. Today the RTP network
reaches over 50 percent of U.S. transaction accounts, with a path to
achieving universal adoption over the coming years. The RTP network was
built for financial institutions of all sizes and serves as a platform
for innovation enabling the delivery of new products and services to
their customers. Real-time payments over the RTP network provide
consumers and businesses with the ability to conveniently send payments
directly from their accounts 24/7 and to receive and access funds sent
to them over the RTP network immediately.
RTP Facts and Frequently Asked Questions:
Ubiquity--All federally insured U.S. depository
institutions can participate on the RTP network.
Access to the RTP network--Federally insured U.S.
depository institutions have the option to directly connect to
the RTP network or use an electronic connection provided by a
third-party service provider such as a core processor, a hosted
gateway, a bankers' bank or a corporate credit union.
Pricing--The RTP network has a single price for all
participants regardless of size, with no volume discounts, no
volume commitments and no monthly minimums. Pricing for the RTP
network is available on The Clearing House's website
(www.theclearinghouse.org/).
24/7--The RTP network operates 24/7, which allows financial
institutions to send or receive payments at any time.
All Types of Payments--The RTP network supports all types
of payments (B2B, B2C, C2B, P2P, G2C). The RTP system may not
be used to make a payment for a foreign account.
Flexible Messaging Functionality--Rich, flexible messaging
functionality (nonpayment messages) is included to support
communications between participants and value-added products.
For example, the RTP system provides messaging capability
enabling a request for payment of a bill or invoice directly
via the RTP network.
Immediate Availability--Recipients receive the payment
within seconds of the sending financial institution initiating
the transaction; the receiving financial institution is
required to make funds available immediately, except where
necessary for risk management or legal compliance purposes.
Payment Certainty--Sending financial institutions are not
permitted to revoke or recall a payment once it has been
submitted to the RTP network. However, there is a process to
facilitate communication between financial institutions around
return of funds sent in error or if there is suspected fraud.
Transaction limits--The RTP network is strictly a credit
push system. The credit transfer limit is currently $25,000.
Prefunding--RTP participants that intend to send payments
over the RTP network are currently required to contribute
funding to a special deposit account at the Federal Reserve
Bank of New York (an account that may be used by all RTP
participants regardless of the Federal Reserve district in
which they are located). A participant may use a liquidity
provider such as a bankers' bank or corporate credit union to
provide its funding. An RTP participant that only receives
payments over the RTP network does not have to contribute
funding.
Rules Governing the RTP Network--The RTP Participation and
Operating Rules apply to all network messages and are available
on The Clearing House's website (www.theclearinghouse.org).
______
PREPARED STATEMENT OF ROBERT A. STEEN
Chairman and CEO, Bridge Community Bank, on behalf of the Independent
Community Bankers of America
September 25, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
I am Bob Steen, Chairman and CEO of Bridge Community Bank in Mount
Vernon, Iowa.
I testify today on behalf of the Independent Community Bankers of
America and community banks nationwide, with more than 52,000
locations. I have played an active role in ICBA over the years
including serving on the Bank Operations and Payments Committee. Thank
you for the opportunity to testify at today's hearing titled
``Facilitating Faster Payments in the U.S.'' I believe that it is
imperative that the U.S. develop a robust real-time payments system to
meet consumer demand and stay competitive with the rest of the world.
This system must create access for all institutions, regardless of size
or charter type, and must be situated in a competitive environment with
end-user choice.
How we achieve this goal is critical. A real-time payments system
is too important to be entrusted to a private monopoly. The two dozen
largest banks simply cannot own and operate the U.S. payments system.
ICBA strongly supports the Federal Reserve's decision to build FedNow,
a real-time payments system that will give direct access to all
financial institutions and their customers. I am pleased to provide the
perspective of thousands of community banks such as ours that strive to
remain independent and competitive by offering state-of-the-art payment
products to our customers.
What Faster Payments Mean to My Bank and Community Banks
Bridge Community Bank is a $96 million asset community bank founded
in 1903 and owned by our 20 employees. We have three full-service
locations serving rural communities in growth markets in and around
Cedar Rapids and Iowa City. Bridge Community Bank meets the needs of
our communities through small business, agricultural, and consumer
banking. The rural communities we serve are beyond the appetite of most
of the largest national banks because we do not have the population
density to suit their transaction-based business model. What works for
Bridge Community Bank is a personal relationship model in which we
serve the totality of a family's business and personal banking needs,
both deposits and lending--often two to three generations, and
sometimes four and even five. The transaction account is the key to the
broader customer relationship and at the heart of community banking. We
have long recognized that payments innovation is critical to the long-
term prosperity and independence of Bridge Community Bank and the
community banking industry.
In recent years, we have seen numerous nonbanks move into the
payments arena. The players include Square, PayPal, also doing business
as Venmo, and many others. We are losing our place as an industry, and
we must be part of the solution. Many of these nonbank providers are
willing and able to absorb long-term and extraordinary losses for the
single purpose of growing market share. Their losses do not translate
to our gains. My industry cannot and should not do what they do. Still,
if we lose the payments side of the customer relationship, our
franchise will have no value. This is why I have invested so much of my
time and energy over the years into payments innovation. We have
incubated multiple payments projects in our bank. Of note, the ExcheQ
mobile application, on which we partnered with a community bank in the
development and testing, allows any account holder to pay any other
person as easily as sending a text or email. Using the ubiquitous ACH
same day settlement system, ExcheQ is able to send money to anyone in
the U.S. that has an account at any financial institution without a
payment application on the receiver's mobile device. This type of
innovation is critical to keeping our bank and other community banks
relevant to both our customers and our community, especially but not
exclusively for the younger generation. FedNow, a neutral, real-time
settlement network, will be critical to our ability to continue to
innovate on behalf of our customers. Once FedNow is fully operational
and ubiquitous, our customers will be able to send money in real-time
using ExcheQ without being dependent on our core banking system. That,
by itself, is magic.
U.S. Rapidly Being Marginalized in the Payments Services That Underlie
Our Economy
It is an unfortunate reality that the U.S. lags much of the rest of
the world in faster payments. Globally, 40 real-time payments systems
are live. Europe, Mexico, and Australia have already implemented real-
time systems. For example, one of our own bank payment solutions can
achieve a real-time transaction for our customers utilizing a Mexican
prefunded account connecting through the Central Bank of Mexico SPEI
network. These systems are realizing significant growth. In China, for
example, there are now more than 25 million faster payments made every
day, more than double the daily average from just a year ago.
America's economic vitality depends on a modern, continually
innovating, and globally competitive payments system. As more and more
transactions move online, delays in settlement will extend cross-party
risk and ultimately hobble the evolution of American commerce.
Transactions have become instantaneous, but the underlying payments
that support them continue to lag. A dynamic economy needs to be
supported by a modern payments system. I believe that FedNow will
promote U.S. competitiveness in payments and is a natural extension of
the Federal Reserve's historical role in ensuring access and secure
payments for all financial institutions.
Customers Need a Payment System That Matches Their Expectations
Customers expect an electronic payment, especially a payment
initiated on a mobile device, to arrive as soon as it is sent. However,
most payments today take one-to-three days to clear and settle,
delaying customer access to funds. A customer might need a paycheck or
other incoming payment to clear before making a mortgage or car payment
and avoid late penalties. These delays come at a real cost. A single
delay can result in unnecessary returns, late charges, credit history
impact, and even affect the consumer spending that sustains our
economy. Funds availability delays make it more difficult for a small
business to manage money between and among accounts to meet payroll,
service debts, pay a supplier, or other immediate and critical
expenses.
Real-time payments will facilitate commerce by ensuring immediate
access to funds, without holds or delays. As our economy evolves,
immediate access to funds will become increasingly important. The
emergence of task-based employers such as Uber and Lyft and other
``sharing economy'' peer-to-peer arrangements must be supported by a
real-time payments system that allows for the true instantaneous
exchange of funds. Payments innovation must keep pace with broader
technological innovation.
As Federal Reserve Governor Brainard has noted, the unmet demand
for real-time payments is fueling the development of solutions that
bypass banks and even sovereign currencies. Dislodging banks and
sovereign currencies from their historic role in the exchange of
payments will likely have a profound, unintentional impact on the
global economy.
The Clearing House Solution Fails Critical Tests
In November 2017, the largest banks, through The Clearing House,
launched a real-time payments network. The Clearing House effort has
failed on the critical parameters of creating access for all financial
institutions and ubiquity. A system that lacks these is of little true
value to American consumers and businesses. It is my understanding that
only 15 financial institutions--out of nearly 11,000 nationwide--are
actively engaged on the network. The Clearing House system will not
have the reach, on its own, to be the effective real-time payments
solution our economy needs. In fact, a private sector payments provider
has never achieved nationwide reach on its own in checks, ACH, cards,
or wire transfers. Unlike the Federal Reserve, The Clearing House has
neither the mission nor the capability to achieve this critical goal.
It cannot be the only option.
Most critically, The Clearing House system is a private system
owned by the largest banks. As a matter of principle, ICBA is against
any monopoly or other concentration of economic power. This is one of
our core and foundational values. Monopolies harm consumers and
ultimately escalate costs, erode service quality, and limit choice.
What's more, monopolies create financial and systemic risk. Real-time
payments are too important to our economic prosperity to leave in the
hands of two dozen of the largest banks, especially an organization
that does not have a proven track record of reaching smaller financial
institutions in clearing checks, ACH, and wire transfers.
Two years ago, The Clearing House obtained approval from the U.S.
Justice Department to build a private real-time payments network based
on a pledge that they would offer the same entry and transactional
pricing to all financial institutions. The Clearing House asked for
Justice's assurance that the agency would not bring an antitrust
lawsuit against their payments network. Recently, the Clearing House
added a caveat to its pledge not to offer volume discounts--that it
must not have a competitor. That sounds a lot like: ``Trust us. We
won't behave like a monopoly as long as we can be a monopoly.'' While
the caveat has since disappeared from their website, this posture
should only strengthen our collective demand to ensure access and
create competition and choice.
In addition to questions of monopoly power and its abuse, there's
the question of systemic risk. If the U.S. is limited to a single real-
time payments system, we will be vulnerable to a critical disruption of
the system which would have serious and lasting economic repercussions.
It makes no sense for us to acquiesce to that level of risk. Having
more than one settlement provider creates a critical safety net for the
U.S. payment system. The Federal Reserve has a long and proven record
of managing resilient systems in times of crisis.
The Federal Reserve Must Be Involved in Faster Payments
Bridge Community Bank and ICBA strongly support the recent
announcement by the Federal Reserve to build and operate a real-time
payments settlement system. In this role the Federal Reserve can
guarantee competition, provide choice for consumers, businesses, and
banks, create true universal access and payment ubiquity, and keep pace
with the rest of the world. This system should ultimately interoperate
with other systems such as The Clearing House system, much as it has
with ACH and paper checks.
Competition
The remedy for monopoly is competition. Competition is the defining
feature of our economic system and the foundation of our national
prosperity. It creates choice for consumers as well as businesses and
promotes innovation in the development of new products to meet consumer
preferences and needs. Competition promotes efficiency and helps
contain costs.
What is broadly true in our economic system is also true in
payments. The Federal Reserve's development and operation of a real-
time gross settlement system would guarantee needed competition. This
point bears repeating: FedNow will not displace The Clearing House
system. It will create an alternative to operate alongside any private
sector system, ensuring equitable access to banks and communities of
all sizes nationwide. This is the Federal Reserve's historic role in
check clearing, ACH, and wire services. It's is their duty to play the
same role in faster payments.
FedNow is true to the historic legacy of the Federal Reserve. One
of the initial responsibilities of the Federal Reserve was to serve as
a clearinghouse of checks, ensuring that a customer's good check is
honored, regardless of whether their bank is a Wall Street bank or
located on Main Street in Mount Vernon, Iowa. The Federal Reserve,
leveraging its regional bank structure, demanded reasonable
availability of funds thereby limiting intentional float and delays at
the expense of the public. During the past century, every eligible
financial institution, regardless of size, has had equal access to the
Nation's payments and settlement systems at par through their local
district Federal Reserve Bank if they have so desired.
Reach
Most importantly, the U.S. does not need another closed-loop real-
time payment system in which some financial institutions participate,
and others are excluded. All financial institutions, regardless of size
or charter type, and all customers, whether they live in small or rural
communities that are exclusively served by community banks, or in
suburban or urban communities, must have access to a real-time payments
network. To create an inclusive financial system, every single
financial institution should have the opportunity to participate. I
firmly believe that simply cannot happen without the Federal Reserve's
role in real-time settlement.
The Fed is uniquely positioned to provide access to all 11,000
financial institutions because all of these institutions have access to
a settlement account and a service connection with the Fed. The Federal
Reserve operates a check, ACH, and wire transfer service. The Clearing
House simply cannot match this capability. In short, industrywide
ubiquity may never be achieved without the Fed developing and operating
a real-time gross settlement system and interoperating with the private
sector. If we want to maximize access to real-time payments for
financial institutions and consumers nationwide, the Federal Reserve,
as the U.S. central bank, must be involved.
Affordability
If history is any guide, the Fed will maintain affordable as well
as universal access to faster payments. The Federal Reserve offers a
fair and affordable pricing structure, even to the smallest of the
small financial institutions like our bank. For example, as the first
bank to forward an electronic check file to the Federal Reserve shortly
after the effective date of the Check21 Act, our bank saw an immediate
60 percent savings for check services. Universal access, as critical as
it is, has little value if not offered on affordable terms. That is
exactly what the Fed has done over my long career.
Direct Access for Community Banks
The Fed is trusted among community banks. Each community bank has a
relationship manager and the opportunity for direct access to the Fed.
I know our representative's name and I know his cell number. He answers
the phone. As a community bank, I know that I have direct and easy
access to Federal Reserve support services even after our banking
hours. I place a high value on this access. I would not have this
access with the largest banks or their proxy which historically have
served as a settlement provider for only a few of the Nation's 11,000
financial institutions.
A Platform for Innovation
Ubiquitous access for all payments system end users to faster, more
efficient and more secure payments--irrespective of their financial
institution's size or charter type--will also provide a foundation for
a payments system that will lead to more innovation. Once ubiquity is
achieved, new use cases will emerge that we have not thought of. Real-
time payroll, immediate bill payment, person-to-person payments, and
business-to-business payments that are actually real-time will become
the norm.
A Natural Extension of the Federal Reserve's Current Role
The Federal Reserve's entry into real-time payments is part of a
natural evolution from its involvement in check clearing, ACH payments,
and wire transfers. By playing a settlement role in these services, the
Fed has strengthened the payments system by providing safety,
integrity, choice and equitable access to all financial institutions.
The Federal Reserve will bring the same critical benefits to real-time
payments.
A Deterrent to Further Consolidation
As I stated at the outset, payments innovation, offering customers
what they want when they want it, is critical to the prosperity,
sustainability, and continued independence of community banks. A
monopoly in the payments space and especially in real-time payments,
operated by the largest banks, would surely marginalize our bank and
our industry, weaken our customer relationships, and ultimately speed
the pace of consolidation that is changing the American financial
services landscape. The Federal Reserve's involvement, together with
tiered regulation based on size and complexity, which--thanks to
Chairman Crapo and this Committee--has been enacted and is now directly
benefiting community banks, will help to preserve and strengthen the
community banking industry, which is so vital to the U.S. economy.
Conclusion
Thank you again for convening this hearing and raising the profile
of a critical issue for the future of American commerce and consumer
finance.
The demand for faster payments is already here, and it's only going
to increase. By playing a settlement role in real-time payments as it
already does for checks, ACH payments and wire transfers, the Fed will
provide safety, integrity, choice and equitable access to all financial
institutions. The Fed has not only the authority, but the duty, to
build and operate our real-time settlement system.
______
PREPARED STATEMENT OF GEORGE SELGIN
Senior Fellow and Director, Center for Monetary and Financial
Alternatives, Cato Institute
September 25, 2019
Introduction
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee on Banking, Housing, and Urban Affairs, my name is George
Selgin, and I am the Director of the Cato Institute's Center for
Monetary and Financial Alternatives. I am also an adjunct professor of
economics at George Mason University, and Professor Emeritus of
Economics at the University of Georgia.
I'm grateful to you for allowing me to take part in this hearing on
``Facilitating Faster Payments in the U.S.'' The slow speed of many
payments in this country is a cause of serious inconvenience and
substantial losses to American businesses and consumers, and one that
places an especially great burden on people living paycheck-to-
paycheck, who can least afford to wait, sometimes for days, for checks
or employer direct deposits to clear. \1\ For that reason it is
essential that Congress do everything in its power to facilitate the
speeding up of payments in this country.
---------------------------------------------------------------------------
\1\ For some figures see Aaron Klein, ``How the Fed Can Help
Families Living Paycheck to Paycheck'', Brookings Series on Financial
Markets and Regulations, November 22, 2017, and idem., ``The Fastest
Way To Address Income Inequality? Implement a Real-Time Payment
System'', Brookings Series on Financial Markets and Regulations,
January 2, 2019. Available at https://www.brookings.edu/research/how-
the-fed-can-help-families-living-paycheck-to-paycheck/ and https://
www.brookings.edu/research/the-fastest-way-to-address-income-
inequality-implement-a-real-time-payment-system/, respectively.
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To assist Congress in that endeavor, I wish to draw your
Committee's attention to some dangers posed by the Federal Reserve
decision to proceed with FedNow--a real-time retail payments service
that will compete directly with private-sector retail payments
services. Specifically, I wish to discuss four ways in which the Fed's
plan might hinder rather than facilitate the achievement of an
equitable, efficient, and safe U.S. fast payments system, and to
suggest steps Congress should take to guard against this outcome.
The Federal Reserve as a Payment Service Competitor
As a rule, competition is an effective--if not the most effective--
means for encouraging providers of services to price those services
equitably, to produce them efficiently, and to improve their quality
over time. However, these outcomes depend on the presence of a level
playing field on which all providers compete--that is, they depend on
the various providers having roughly equal legal privileges and
obligations. In the absence of a level playing field, the presence of
multiple providers alone does not guarantee good outcomes. Instead,
special care must be taken to guard against bad ones.
The Federal Reserve banks enjoy many legal advantages over private
suppliers of payment services. They command a monopoly of bank reserves
that serve as means of final payment; they are empowered to regulate
commercial banks and some other private-sector payment service
providers; and they are exempt from antitrust laws. Finally, although
the 1980 Monetary Control Act requires that the Fed charge prices for
its services that recover those services' capital and operating
expenses, it only needs to do so over a ``long run'' of unspecified
length, and then only according to accounting methods of its own
choosing that are not subject to external review.
These and other Fed privileges mean that, when it enters into
direct competition with private-sector payment service providers, it
does so on a playing field that it can easily slant in its favor. It is
owing to this that the Fed itself has established strict criteria it
must meet before offering any new payment service, including the
requirement that the service in question ``be one that other providers
alone cannot be expected to provide with reasonable effectiveness,
scope, and equity.'' \2\
---------------------------------------------------------------------------
\2\ See Board of Governors of the Federal Reserve System,
``Policies: The Federal Reserve in the Payments System'', available at
https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
---------------------------------------------------------------------------
In responding to the Fed's request for comment regarding
``Potential Federal Reserve Actions To Support Interbank Settlement of
Faster Payments'', I argued against the Fed's then-proposed retail RTGS
(Real Time Gross Settlement) payment service partly on the grounds that
it did not meet the Fed's own criteria for providing new payments
services. \3\ I also argued that the new service would delay progress
toward a ubiquitous U.S. fast payments system. I continue to hold these
views.
---------------------------------------------------------------------------
\3\ Available at https://www.cato.org/publications/public-
comments/re-potential-federal-reserve-actions-support-interbank-
settlement.
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I also fear that, instead of preventing private-sector payment
service providers from engaging in anticompetitive behavior, the Fed
will itself engage in such behavior. In my testimony today, I wish to
draw attention to four particular anticompetitive dangers that the
Fed's entry into the fast payments business poses, and to recommend
steps Congress should take to guard against each.
Postponed Fed Settlement System Reform
The first danger is that the Fed will treat FedNow as a substitute
for a 24x7x365 expansion of the operating hours of Fedwire, its
wholesale RTGS service, and NSS (the National Settlement Service), a
separate multilateral settlement service that is also owned and
operated by the Federal Reserve banks. \4\ The availability of 24x7x365
Fed settlements is essential to achieving faster (though not
necessarily real-time) payments on other payment services. But instead
of hastening to offer that service, the Fed may delay doing so to limit
private payment services' ability to compete with it.
---------------------------------------------------------------------------
\4\ The NSS serves ``depository institutions with Federal Reserve
master accounts that settle for participants in clearinghouses,
financial exchanges and other clearing and settlement arrangements.''
For further details see FRBServices.org, ``National Settlement
Service'', available at https://www.frbservices.org/financial-services/
national-settlement-service/index.html.
---------------------------------------------------------------------------
The danger here stems from the Fed's monopoly of final means of
payment, including bank reserves. Because of that monopoly, most
private noncash payments, including most check, card, and ACH
(Automated Clearing House) payments, can only be completed with the
help of either Fedwire or the NSS or both. Only once settlement takes
place can recipient banks credit funds to a payee's account without
assuming some credit risk. Because Fedwire and the NSS operate only on
weekdays, excluding holidays, and then with limited hours, retail
payment services that rely on them are correspondingly limited in their
ability to process payments quickly at all times.
Although it would also enhance the efficiency of private real-time
payments services, the main benefit of 24x7x365 Fed settlement services
would consist of a substantial reduction in delays on ``legacy''
payment networks. \5\ For example, today's Fedwire and NSS operating
hours currently stand in the way of National Automated Clearing House
Association's (NACHA) long-standing effort to enhance ACH's same day
payment services by providing for a third ACH ``processing window.''
Although NACHA had hoped to make this third window available by
September 2020, and the change required only a minor extension of
Fedwire and NSS operating hours, the Fed failed to prepare for the
change on time, forcing NACHA to postpone its planned reform until
March 2021. \6\
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\5\ Because RTP settlements occur on the books of a special Fed
account jointly owned by RTP participants, it can operate 24x7x365.
However, its participants depend on Fedwire or the NSS to occasionally
replenish their individual RTP account balances. The settlement
services' limited operating hours raise participants' costs of using
RTP by obliging them to maintain larger non- interest earning RTP
account balances than they otherwise might, especially going into
weekends. Concerning the non- interest-bearing status of RTP account
balances, see below.
\6\ Jim Daly, ``Fed Delay Causes NACHA To Postpone a Third
Processing Window for ACH Transactions for Six Months''. Digital
Transactions, September 30, 2019. Available at https://
www.digitaltransactions.net/fed-delay-causes-nacha-to-postpone-a-third-
processing-window-for-ach-transactions-for-six-months/.
---------------------------------------------------------------------------
When the Fed requested public comment on whether it should
establish its own fast payments network, it also asked whether it
should either arrange to have Fedwire and the NSS operate 24x7x365 or
establish a new ``Liquidity Management Tool'' for the purpose of
allowing 24x7x365 transfers among commercial banks' Federal Reserve
accounts. Almost every response to this question favored having the Fed
pursue one of these proposed reforms (most respondents did not care
which), making the proposal much less controversial than the Fed's plan
to establish its own retail RTGS service. Yet despite this, and the
relative easiness and great potential benefits of the asked-for reform,
the Fed ultimately chose to do no more than continue to ``explore'' the
possibility of offering 24x7x365 settlement services, and to perhaps
seek comment upon the proposal yet again! \7\
---------------------------------------------------------------------------
\7\ 84 FR 39301. Available at https://www.govinfo.gov/content/pkg/
FR-2019-08-09/pdf/2019-17027.pdf.
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Why is the Fed dragging its feet on an almost universally favored
reform that could alone suffice to eliminate most of the more notorious
payment delays in this country? \8\ The Fed's actions seem at odds with
its overarching public mission. But they are what one would expect from
a firm endeavoring to compete successfully with rival payment service
providers. For example, when NACHA was first endeavoring to make same-
day ACH payments possible, its efforts were opposed by several large
banks. It was widely suspected, according to a contemporary report,
that this opposition stemmed from those banks' intent ``to build their
own proprietary electronic payment systems, which could give them a leg
up on smaller banks.'' \9\ The Fed's hesitation to make 24x7x365 Fed
settlements available to private payment service providers may likewise
reflect its own desire to give FedNow ``a leg up'' on other payment
networks. \10\
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\8\ Because the most costly payment delays at present are those
that keep workers waiting not hours but days for payments to clear,
``The Fastest Way To Address Income Inequality'' stemming from such
delays is, with all due respect to Aaron Klein (op. cit.), not to have
the Fed implement FedNow, which will not be ready for several years,
but to have it offer 24x7x365 settlement services, which should take
much less time.
\9\ Kevin Wack, ``How Big Banks Killed a Plan To Speed Up Money
Transfers''. American Banker, November 13, 2013. Available at https://
www.americanbanker.com/news/how-big-banks-killed-a-plan-to-speed-up-
money-transfers. Although Wack here refers to TCH as NACHA's ``most
visible foe,'' it only appears that some of TCH's owner banks opposed
NACHA's plan. In a comment letter TCH itself submitted, in its capacity
as an ACH operator, to NACHA in February 2015, it expressed its overall
approval of NACHA's proposal. TCH's comment letter is available at
https://www.theclearinghouse.org/-/media/files/association-documents-2/
20150206-comment-letter-to-nacha-supporting-same-day-settlement.pdf.
\10\ NACHA itself seems to have anticipated this outcome. In its
own comment letter concerning the Fed's various proposals, it
complained that the Fed already appeared to be retreating from what
once seemed to be a commitment to further expand Fedwire and NSS
operating hours, while expressing its fear that it was doing so in
order to favor the establishment of its own real-time retail payments
systems, over measures that could further expedite payments on legacy
systems. See Jim Daly, ``NACHA Wants the Fed To Take a Broader View of
Faster Payments'', Digital Transactions, December 5, 2018. Available at
https://www.digitaltransactions.net/nacha-wants-the-fed-to-take-a-
broader-view-of-faster-payments/.
---------------------------------------------------------------------------
Whatever the Fed's motives, Congress should not allow it to delay a
badly needed enhancement of its settlement services any longer.
Instead, it should give the Fed 2 years within which to either place
its Fedwire and NSS services on a 24x7x365 operating basis, or
establish an alternative 24x7x365 Liquidity Management Tool. If
Congress does not do this, I fear that Congress will overlook the most
important of all steps it might take to dramatically and rapidly
enhance the speed of U.S. retail payments.
Volume-Based Pricing Favoring Large Banks
A second danger the Fed's entry into the fast payments business
poses is that, by resorting to volume-based pricing, the Fed will
ultimately put small banks that wish to offer fast payment services to
their customers at a disadvantage.
Because many are counting on the Fed to guard against rather than
introduce volume-based fast payment fees, some background is required
to understand why that expectation exists, and why just the opposite
might happen.
The only potentially ubiquitous real-time payments service that
exists at present, the RTP system established by TCH (The Clearing
House) in 2017, presently operates on a contractually binding flat-rate
basis, with no minimum volume requirements. \11\ But TCH's flat-fee
commitment isn't absolute: instead, it allows RTP to alter its pricing
policy in the event that the Fed enters into competition with it.
Noting this, Fed officials and others have argued that RTP cannot be
trusted to make certain that small banks continue to receive equitable
treatment, instead of finding themselves placed at a disadvantage
relative to their large competitors. That TCH is itself owned by 25 of
the Nation's largest banks makes the risk to smaller banks seem all the
more obvious. Consequently, the Fed and others argue, having FedNow
directly compete with RTP is the surest way to keep RTP from reneging
on its flat-fee commitment.
---------------------------------------------------------------------------
\11\ For RTP's pricing policies see https://
www.theclearinghouse.org/payment-systems/rtp/-/media/
00a1f095c9a049fea6c3e2e5fbc2c6ad.ashx.
---------------------------------------------------------------------------
But closer consideration of TCH's general pricing practices, along
with some history, suggest that the Fed's entry is more likely to have
just the opposite consequence. Regarding TCH's practices, in seeking a
statement from the Justice Department's Antitrust Division ``of its
present intention not to seek any enforcement action against'' the RTP
system it was then developing, TCH explained that it:
operates on a ``utility'' model, charging fees only to cover
the costs incurred in operating its CHIPS, EPN, and check
imaging systems and to support future innovation, and does not
pay dividends to its owner banks. \12\ Accordingly . . . TCH
owner banks . . . will benefit by participating in the RTP
system and enhancing their abilities to compete more
effectively among themselves and with non-TCH owner banks and
nonbank payment service providers. \13\
---------------------------------------------------------------------------
\12\ CHIPS (for Clearing House Interbank Payment System) is TCH's
large-value interbank payment service, while EPN (for Electronic
Payments Network) is its ACH (Automated Clearing House) operations
service. [This writer's note.]
\13\ Richart Taffet, ``The Clearing House Payment Company LLC's
Request for Business Review Letter'', October 11, 2016. Available at
https://www.justice.gov/atr/page/file/998216/download.
The veracity of TCH's claims is attested to both by the known
pricing practices of its established payment systems and by the Justice
Department's conclusion that RTP did not in fact pose ``significant
anticompetitive threats.'' \14\
---------------------------------------------------------------------------
\14\ Andrew C. Finch, ``The Clearing House Payments Company LLC
Business Review Request'', September 21, 2017. Available at https://
www.justice.gov/atr/page/file/998201/download.
---------------------------------------------------------------------------
FedNow, in contrast, does pose such a threat, as is clear from what
happened in the case of ACH payments. The Fed competes with TCH, and in
the past competed with other private-sector providers, in providing ACH
payment services. TCH initially charged flat ACH fees. But during the
1990s, the Fed, in an effort to compete more aggressively in an
increasingly national ACH market, resorted to volume-based ACH fees.
\15\ The Fed's move compelled TCH to follow suit to avoid losing the
business of its larger ACH customers. Yet TCH's ACH prices are still
more favorable to small banks than those charged by the Fed, which
charges many smaller banks five times the per-transaction fee it
charges its largest customers. \16\
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\15\ Some years earlier, when the Fed first sought comment on its
plans to establish nationwide EFT (Electric Funds Transfer) services,
the Justice Department's Antitrust Division commented in favor of the
Fed's adoption of a nondiscriminatory pricing system, noting that a
discriminatory pricing system could prove to be ``as substantial a bar
to competition as exclusionary rules.'' Anatoli Kuprianov, ``The
Monetary Control Act and the Role of the Federal Reserve in the
Interbank Clearing Market'', Federal Reserve Bank of Richmond Economic
Review, July/August 1985, p. 31. Available at https://
www.richmondfed.org/-/media/richmondfedorg/publications/research/
economic_review/1985/pdf/er710403.pdf.
As Mark Weinberg has observed, whereas uniform average-cost pricing
generally ``maximizes net social benefits subject to the constraint
that total revenues from the sale of the product just equal total
costs,'' volume-based pricing, a form of price discrimination, does
not. Consequently the Fed's resort to the latter ``raises some
important questions,'' including whether ``the Reserve Banks' `business
interests' [are] in conflict with their public policy
responsibilities.'' ``An efficiency perspective,'' he continues,
``dictates that a loss of market share by the Federal Reserve is
neither good nor bad per se. What matters is the overall cost
efficiency of the market. If the Federal Reserve is replaced by
providers with lower costs, then such a change should be accommodated.
The goal of pricing policy, however, should be that only efficiency-
enhancing losses are experienced.'' John A. Weinberg, ``Selling Federal
Reserve Payment Services: One Price Fits All?'' Federal Reserve Bank of
Richmond Economic Quarterly, Fall 1994, pp. 3 and 8. Available at
https://www.richmondfed.org/-/media/richmondfedorg/publications/
research/economic_quarterly/1994/fall/pdf/weinberg.pdf.
\16\ Thomas Wade, ``How the Federal Reserve's Automated Clearing
House Informs the Fed's Proposed Real-Time Payments Entry'', American
Action Forum, July 11, 2019. Available at https://
www.americanactionforum.org/insight/the-federal-reserves-automated-
clearing-house/.
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It was to protect itself from such potential Fed competition, and
not (as Fed officials have suggested) to be able to ultimately resort
to discriminatory pricing, that TCH made its flat-rate commitment
contingent on the Fed's not entering into competition with it. Were TCH
not to do this, it would risk having FedNow bid away its large
participants.
To avoid having volume-based pricing undermine the goal of
equitable real-time payments, Congress must do more than merely trust
the Fed not to engage in such pricing. At very least, it should insist
that the Federal Reserve Board follow TCH's example by making a public
commitment to refrain from offering volume-based discounts on FedNow
or, at very least, by publicizing a specific, anticipated FedNow
pricing policy, such as it presumably employed in assessing the new
service's feasibility and desirability. As then Richmond Fed economist
John Weinberg observed some years ago, ``When the Fed is one of several
competitors, it can contribute to the efficiency of the market by
adopting a clear pricing policy to which other sellers can react.''
\17\
---------------------------------------------------------------------------
\17\ Weinberg, op. cit., p. 20.
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Prejudicial Treatment of Balances in Jointly Held Fed Accounts
The third danger stems from the Fed's ability to refuse to classify
bank balances held in jointly owned Fed accounts as reserves, and to do
so even when the accounts in question are ``intended to facilitate
settlement between and among depository institutions participating in
private-sector payment systems.'' \18\
---------------------------------------------------------------------------
\18\ For the Fed's rules for establishing such joint accounts see
82 FR 41951, available at https://www.govinfo.gov/content/pkg/FR-2017-
09-05/pdf/2017-18705.pdf.
---------------------------------------------------------------------------
Fed balances classified as ``reserves'' earn interest, while those
not so classified do not. Consequently, by refusing to classify the
jointly held Fed balances held by banks participating in a private
payments network as reserves, the Fed adds to the cost of participating
in that network, and hence to the relative attractiveness of other
networks, including those it itself operates, that aren't subject to
the same ``reserve tax.'' The Fed's status as bank regulator can thus
allow it to compete unfairly by ``raising [its] rivals' costs.'' \19\
---------------------------------------------------------------------------
\19\ The seminal paper here is Steven C. Salop and David T.
Scheffman, ``Raising Rival's Costs'', American Economic Review, May
1983, pp. 267-271. Available at https://www.jstor.org/stable/
1816853?seq=1#metadata_info_tab_contents.
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Although the Fed allows ``only an institution eligible to have a
Federal Reserve account under the applicable Federal statute and
Federal Reserve rules, policies, and procedures'' to be a joint account
holder, it reserves the right to determine whether balances in joint
accounts count as reserves on a balance-by-balance basis. \20\ Today,
the Fed administers three joint accounts serving to facilitate
settlements among participants in TCH's CHIPs, RTP, and EPN networks.
\21\ So far as I'm aware, it has not yet chosen to treat balances in
any of these accounts as reserves. Consequently those balances neither
bear interest nor qualify as ``High Quality Liquid Assets'' that can
satisfy Basel's LCR (Liquidity Coverage Ratio) requirements.
---------------------------------------------------------------------------
\20\ 82 FR 41956.
\21\ Although most EPN ACH payments are settled using Fedwire, TCH
relies on a joint Fed account to assist in the settlement of items sent
by Fed ACH participants to EPN participants that choose to be
identified by UPIC (Universal Payment Indication Code) numbers only, so
as to avoid divulging confidential banking information.
---------------------------------------------------------------------------
I can think of no economic reason why the Fed should not classify
all Federal Reserve bank balances held in joint accounts used in
settling payments as reserves, and to accord such balances the same
privileges as other reserve balances. RTP account balances, for
example, are no less liquid than banks' regular Fed account balances,
and serve the same purpose of supplying their owners with means for
settling payments. That banks choose to fund their RTP accounts rather
than their individual Fed accounts, so as to allow them to make real-
time payments instead of relying on slower ones, should not subject
them to any avoidable penalties.
Moreover, by refusing to treat RTP balances as reserves the Fed may
complicate its monetary policy operations unnecessarily by creating a
new ``autonomous'' determinant of the total stock of bank reserves. As
the Fed itself explains:
if joint account balances are not treated as reserves, they are
a factor affecting the supply of reserve balances, meaning, all
else equal, movements in joint account balances have similarly
sized but opposite effects on the supply of reserve balances,
which the Federal Reserve will need to offset to provide the
appropriate level of reserves in a scarce reserve regime. \22\
---------------------------------------------------------------------------
\22\ See Federal Reserve System, ``Final Guidelines for Evaluating
Joint Account Requests'', at https://www.govinfo.gov/content/pkg/FR-
2017-09-05/pdf/2017-18705.pdf. Although the Fed presently operates an
abundant reserve regime, recent experience has illustrated, rather
dramatically, that under certain conditions the Fed may still have to
intervene to offset autonomous reserve losses. See Nick Timiraos and
Daniel Kruger, ``Fed Intervenes To Curb Soaring Short-Term Borrowing
Costs'', Wall Street Journal, September 17, 2019. Available at https://
www.wsj.com/articles/fed-to-conduct-first-overnight-repo-transactions-
in-several-years-11568729757.
In short, the Fed's ability to refuse to classify balances held in
joint accounts ``intended to facilitate settlement'' on private
payments system with which it competes represents a clear conflict of
interests. To resolve this conflict, and thereby assure that the Fed
competes fairly with rival payment service providers, Congress should
compel the Fed to classify all balances held in joint Federal Reserve
bank accounts as reserves, provided only that the accounts in question
are designed to facilitate settlements on private payments networks.
Congress should also have the Government Accountability Office (GAO)
occasionally review the Fed's handling of applications for such joint
accounts, to ensure that it continues to abide by its current
guidelines for granting them.
Abuse of Monetary Control Act Loopholes
Finally, I wish to point to the risk that the Fed will take
advantage of loopholes in the 1980 Monetary Control Act (MCA) to charge
prices for its FedNow services that fail to cover their full costs, as
that act requires. Thanks to its monopoly of paper currency, the Fed
earns substantial ``seigniorage'' revenue it can use to cross-subsidize
its other payment services to the extent that MCA loopholes allow it.
Although the MCA is supposed to rule out such cross-subsidies,
there are at least two defects in its provisions that can prevent it
from doing so. One concerns the Act's requirement that the Fed's
service fees cover its costs ``over the long run.'' Because it fails to
define ``the long run,'' the Act as written allows the Fed to interpret
the phrase as it pleases. In contrast, private-sector payment service
providers must generally be able to recover the cost of new services
rapidly enough to achieve a positive present value for those services.
Fed officials claim that they generally endeavor to recover the
Fed's expenditures for established services within a 10-year period,
but that they expect FedNow's ``first instance of long-run cost
recovery to occur outside'' that 10-year cost recovery period. \23\
However, they do not say how far outside, and the Fed incurs no
penalties for failing to recover its costs within any specific length
of time. \24\ It follows that the Fed's investment in FedNow needn't
have a positive present value, so that it can set FedNow fees below
what a private-sector provider of an equally costly service could
afford.
---------------------------------------------------------------------------
\23\ 84 FR 39314.
\24\ GAO, ``Federal Reserve's Competition With Other Providers
Benefits Customers, but Additional Reviews Could Increase Assurance of
Cost Accuracy'', GAO-16-614, August 2016. Available at https://
www.gao.gov/assets/680/679388.pdf.
---------------------------------------------------------------------------
A second MCA loophole leaves to the Fed itself the choice of an
internal cost accounting system by which the Fed allocates its
expenditures among its various activities, while failing to provide for
periodic and systematic external reviews of that accounting system to
assure its adequacy. In consequence the last external review of the
Fed's cost accounting system took place in 1984! External assessments
of the Fed's success in complying with the MCA's cost recovery
provisions, such as that undertaken by the GAO in 2016, \25\ are
therefore only as accurate as the Fed's own internal audits--a highly
unsatisfactory circumstance.
---------------------------------------------------------------------------
\25\ Ibid.
---------------------------------------------------------------------------
By closing these MCA loopholes, Congress can prevent the Fed from
underpricing its payments services, including FedNow. To do so, it
should insist that the Fed offer compelling proof that it will be able
to recover the costs of FedNow rapidly enough to give that project a
positive present value using an equitable and competitive fee
structure. Congress should also follow the GAO's 2016 recommendation
that it provide for periodic independent reviews of the Fed's cost-
accounting practices. \26\ Together these changes should go far in
assuring that the Fed competes fairly with private payment service
providers.
---------------------------------------------------------------------------
\26\ Ibid., p. 64: ``Having [the Fed's] cost accounting practices
periodically subject to independent testing would provide greater
assurance that the Federal Reserve is complying with the Monetary
Control Act.''
---------------------------------------------------------------------------
Conclusion
I conclude my testimony by observing that none of the steps I have
recommended to Congress would prevent the Fed from doing all that it
can possibly do to facilitate faster payments in the United States. My
recommendations will only serve to make sure that in competing with
private-sector payment service providers, the Fed plays by the rules,
as it must if it is to contribute to rather than hinder the speeding-up
of U.S. payments. A well-intentioned Fed should therefore have no
objection to them, while an ill-intentioned one will make them
indispensable.
______
PREPARED STATEMENT OF SHEILA C. BAIR
Former Chair, Federal Deposit Insurance Corporation
September 25, 2019
Chairman Crapo, Ranking Member Brown, Members of the Committee.
Thank you for the opportunity to testify today to present my personal
views on the need to facilitate faster payments in the United States. I
applaud the Federal Reserve Board's recently announced plans to build
``FedNow''--an interbank settlement system to support real-time
payments. This initiative by the Fed will provide the foundation upon
which to build the next generation of instantaneous payment services,
in partnership with the private sector. At the same time, the Fed's
operational involvement will ensure that the payments system of the
future is resilient, safe, and broadly accessible on fair and equitable
terms.
Payments are the lifeblood of an economy. Any major disruption in
the ability of households and businesses to transfer funds in payment
of goods and services would have catastrophic results. As such, our
payments system is an essential public utility and like other public
utilities, cannot be left solely in the hands of private enterprise.
This is why the Federal Reserve has long played a core role in payment
services, typically operating alongside and in support of private
sector systems.
The current payments system is fraught with frictions and
inefficiencies. When we send money, the withdrawals from our bank
accounts are usually immediate. However, it can take days for the money
to go from our banks to recipients' banks where the funds can be
accessed. The wait creates costs and hardships, particularly for
households and small businesses on tight budgets--for the house keeper
waiting for her clients' check to clear before she can pay her rent, or
the small business waiting for a customer's check to clear before it
can pay its workers. These delays in payments can lead to a cascade of
negative consequences, including forcing households and businesses to
rely on expensive forms of credit to tide them over, such as overdraft
protection or payday loans.
A handful of financial technology startups have tried to provide
real-time payment services, but they are limited networks, typically
working only if both the sender and recipient are subscribers and/or
have accounts at participating banks. Moreover, they still rely on
legacy systems to settle funds between banks. This results in a buildup
of obligations between sending and receiving banks, as the actual
transfer of payments between banks can take several days. If allowed to
grow, this complex of IOUs among banks is a potential source of
fragility in our payments infrastructure that could present significant
risks in times of stress.
In 2017, a group of large banks under the auspices of The Clearing
House or TCH launched a real-time payments platform called the RTP
Network. This network aspires to achieve the ubiquity lacking with
FinTech initiatives. It requires participating banks to prefund a joint
account that stands behind payment transfers. Debits and credits are
tracked in a centralized ledger maintained by TCH. As yet, RTP has
failed to gain significant traction, with relatively low volumes and
few banks participating beyond mostly the big ones which own TCH.
Importantly, its safety and resilience is heavily reliant on the larges
banks which built and back it.
What's needed--but what the private sector has yet to deliver--is a
trusted and universally available infrastructure that would allow banks
and credit unions of all sizes to send and receive money in ``real
time''. After years of study and public outreach, the Fed has now
decided to develop and launch such a system: FedNow. The Fed is already
connected to virtually every depository institution in the country and
thus is well-positioned to provide the basic infrastructure to move
money quickly between banks.
Not surprisingly, the Fed's decision has been widely applauded by
smaller institutions and FinTechs, but roundly criticized by TCH and
its advocates, who argue that FedNow will unnecessarily compete with
the RTP Network and stifle innovation.
History has shown the folly of exclusively relying on big Wall
Street banks for financial infrastructure. Indeed, one political
catalyst for Congress creating the Federal Reserve System in 1913 was
the inability of midwestern farmers to access funds during planting
season. The large New York institutions rural banks then relied upon to
keep their reserve deposits had a bad habit of lending those funds to
securities speculators, instead of keeping them safe and readily
accessible. Currently, nearly all major payments systems--including
those for processing checks, facilitating direct deposits, and wire
transfers--depend on both private and Fed systems.
Smaller depository institutions and FinTechs are understandably
wary of a system controlled by big bank competitors. For now the TCH
has promised its system will be accessible to all on fair and equitable
terms, but will those promises hold in the future if they achieve
market dominance? Until recently, the TCH website acknowledged its
pricing could change if it has to ``react competitively''. The Federal
Reserve lacks regulatory authority to require TCH to make its system
accessible to everyone or regulate its fees to prevent anti-competitive
pricing.
FedNow will promote competition, not stifle it, by protecting
against potential anticompetitive behavior by TCH or any other dominant
private actor of the future. The Fed wants private sector innovation.
Indeed, it worked closely with TCH to set up the joint account which
underpins the RTP Network. And it is exploring making its current wire
and net settlement services available on a 24x7x365 basis to support
private initiatives to provide faster payments around the clock. But
the Fed wants multiple players in this space, competing on fair terms.
With FedNow, it will give all depository institutions and their FinTech
partners a ubiquitous infrastructure upon which they can build their
own platforms and services.
Some critics have scoffed at the notion that ``Government
bureaucrats'' at the Fed could come up with an innovative new system,
and point to the fact that FedNow is not expected to launch until 2023
or 2024. Given the Fed's long history in payments, the expertise of the
Fed's staff is unparalleled, while private sector innovation in this
space has been sluggish. Work on the TCH system started in 2014. It did
not go live until 3 years later, and TCH acknowledges that it will not
be easily available to all depository institutions until the end of
2020. The widely used ACH system, which facilitates direct deposits,
took 6 years to develop during the late 1960s and early 1970s, and even
longer after it was developed to mature in its current widely used
form. Four to five years does not seem like an inordinate amount of
time to build FedNow, particularly given the Fed's commitment to work
with all industry stakeholders and fully explore use of new
technologies to construct the system.
Perhaps most importantly, FedNow will promote financial system
resiliency. As we discovered in 2008, big banks can fail. The Fed
cannot. The TCH has tried to construct a system that comes close to
replicating central bank settlement, but it is not the Federal Reserve.
We hope that postcrisis reforms will prevent the failure of large,
systemic institutions in the future, but we cannot be sure. Only the
Fed has the institutional capability and proven track record to operate
under the most highly stressed conditions. Without a backup system, a
failure to fund RTP's joint account by a major bank could impact
continuity in payment services for millions of Americans. This could
leave taxpayers with a conundrum similar to the one they faced in 2008:
bail the banks out or expose households and businesses to disruptions
in essential payment services. If the big banks were truly interested
in the resiliency of the financial system--and rebuilding trust with
the public--they would be applauding FedNow as a parallel system that
could serve as a backup to their own. FedNow would also serve as an
important backstop to potential operational breakdowns in the RTP
system, including compromise of its centralized ledger.
Finally, while I strongly support the Fed's decision to build
``FedNow'' let me also express the hope that the Fed fully explores the
use of digital currency, including a cryptocurrency based on
distributed ledger technology (DLT), in effectuating real-time
settlement between banks. As I have written in the past, the Fed should
consider development of a Central Bank Digital Currency (CBDC) that
could eventually be used by members of the public to transfer money
directly between each other without the need for bank intermediation
and its attendant costly fees. If based on DLT, such a system promises
to be more secure, efficient and less costly than intermediated systems
that rely on centralized ledgers and master accounts. Given the
permanence and immutability of DLT, it could also provide important law
enforcement benefits. In moving toward such a system, using DLT to
support settlement between banks might be a good place to start.
Importantly, major private sector proposals, such as Facebook's
recent proposal to create a new global cryptocurrency called ``Libra''
rely on DLT. Libra faces many roadblocks. However, even if the Facebook
initiative fails, it certainly won't be the last private sector attempt
to leverage DLT to dominate global payments. If the Fed does not stay
ahead of this rapidly maturing technology, I fear private sector
efforts to eclipse fiat monetary systems will get ahead of them, with
potential disruptions to our banking system and in a worst case
scenario, loss of control of our own currency. Since leaving the FDIC,
I have become involved as a board member or advisor to a number of
financial technology startups developing use cases for DLT ranging from
securities to mortgages to gold to a stable coin tied to the dollar.
While the promise of such technology is great, I am convinced that when
it comes to payments, the Federal Reserve is in the best position to
utilize it in a way that maximizes the public good.
Whether the threat comes from big banks or big tech, private
interests should not dominate payments services so crucial to the
financial well-being of the public. They should have the right to
compete, but not monopolize, how we move our money. Only the Fed has
the resources, expertise, and public mandate to build a payments system
infrastructure that can capture the benefits of private innovation
while ensuring a competitive playing field and most importantly, a
stable system that will serve the public during good times and bad.
For the Committee's information, I have attached some of my
previous writings on Facebook's Libra and the need for a CBDC.
I would be happy to answer the Committee's questions.
Attachments:
https://finance.yahoo.com/news/fed-libra-sheila-bair-160930832.html;
https://finance.yahoo.com/news/former-fdic-chair-fed-needs-get-serious-
digital-currency-131756819.html
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM ESTHER GEORGE
Q.1. How is the Federal Reserve's decision to implement real-
time payments consistent with its historic role in the payment
system?
A.1. A new Federal Reserve service to support faster payments,
operating alongside private-sector real-time gross settlement
(RTGS) services for faster payments, aligns with the current
model for most other payment systems in the United States.
Since its inception, as intended by Congress, the Federal
Reserve has played a key operational role in the Nation's
payment system by providing payment and settlement services
between banks. Over the last 100 years, this operational role
has allowed the Federal Reserve to advance key policy goals
that support the Federal Reserve's broader mission, such as the
accessibility, safety, and efficiency of the U.S. payment
system. The payment and settlement services offered by the
Reserve Banks, such as services for funds transfers, checks,
and automated clearinghouse (ACH) payments, have traditionally
operated alongside and in support of similar private-sector
services. Through the decision to develop the FedNowSM Service,
the Federal Reserve will continue to serve its traditional role
of providing payment and settlement services to banks and will
help establish a safe and efficient nationwide infrastructure
for faster payments in the United States.
Q.2. During the hearing, Mr. Hunter testified that the
regulatory authority the Federal Reserve has over a bank that
they supervise is the same regulatory authority that they have
over The Clearing House. Is this characterization accurate?
Please explain the distinction between the Federal
Reserve's authority over State-chartered member banks and its
authority over payments system operators like TCH.
A.2. The Federal Reserve Board (Board) has examination and
enforcement authority over State member banks under section 9
of the Federal Reserve Act and section 8 of the Federal Deposit
Insurance Act (FDIA), and can examine all aspects of their
operations. Its enforcement tools for these banks include cease
and desist orders, written agreements, prompt corrective action
directives, removal, and prohibition orders, and orders
assessing civil money penalties.
The Board does not have plenary regulatory or supervisory
authority over the U.S. payment system. Some payments system
operators, such as The Clearing House (TCH), are examined by
the Board, Federal Deposit Insurance Corporation, and Office of
the Comptroller of the Currency (the agencies) under the Bank
Service Company Act (BSCA). The BSCA provides the agencies with
the authority to examine and regulate (but not take enforcement
actions against) a firm that provides certain services to
supervised institutions. This authority is limited to any
services authorized by the BSCA that the firm provides to a
depository institution, or any subsidiary or affiliate of such
depository institution.
In addition, the Board is the supervisory authority for TCH
in its role as the operator of the Clearing House Interbank
Payments System, as a designated financial market utility under
Title VIII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010. Pursuant to this authority, the Board
can, among other things, examine TCH, prescribe risk management
standards, and receive and review advance notice of proposed
changes to the operations of TCH. This authority, however, does
not apply with respect to TCH's role as the operator of other
payment systems, such as its system for faster payments.
Q.3. How will the liquidity management tool and expanded hours
for Fedwire Funds Service and the National Settlement Service
benefit banks and private-sector payment operators, including
TCH?
What actions has the Federal Reserve already taken to
support private sector developments and the existing private-
sector RTP system?
A.3. Over the past 6 years, the Federal Reserve and industry
stakeholders have collaborated on a number of initiatives to
improve the speed, safety, and efficiency of the Nation's
payment system. In 2015, the Federal Reserve convened the
Faster Payments Task Force, a 320-member group comprised of a
broad range of industry stakeholders, to identify and assess
alternative approaches for implementing safe and ubiquitous
faster payment capabilities in the United States. The Federal
Reserve also has directly supported the development of private-
sector services for faster payments by providing joint accounts
to facilitate settlement in faster payment services. For
example, the faster payment service offered by TCH settles
payments in real time on its private ledger, supported by a
joint account at a Reserve Bank that is prefunded by banks
participating in the service.
Expanded Fedwire Funds Service and National Settlement
Service (NSS) hours would support a wide range of payment
activities, including private-sector RTGS services for faster
payments. In particular, the Reserve Banks do not currently
offer a service that provides the functionality to manage
liquidity on a 24x7x365 basis for RTGS services that rely on a
joint account. The ability to transfer funds from master
accounts at the Reserve Banks to a joint account on a 24x7x365
basis would allow participants in such services to manage
liquidity more effectively, avoiding the need for additional
funding of a joint account ahead of times when liquidity
transfers are not currently possible, such as weekends and
holidays. By expanding Fedwire Funds Service and NSS hours, the
Federal Reserve would provide further support to private-sector
RTGS services for faster payments based on joint accounts.
Expanded hours for the Fedwire Funds Service and NSS could also
benefit other retail or wholesale payment activities, for
example, by enabling additional settlement windows for ACH
payments.
Q.4. How will faster payments benefit lower income workers and
small businesses?
A.4. Beyond speed and convenience, faster payments can yield
real economic benefits for individuals and businesses,
including lower-income workers and small businesses, by
allowing them to make time-sensitive payments whenever needed
and providing them with more flexibility to manage their money.
This flexibility is especially important for individuals and
households on tight budgets, for whom receiving a payment in
real time could help avoid the need to use expensive check
cashing services, engage in high-cost borrowing, or incur
overdraft or late fees, which may represent a significant
financial burden. Similarly, immediate access to funds and the
ability to make bill and invoice payments instantly can benefit
small businesses that may otherwise need to seek costly short-
term financing. Widely available faster payments would be the
foundation for the next generation of payment services,
catalyzing innovations that generate new economic activity.
Q.5. The Federal Reserve anticipates the FedNow Service to be
available in 2023 or 2024. What is your process for developing
and building this new system?
To what extent is industry and public feedback factored
into this timeline?
A.5. The Federal Reserve recognizes that establishing the
FedNow Service will need to be carried out as soon as
practicably possible and that time-to-market is an important
consideration for many industry participants. As part of the
process for developing the FedNow Service, the Board requested
public comment on the service's desired features and
functionality. \1\ The Federal Reserve has engaged with
industry participants through one-on-one meetings, industry
forums, and presentations to facilitate and encourage those
comments. The public comment period ended on November 7, 2019.
All comments will be carefully and thoroughly reviewed.
Following this, the Board will publish a final service
description in an upcoming Federal Register Notice. In
addition, the Federal Reserve will continue to engage with
industry stakeholders, the public and Congress, throughout the
development process for the FedNow Service in order to
understand and address, on an ongoing basis, the needs of
depository institutions, other industry stakeholders, and the
public.
---------------------------------------------------------------------------
\1\ The Federal Register Notice is available at https://
www.federalreserve.gov/newsevents/pressreleases/files/
other20190805a1.pdf.
Q.6. I have been concerned about private entities like Facebook
introducing digital currencies as an alternative to the U.S.
dollar or other fiat currencies. What are the risks to the
financial system if there are private digital currencies
competing with the U.S. dollar?
Please provide historical examples.
A.6. History provides many experiences to draw on for assessing
proposals for private money, from the period in our history
when the colonial States each issued their own currencies to
the many decades when the circulation of private commercial
banknotes stood in for a national currency. The Federal Reserve
was created in part to respond to the inability of many of
these banks to honor their obligations for the banknotes they
issued and the panics and runs that ensued. Those experiences
inform how we think about current innovations in payments and
potential new forms of private money.
The existing financial system combines central bank money,
commercial bank money, and certain nonbank private money based
on the U.S. dollar as the unit of account. Central bank money
is composed of paper currency and money held in deposits at the
Federal Reserve Banks. Commercial bank money refers to money
held in deposits at commercial banks. Commercial bank money is
widely used in part because people are confident that they can
convert it on demand to the liability of another commercial
bank or of the central bank, such as physical cash. This
confidence comes in no small part because bank deposits are
insured, and commercial banks are subject to supervision and
regulation. Consumers and businesses also use this money in
transactions because of its convenience and availability.
Nonbank private money based on the U.S. dollar as the unit
of account exists in smaller scale for a variety of consumer
uses, including payments (e.g., Paypal) and general purpose
stored value cards. The current diverse set of retail payment
options available to consumers is provided by a variety of
partnerships between nonbank private payment companies and
commercial banks (e.g., card networks). Various Federal and
State laws regulate private nonbank money and establish
consumer protections for their users. Nonetheless, the
corporate issuers of nonbank private money are not regulated to
the same extent as are banks, the value stored in these systems
is generally not FDIC insured, and consumers may be at risk
that the company issuing such money will not be able to honor
these liabilities.
Facebook's Libra initiative stands out from the above types
of money in a variety of ways, including potential scale,
cross-border ambitions, and its intention to create its own
denomination. The Libra initiative belongs to a diverse class
of products called stablecoins. Many stablecoins aspire to
serve as a new technological iteration of either commercial
bank or nonbank private U.S. dollars, while others, like Libra,
aspire to establish a separate unit of account. Facebook has
stated that its use of a separate denomination is not meant to
rival existing fiat currencies but to reduce cross-border
payments frictions through the use of a single unit of account.
Regardless of their potential use cases, it is important that
Libra and similar projects address a core set of legal and
regulatory issues before processing payments. Compliance with
customer due diligence over anti- money-laundering rules and
regulations will be essential to ensure Libra is not used for
illegal activities and illicit finance. Facebook and/or the
Libra Association should clearly demonstrate how consumer
protections would be assured.
Consumers should be educated on how their rights differ
with respect to digital wallets compared to bank accounts.
Additionally, Facebook and/or the Libra Association should
provide clarity on what legal entity can be held responsible
for the security of personally identifiable information and
transaction data, and clarity on how and by whom personal data
will be stored, accessed, and used.
More broadly, Libra or similar large-scale initiatives
raise questions regarding the ways they will link to the
banking system or other financial institutions, which specific
financial activities will be conducted by the envisioned
payment network and broader services ecosystem, and what
potential broader impacts these initiatives might have on the
implementation of monetary policy and the preservation of
financial stability. If not managed effectively, liquidity,
credit, market, or operational risks--alone or in combination--
could trigger a loss of confidence and a classic run out of
Libra. A global network raises complicated issues associated
with many legally independent but interdependent operations,
and the lack of clarity about the management of reserves and
the rights and responsibilities of various market participants
in the network.
Guided by public and private cooperation, the U.S. payment
system has evolved greatly to better serve all participants in
the economy. Innovations and reforms have ushered in greater
convenience in many ways, not least of which in the way
individuals and institutions conduct transactions between and
among themselves. As we continue to evaluate innovations in
payments, including those that potentially include issuance of
private, nondollar, digital currencies, we will continue to
press for responsible innovation that contributes to the safety
and efficiency of the payment system. Technology and innovation
hold potential to improve the financial system and reduce
frictions and delays, while also preserving consumer
protections, data privacy and security, financial stability,
and monetary policy transmission and guarding against illicit
activity and cyber risks.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM ESTHER GEORGE
Q.1. During the hearing, you confirmed that the Fed had not
identified a specific pricing structure for FedNow. Why hasn't
the Fed committed to a flat pricing structure such that
institutions of all sizes are charged the same fees regardless
of transaction volume? Please describe how a variable pricing
structure could benefit depository institutions, especially
small community banks and credit unions.
A.1. The Federal Reserve will announce the fee structure and
schedule for the FedNowSM Service before the service is
launched. To be responsive to the evolving needs of
participants in the faster payment market, the Federal Reserve
will perform an assessment of market practices at the time of
service's implementation, and that assessment will inform the
ultimate fee structure and schedule. Additionally, the Federal
Reserve reviews its fees on an annual basis and revises them if
necessary. As part of that annual process, the Federal Reserve
publishes fee schedules in a Federal Register Notice.
For existing services, the Federal Reserve has used a
variety of pricing structures, including volume-based pricing.
The provision of payment services often involves large fixed
costs. In such a situation, volume-based pricing structures can
yield lower prices for service participants. Volume-based
pricing can help encourage use of the service. If a payment
service has high volumes, the fixed costs of providing the
service can be spread among those many transactions, resulting
in lower fees for all. Without such a pricing structure to
encourage use, fixed costs would be distributed among lower
volumes, increasing fees for all users of the service. The
Federal Reserve therefore has used multiple pricing approaches
to enable it to offer lower fees for all service users,
including community banks and credit unions.
Q.2. If the Federal Reserve launches a real-time payments
network that is not interoperable with those already in
existence, the United States will face a fragmented real-time
payments system. The requirement for banks to incur additional
costs to connect account holders to multiple networks will
likely introduce costly inefficiencies that will be borne by
financial institutions, businesses, consumers, and taxpayers.
Should the Federal Reserve avoid fracturing our country's real-
time payments system infrastructure by ensuring that its FedNow
network is interoperable with all other real-time payments
networks before launch?
A.2. The U.S. payment system must reach over 10,000 depository
institutions across the Nation, an outcome that the Federal
Reserve views as a key objective for the real-time gross
settlement (RTGS) infrastructure for faster payments. Achieving
such nationwide reach has been a recurring challenge, and, to
date, no single private-sector payment service provider of
traditional payment services, such as check, automated
clearinghouse (ACH), funds transfer, or payment card services,
has done so alone. By helping the RTGS infrastructure achieve
nationwide reach through interoperability or other approaches,
the FedNow Service can improve efficiency by increasing
innovation and competition in the market for end-user faster
payment services. In addition, the presence of multiple RTGS
services for faster payments--the FedNow Service and private-
sector RTGS services--can yield additional efficiency benefits
by leading to lower prices and higher service quality, which
would benefit the U.S. payment system and its users.
Through its engagement with the industry, the public, and
Congress, the Federal Reserve is exploring interoperability and
other paths to achieving the ultimate goal of nationwide reach
for faster payments. Interoperability will continue to be a
focus of the Federal Reserve's efforts.
Q.3. Do you believe the Federal Reserve has competitive
advantages over private payment system operators?
If so, please describe them. If not, please explain why you
believe there is a level playing field between the Federal
Reserve and other payment system operators.
A.3. The Federal Reserve Board (Board) has recently published a
Federal Register Notice that includes an initial competitive
impact analysis, a typical practice when the Reserve Banks are
considering an operational or legal change to a new or existing
service, such as the planned FedNow Service.
In conducting its initial competitive impact analysis, the
Board identified relevant private sector providers of similar
services, and the Board then compared those providers' services
with the FedNow Service to identify differences. The Board
identified various differences between the FedNow Service and
the private-sector RTGS that may construe relative advantages
and disadvantages that benefit one service or the other. The
Board requested public comment on its initial competitive
impact analysis from August 5 to November 7, 2019. The Board
will carefully review and consider all comments before issuing
a final Federal Register Notice.
Q.4. In its January 2015 report titled ``Strategies for
Improving the U.S. Payment System'', the Federal Reserve Board
said it looked forward to exploring ``the technology,
infrastructure and operational and resource changes required to
support weekend and/or 24x7 operating hours'' for its National
Settlement Service, which could allow all check and ACH
payments to settle within a day. Why has the Federal Reserve
chosen to focus its efforts on launching FedNow, which will
take several years to implement, when it could much more
quickly advance faster payments by expanding the hours of its
existing National Settlement Service?
A.4. In January 2015, the Federal Reserve expanded National
Settlement Service (NSS) operating hours to accommodate new
rules for the posting and settlement of check and automated
clearinghouse (ACH) payments. \1\ More recently, in a May 2019
Federal Register Notice, the Federal Reserve Board sought
public comment on potentially expanding further the operating
hours of NSS and the Fed wire Funds Service to allow for a
third same-day ACH processing and settlement window, which
could result in increased adoption and use of same-day ACH
payments. \2\
---------------------------------------------------------------------------
\1\ The notice is available at https://www.govinfo.gov/content/
pkg/FR-2014-12-05/pdf/2014-28664.pdf.
\2\ The notice is available at https://www.federalregister.gov/
documents/2019/05/16/2019-09949/potential-modifications-to-the-federal-
reserve-banks-national-settlement-service-and-fedwire-funds.
---------------------------------------------------------------------------
Both the FedNow Service and potential modifications to
further support the ACH system through upgrades to existing
services are part of the Federal Reserve's continued efforts to
improve the U.S. payment system. In these efforts, the Federal
Reserve will continue to evolve its existing services. In
particular, the Federal Reserve is exploring the expansion of
Fedwire Funds Service and NSS hours, up to 24x7x365, to
facilitate liquidity management in private sector RTGS services
for faster payments and to support a wide range of payment
activities, beyond those related to faster payments.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM ESTHER GEORGE
Q.1. What are the implementation challenges associated with
FedNow? How does the Federal Reserve (the Fed) plan to resolve
these challenges?
A.1. The United States has a highly complex banking system with
more than 10,000 diverse depository institutions, including
commercial banks, savings banks, savings and loan associations,
and credit unions. This diversity inherently creates challenges
with achieving nationwide reach, an outcome that the Federal
Reserve views as a key objective for the real-time gross
settlement (RTGS) infrastructure for faster payments. Achieving
such nationwide reach has been a recurring challenge, and, to
date, no single private-sector payment service provider of
traditional payment services, such as check, automated
clearinghouse (ACH), funds transfer, or payment card services,
has done so alone. The Federal Reserve plans to leverage its
existing nationwide infrastructure to provide a key channel to
reach institutions across the country that might otherwise not
have access to an RTGS infrastructure for faster payments. In
advance of the service's launch, the Federal Reserve will be
working closely with depository institutions and their
technology partners to prepare for expeditious onboarding.
Nevertheless, achieving nationwide reach of an RTGS
infrastructure for faster payments will take time, as the
industry takes steps to adopt the FedNowSM Service and private-
sector RTGS services. The Federal Reserve intends to work with
the industry to resolve implementation challenges and to
connect with the majority of institutions in the country, in
furtherance of the ultimate objective of nationwide reach.
Q.2. In your testimony, you stated that the FedNow service
would allow the Fed to ``promote the development and
implementation of industrywide fraud mitigation standards.''
Can you provide more detail regarding the steps being taken to
prevent consumer harm from fraud on FedNow?
A.2. The Federal Reserve is actively engaging with industry
stakeholders to better assess potential features of the FedNow
Service that could help mitigate fraud risk and advance the
safety of faster payments in the United States. For example,
the FedNow Service could offer tools to help banks detect
fraudulent payments. Following analysis of comments received
from the public comment period that ended on November 7, 2019,
the Board will elaborate on these features in a final service
description, which will be provided in an upcoming Federal
Register Notice.
Q.3. How will the Fed ensure that its system is fully
interoperable with existing RTP systems and future ones that
may develop?
A.3. The Federal Reserve views nationwide reach as a key
objective for the RTGS infrastructure for faster payments and
has considered the possible relationships between the FedNow
Service and private-sector RTGS services. As mentioned
previously, achieving nationwide reach has been a recurring
challenge, and, to date, no single private-sector provider of
traditional payment services, such as check, automated
clearinghouse (ACH), funds transfer, or payment card services,
has done so alone. Through its engagement with the industry,
the Federal Reserve is exploring interoperability and other
paths to achieving the ultimate goal of nationwide reach for
faster payments. Interoperability will continue to be a focus
of the Federal Reserve's efforts.
Q.4. In the Federal Register notice for the proposed FedNow
Service, the Fed also announced plans to explore expanding the
hours for the Fedwire Funds Service and the National Settlement
Service. \1\
---------------------------------------------------------------------------
\1\ Federal Reserve System, Federal Register Notice, ``Federal
Reserve Actions To Support Interbank Settlement of Faster Payments'',
August 9, 2019, https://www.federalreserve.gov/newsevents/
pressreleases/files/other20190805aI.pdf.
---------------------------------------------------------------------------
Does the Federal Reserve have a timeline for implementing
this proposed expansion?
A.4. Because of the Federal Reserve Board's (Board) risk
management expectations for the Fedwire Funds Service,
additional analysis is needed to evaluate fully the relevant
operational, risk, and policy considerations for both the
Reserve Banks and a large number of service participants, with
a range of needs and objectives. The Federal Reserve plans to
engage with the industry on issues related to expanded Fedwire
Funds Service and National Settlement Service (NSS) operating
hours, as well as potential approaches for expanding those
hours. Subject to the outcome of this engagement, as well as
additional analysis of relevant operational, risk, and policy
considerations, the Board will seek public comment on plans to
expand hours for the Fedwire Funds Service and NSS.
Q.5. Please describe the ways in which this expansion will
further support private sector initiatives to provide faster
payments and more quickly settle transactions.
A.5. Expanded Fedwire Funds Service and NSS hours would support
a wide range of payment activities, including private-sector
RTGS services for faster payments. In particular, the Reserve
Banks do not currently offer a service that provides the
functionality to manage liquidity on a 24x7x365 basis for RTGS
services that rely on a joint account at a Reserve Bank. The
ability to transfer funds from master accounts at the Reserve
Banks to a joint account on a 24x7x365 basis would allow
participants in such services to manage liquidity more
effectively, avoiding the need for additional funding of a
joint account ahead of times when liquidity transfers are not
currently possible, such as weekends and holidays. By expanding
Fedwire Funds Service and NSS hours, the Federal Reserve would
provide further support to private-sector RTGS services for
faster payments based on joint accounts. Expanded hours for the
Fedwire Funds Service and NSS could also benefit other retail
or wholesale payment activities, for example, by enabling
additional settlement windows for ACH payments.
Q.6. The Fed has stated that the ultimate pricing structure for
FedNow ``would be informed by the Board's assessment of market
practices at the time of implementation.'' \2\ Could you
provide further detail as to what factors the Fed will be
considering as it develops a fee structure and schedule,
particularly with respect to whether the Fed will offer volume
discounts to the largest banks?
---------------------------------------------------------------------------
\2\ Ibid.
A.6. The Federal Reserve will announce the fee structure and
schedule for the FedNow Service before the service is launched.
To be responsive to the evolving needs of participants in the
faster payment market, the Federal Reserve will perform an
assessment of market practices at the time of service's
implementation, and that assessment will inform the ultimate
fee structure and schedule. Additionally, the Federal Reserve
reviews its fees on an annual basis and revises them if
necessary. As part of that annual process, the Federal Reserve
publishes fee schedules in a Federal Register Notice.
For existing services, the Federal Reserve has used a
variety of pricing structures, including volume-based pricing.
The provision of payment services often involves large fixed
costs. In such a situation, volume-based pricing structures can
yield lower prices for service participants. Volume-based
pricing can help encourage use of the service. If a payment
service has high volumes, the fixed costs of providing the
service can be spread among those many transactions, resulting
in lower fees for all. Without such a pricing structure to
encourage use, fixed costs would be distributed among lower
volumes, increasing fees for all users of the service. The
Federal Reserve therefore has used multiple pricing approaches
to enable it to offer lower fees for all service users,
including community banks and credit unions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM ESTHER GEORGE
Q.1. According to the Federal Reserve (Fed), FedNow will be
able to leverage the Fed's existing network and infrastructure
to achieving nationwide reach. However, joining FedNow will not
only depend on existing infrastructure but the cost of
connecting to the system. Can you provide any insight into
pricing and how the Fed will ensure a level playing field for
smaller financial institutions, such as community banks?
A.1. Historically, driven by its longstanding policy commitment
to promote nationwide access to payment services, the Federal
Reserve has provided services to banks of all sizes on fair and
equitable terms, including smaller banks in rural and remote
areas of the country. The FedNowSM Service will facilitate
access to a real-time gross settlement (RTGS) infrastructure
for faster payments for these banks and, most importantly, the
communities they serve.
In assessing fees for new and existing services, the
Federal Reserve evaluates customer needs, while recognizing
longstanding principles for the pricing of Federal Reserve
services and the requirement of the Monetary Control Act of
1980 that, over the long run, fees shall be established on the
basis of all direct and indirect costs incurred in providing
the services. \1\ In order to make payment services available
to banks in a fair and transparent manner, the Federal Reserve
reviews fees on an annual basis and revises them if necessary,
in addition to making all fee schedules available publicly to
customers and competitors alike. \2\
---------------------------------------------------------------------------
\1\ The pricing principles are available at https://
www.federalreserve.gov/paymentsystems/pfs_principles.htm.
\2\ The 2019 fee schedule is available at https://
www.federalregister.gov/documents/2019/02/01/2019-00624/federal-
reserve-bank-services.
---------------------------------------------------------------------------
Before the FedNow Service is launched, the Federal Reserve
will assess market practices to inform the service's fee
structure and schedule and will provide the fee schedule to the
public. Following the launch of the service, the Federal
Reserve will continue to assess evolving conditions in the
market and will respond accordingly as part of its annual
review of priced services.
Q.2. According to the Fed, interoperability may not be an
initial element of FedNow. However, there are growing concerns
that a lack of interoperability at the onset will lead to a
fragmented payments system, where smaller institutions will be
unable to join FedNow because they have already dedicated
resources to connecting to another real-time system. What steps
is the Fed taking to mitigate a fragmented system?
A.2. The U.S. payment system must reach over 10,000 depository
institutions across the Nation, an outcome that the Federal
Reserve views as a key objective for the RTGS infrastructure
for faster payments. Achieving such nationwide reach has been a
recurring challenge, and, to date, no single private-sector
provider of traditional payment services, such as check,
automated clearinghouse (ACH), funds transfer, or payment card
services, has done so alone. By helping the RTGS infrastructure
achieve nationwide reach through interoperability or other
approaches, the FedNow Service can improve efficiency by
increasing innovation and competition in the market for end-
user faster payment services. In addition, the presence of
multiple RTGS services for faster payments--the FedNow Service
and private-sector RTGS services--can yield additional
efficiency benefits by leading to lower prices and higher
service quality, which would benefit the U.S. payment system
and its users.
Through its engagement with the industry, the Federal
Reserve is exploring interoperability and other paths to
achieving the ultimate goal of nationwide reach for faster
payments. Interoperability will continue to be a focus of the
Federal Reserve's efforts.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM ROBERT HUNTER
Q.1. One third of The Clearing House's owners are foreign
banks, and the RTP system is based on technology developed and
owned by a U.K. payments company. What data security protocols
does TCH use to protect the RTP system from a data breach or
infiltration by a foreign actor? What cloud services, if any,
does TCH use?
A.1. The Clearing House (TCH) takes data security extremely
seriously and maintains a critical and constant emphasis on the
safety, security, reliability, and efficiency of our payment
systems. This commitment is evident in TCH's remarkable 166-
year history of reliability and resiliency, having maintained
our operations without interruption through multiple world
wars, financial crises, natural and man-made disasters,
including 9/11 and the great recession, and a host of
cybersecurity threats.
Importantly, TCH is supervised and regulated to the highest
standards of information security protection by the Federal
Reserve, the Federal Deposit Insurance Corporation and the
Office of the Comptroller of the Currency under the Bank
Service Company Act and through the Significant Service
Provider (SSP) program. \1\ Through the Bank Service Company
Act, the SSP program, and other authorities, TCH is subject to
voluminous standards and guidance relating to information
security promulgated by the Federal Financial Institutions
Examination Council. In addition to regulation and supervision
under the SSP program, TCH has also been designated as a
systemically important financial market infrastructure and is
regulated and supervised by the Federal Reserve pursuant to
Title VIII of the Dodd-Frank Act. \2\
---------------------------------------------------------------------------
\1\ The agencies' authority under the Bank Service Company Act is
quite broad. See, e.g., 12 U.S.C. 1867 (c) (``whenever a depository
institution that is regularly examined by an appropriate Federal
banking agency or any subsidiary of or affiliate of such depository
institution that is subject to examination by that agency causes to be
performed for itself, by contract or otherwise, any services authorized
under this chapter, whether on or off its premises such performance
shall be subject to regulation and examination by such agency to the
same extent as if such services were being performed by the depositary
institution itself on its own premises''); 12 U.S.C. 1867 (d) (``The
Board and the appropriate Federal banking agencies are authorized to
issue such regulations and orders as may be necessary to enable them to
administer and to carry out the purposes of this chapter'').
\2\ While The Clearing House's regulation and supervision under
Title VIII relates specifically to its role as the operator of CHIPS,
the exam team frequently takes the view that their supervisory
authority encompasses all aspects of TCH's operations given the shared
infrastructure of the company.
---------------------------------------------------------------------------
In order to protect the security and integrity of the
RTP' network, TCH employs a state-of-the-art,
multitier, multisite application architecture with robust
security controls and industrial-strength resiliency to protect
the confidentiality, integrity, and availability of real-time
payments, messages, and associated data. TCH systems and
protocols are compliant with the highest Government, financial,
and technology industry standards (NIST, FFIEC, ISO). All
payments and related data are transmitted over private network
communications lines only, data is encrypted both in transit
and at rest and TCH does not employ any cloud services in the
RTP' network architecture. Systems are continuously
and regularly monitored for vulnerabilities, with real-time
alerting and reporting features. TCH is also in regular contact
with the Federal Bureau of Investigation, the Internet Crime
Complaint Center, the National Cyber Investigative Joint Task
Force, FS-ISAC, and FSARC to help facilitate coordination and
communication relating to information security events.
We also note that the technology provider for the RTP
network, Vocalink, while headquartered in the United Kingdom,
is owned by MasterCard, a U.S. company. Vocalink does not run
the RTP network and does not receive any transactional data.
All code provided by Vocalink is scanned by TCH for potential
viruses and anomalies and PEN tested before being placed in
production. Production code for the RTP network runs on TCH
servers located in the United States.
Finally, we note that while banks that are chartered
outside of the United States may become members of TCH, they
must have powers in their home jurisdiction similar to those of
the domestic commercial banks or trust companies that are
otherwise eligible for membership in TCH and must have a branch
or agency located within the United States licensed by the
Comptroller of the Currency or a State of the United States and
therefore subject to domestic regulation and supervision in the
United States. Participation in the RTP network is limited to
U.S. licensed banks and the U.S. licensed branches of foreign
banks and, therefore, all participants are U.S. regulated and
supervised institutions. TCH owner banks do not have access to
RTP network code or transactional data flowing through the
network (other their own transactional data if they are a
network participant). RTP network participants only have access
to their own transactional data.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM ROBERT HUNTER
Q.1. In 2013, The Clearing House released a report that
acknowledged ``A monopoly, however, eliminates competition, and
competition is necessary to drive customer value and
innovation. With interoperability among payment systems,
operators can compete vigorously to provide value for their
participants and enjoy the value created by a ubiquitous
network.'' \1\ More recently, TCH has pushed back against
efforts to create a competitive real-time payments marketplace
and has even suggested it could change its pricing model in a
way that negatively affects smaller institutions as a result of
the Federal Reserve's proposed FedNow. \2\
---------------------------------------------------------------------------
\1\ The Clearing House, ``U.S. Payment System: Recommendations for
Safe Evolution and Future Improvements'', December 3, 2013, https://
fedpaymentsimprovement.org/wp-content/uploads/2013/12/Response-The-
Clearing-House-120313.pdf.
\2\ American Banker, ``Community Bankers Alarmed After Big Banks
Backtrack on Faster-Payments Pricing'', Kevin Wack, April 10, 2019,
https://www.americanbanker.com/news/community-bankers-alarmed-after-
bie-banks-backtrack-on-faster-payments-pricing.
---------------------------------------------------------------------------
Why has TCH changed its view regarding the need for
competition in the marketplace in the past 6 years?
A.1. TCH has not changed its view regarding the need for
competition in the marketplace and, indeed, there is robust
competition in the marketplace for faster payments, including
competition from Visa, MasterCard, numerous FinTech companies,
same-day ACH, and others. The Federal Reserve's Faster Payments
Task Force alone received 16 different private sector proposals
that were responsive to its call to the private sector to
address the need for faster payments in the United States.
While TCH welcomes competition from the private sector,
competition from Government, and specifically the Federal
Reserve, which also regulates and supervises TCH, is not
competition that is based on a level playing field.
When the Federal Reserve competes with the private sector,
it should do so in a manner that minimizes the competitive
advantages that a Government system would have, both inherently
and as a direct byproduct of the Fed's role as a supervisor,
the supplier of liquidity to the financial system and the
Central Bank. For TCH, this is not the usual competitive
question of impact on profitability because TCH does not seek
to operate at a profit. Rather, it is a question of TCH's
ability to provide the most effective and efficient real-time
payment system to consumers and businesses, to the ultimate
benefit of this country's overall economy.
As noted in my prepared testimony, to help TCH achieve this
objective, we believe there are several actions the Fed should
take now, before launching its FedNow service, that would help
to create competitive equality between the private sector and
the Government.
First, payments on FedNow will settle directly through
financial institutions' master accounts at the Fed, which means
the balances held in the accounts used for FedNow payments will
count towards reserve requirements and bear interest. The Fed
should accord the same treatment to financial institution
positions in the RTP account that is held at the Federal
Reserve Bank of New York, which facilitates RTP settlement.
Second, it appears that the Fed will provide unlimited
access to liquidity (no real-time monitoring) even on nights
and weekends when the discount window is closed. In contrast,
consistent with the Federal Reserve policy for using its joint
account, the RTP network does not extend credit to and does not
permit credit exposures to arise among its participants.
Instead, like other private sector systems, the RTP network is
dependent on Fedwire or NSS to manage liquidity. The Federal
Reserve should therefore move forward with making them
available 24x7 to provide comparable liquidity and enable
private sector competition.
Finally, we note that the report cited predates the
development of systems architecture for The Clearing House's
RTP' network and contains certain assumptions about
the potential for interoperability between real-time gross
settlement systems that, unfortunately, are not consistent with
the reality of how those systems work either here or abroad.
Based on our knowledge of how such systems work today, we are
not optimistic about the potential for interoperability and
understand, based on our reading of the Federal Reserve's
FedNow proposal, that the Federal Reserve is not optimistic
about the potential for such interoperability either.
Q.2. To justify a potential change in the pricing model of the
RTP Network in response to FedNow, you have cited the Federal
Reserve's use of volume discounts. However, the Fed has not yet
determined its pricing model. Given your acknowledgement during
the hearing that TCH does not seek to make a profit, if the Fed
does not implement volume discounts, will TCH commit to
maintaining its flat fee pricing structure?
A.2. TCH built the RTP system to benefit financial institutions
of all sizes and has already publicly committed that TCH will
operate the RTP' network ``as a utility for the
benefit of the industry'' and that RTP fees will ``be flat for
all participants regardless of size and shall not include
volume discounts or minimum volume requirements.'' TCH would
consider a change to this approach only if another provider's
different approach to pricing were to threaten the viability of
the RTP network and require TCH to react competitively to
maintain the integrity and availability of the RTP network to
all financial institutions. This is exactly what happened in
the ACH market in the mid-1990s when the Federal Reserve
introduced volume discounts into its ACH pricing. At the time,
TCH was committed to a level pricing structure for financial
institutions regardless of size. Ultimately, however, the
Federal Reserve's introduction of volume discounts into the ACH
has led to small banks paying 4-5 times the per transaction
fees of large financial institutions and there is significant
concern that the Federal Reserve may follow similar pricing
practices with regard to the pricing of its FedNow product.
Specifically, TCH notes that while TCH has made its commitment
to level pricing abundantly clear, the Federal Reserve has
repeatedly refused to make that same commitment.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM ROBERT A. STEEN
Q.1. The question I want to address is the one of digital
currencies. Are we moving, technologically to a whole different
world that central banks and financial institutions need to be
more focused on? How transformative will this be?
A.1. The current limited regulation and oversight of the
virtual currency marketplace exposes consumers and investors to
significant risks. Appropriate regulation is vital for ensuring
public trust and consumer protection and mitigating prudential
risks for virtual currency stakeholders.
A reasonable legal and regulatory regime is necessary to
manage the consumer and prudential risks related to the
purchase, holding, and use of virtual currency.
Virtual currency companies and activities should adhere to
comparable levels of regulation applicable to traditional,
functionally similar payments products and services offered by
closely regulated banks which includes requirements covering:
capital adequacy and reserves;
activity restrictions;
information security;
business resiliency;
ownership and control;
anti- money laundering and anti-terrorist
financing;
reporting and maintenance of books and records;
consumer protection;
ongoing examination.
An appropriate regulatory framework should not contain
overly broad definitions for ``virtual currency'' and ``virtual
currency business activities'' but should be broad enough to
ensure that the activities that create the greatest consumer
and prudential risk are subject to regulation.
A legal and regulatory regime should not apply to regulated
banks which are already subject to extensive regulation. And
finally, without well defined and legitimate use cases for
crypto currency, there is an equally questionable purpose or
business case for developing such a regulatory regime.
None of this, however, should preclude innovation around
digitizing the U.S. dollar as part of the real-time settlement
process within the FedNow design.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM ROBERT A. STEEN
Q.1. For a community bank, what are the costs associated with
joining a private-sector payments system like TCH compared to a
Fed-operated network?
A.1. While the FedNow service has not yet disclosed their
pricing schedule, it is the start-up costs, particularly from
my core processor, that are of greatest concern to my bank. My
core processor generally charges tens of thousands of dollars
to connect to a provider such as TCH. My bank already has a
connection to the Fed, so those costs will be substantially
mitigated. As a settlement provider for the ACH, the Fed
employs volume-based pricing, but my bank, despite being small
and paying fees adjusted for low volume, still find it is very
reasonable. Having two providers will also provide competition
to ensure fair and reasonable pricing.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM ROBERT A. STEEN
Q.1. Your written testimony acknowledges the important role of
community banks in the small business lending market.
Describe how the lack of a ubiquitous real-time payments
structure has impacted the ability of community banks to serve
small businesses.
A.1. Small businesses and independent contractors rely on short
term cashflow to stay competitive. The quicker the funds are in
the account, the less the need for temporary credit. A
ubiquitous real-time payments settlement rail will compliment
and address this need.
Q.2. Do you believe that community banks have lost small
business customers as they are forced to resort to high-cost
alternative lenders to meet their cash needs in a timely
fashion?
A.2. The lack of a ubiquitous real-time settlement has not
materially impacted our bank's small business lending. However,
the addition of ubiquitous real-time settlement would assure
that funds are posted upon payment and would improve a small
businesses' cashflow.
Q.3. Community banks are also unique in their ability to serve
and maintain relationships with individual consumers.
Describe how the lack of a ubiquitous real-time payments
structure has impacted the ability of community banks to serve
the needs of individual customers.
A.3. The payment system, especially the ACH, has served our
customers well. It provides a low-cost settlement to ensure
that the customer has access to the funds early on payday or
even hours before payday. However, the additional of a
ubiquitous real-time settlement rail could disrupt the way we
think about payroll, especially for contractor pay and task-
based services, ensuring the employee or contractor has
immediate access to funds.
Q.4. Has the emergence of nonbank lenders that individuals can
use to instantly transfer funds impacted the customer base of
community banks?
A.4. Nonbank lenders, while not having the ability to instantly
transfer funds to consumer, can trap our customer in a cycle of
debt, with extremely high interest rates and unreasonable
payments terms.
Q.5. Do you believe that community banks have lost individual
customers as they are forced to resort to high-cost alternative
lenders to meet their cash needs in a timely fashion?
A.5. Bridge Community Bank does not believe we have lost
consumer customers due to the lack of a ubiquitous real-time
settlement, However, the addition of a ubiquitous real-time
settlement rail would assure that funds are posted immediately
and would provide immediate funds to consumers that may in many
cases avoid the need for short term borrowings.
Q.6. Supporters of the payments system operated by TCH have
pointed to the use of third-party service providers (TSPs) as a
mechanism for that system to achieve ubiquity. Yet many others
disagree, and have argued that the smaller and medium-sized
banks, particularly those situated in less populated areas, do
not have established relationships with reliable TSPs.
Do community banks and smaller financial institutions
generally have relationships with the service providers they
would need to implement a private sector real-time payments
system?
A.6. Virtually all community banks have relationships with
third-party core processors, who either write the in-house data
systems for community banks or house the bank's customer data.
This relationship is essential to all community banks and the
core processor relationship serves as one of the most important
vendor relationships for a community bank. It is, however, a
complex and costly relationship, requiring community bank
ongoing oversight. Many times, it is time consuming and
extraordinarily costly for our core processor to link to
services such as Zelle and RTP. All of those costs are passed
down to our bank. Our core processor is already interfaced to
our Federal Reserve connection, which gives us direct access
and a material head start.
Q.7. Do community banks have concerns regarding the
cybersecurity risks associated with third-party service
providers?
A.7. Protecting our customers' data is our primary concern and
we regard our core processor as an ally in this. Like any bank,
we remain vigilant that any technology partner, especially the
core processor protects our customers data and we are steadfast
in overseeing this relationship protects our bank and its
customers. We fully understand that our bank could not
withstand a significant breach of our customers' personal
information such as the recent 107 million customer identity
loss from one of the large banks.
Q.8. Currently the Federal Reserve does not provide a service
that would allow banks to move liquidity to support the real-
time settlements of faster payments.
How would the expansion of the hours for the Fedwire Funds
Service and National Settlement up to 24x7x365 support faster
payments?
A.8. The Federal Reserve should begin the process of improving
liquidity tools for the existing services and would then be
better prepared for those tools being available for FedNow.
Beyond that, we see the expansion of hours for Fedwire and the
National Settlement Service as an extremely important step
toward payments efficiency. Not only will it benefit real-time
settlement systems such as FedNow and RTP, but it can improve
the service of existing services such as ACH and wire transfer.
However, community banks will have to modify our procedures and
forge partnership to ensure their liquidity during off hours.
Q.9. What benefits would this additional service provide to
consumers and small businesses?
A.9. These changes, while significant, will provide an overall
benefit to all our customers and will accelerate the delivery
of funds to our customers. End users do not need immediately
available funds until they do. Those instances, along with use
cases we have yet to see, make this worthwhile.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM SHEILA C. BAIR
Q.1. I have been concerned about private entities like Facebook
introducing digital currencies as an alternative to the U.S.
dollar or other fiat currencies. In your testimony, you
expressed your support for the Federal Reserve to explore the
use of digital currency, including cryptocurrency based on
distributed ledger technology (DLT). What disruptions to the
financial system could occur if we allow private digital
currencies to compete with the U.S. dollar? Why is the Fed in
the best position to use DLT for payments?
A.1. You are right to be concerned about the potential for
financial disruptions from a privately sponsored digital
currency such as Libra. These risks include the possibility of
bank runs, credit disruptions, and consumer losses from foreign
currency risk or financial mismanagement of the Libra reserve.
What we've learned from Bitcoin is that digital currencies not
tethered to fiat currency will be too volatile to function as a
medium of exchange. Thus, privately offered digital currencies
will need to be tied to fiat currencies to maintain stable
value. Libra's sponsors propose to do that by tying their
currency to a basket of stable fiat currencies. But there is no
apparent regulatory authority to make sure that the managers of
the Libra reserve will responsibly invest the money it receives
from its customers in exchange for Libra.
Libra's sponsors have promised to invest it only in high
quality Government debt and bank deposits but since they will
make their profits from the returns on those funds, their
incentives will be to look for yield. And if they invest in
risky assets which suffer losses, this could prompt a run on
Libra similar to the runs on money funds we experienced during
the financial crisis. Even if the reserves are responsibly
invested, Libra purchasers will still be subject to foreign
currency risk when they exchange their Libra back into their
own fiat currency. This may not be well understood by public.
Payments systems are, by nature, natural monopolies. The
more users who join the same payments network, the more
efficient and convenient it becomes. Thus, if a privately
sponsored digital currency such as Libra did gain critical
mass, it could prompt a quick and destabilizing exodus of money
out of traditional banking systems. People could quickly
withdraw money from their banking accounts to purchase Libra if
they saw it as a cheaper, faster way of making payments than
that offered by their banks. This could destabilize banks, but
could also lead to a credit contraction as it would shrink the
amount of deposits available for lending. If most of Libra's
reserves are invested in Government debt, this could result in
an inefficient reallocation of capital from deposits, which
fund private lending, to Government balance sheets. Libra's
sponsors say that at least some of the Libra Reserve would be
redeposited in banks of their choosing. This money would remain
in the banking system but would likely be reallocated to large
institutions selected by Libra's sponsors, increasing
concentration in the banking sector and likely damaging smaller
community banks. Moreover, unlike the bank deposit accounts
used by retail Libra users--which would be protected up to
FDIC-insured deposit limits--Libra reserve deposits would
likely far exceed those limits, exposing the Libra reserve to
credit losses if any of the big banks holding those reserves
fail.
These kinds of problems could be preempted and solved
through a central bank digital currency (CBDC). The Fed or
other central bank could issue a limited amount of CBDC for the
purpose of making payments. This could be done through accounts
kept at traditional banks. CBDC would capture the efficiencies
of modern technology to provide for efficient, secure, and low-
cost real-time payments, while maintaining control over the
amount in circulation. Short of CBDC, there are other ways the
Fed could use distributed ledger technology (DLT) to achieve
greater efficiencies in payments and preempt private efforts to
replace fiat systems. A first step might be to construct a
distributed ledger that could be accessed only by regulated,
insured depository institutions. Such a ledger would enable
each institution, regardless of size or resources, the ability
to directly transfer funds to one another on the ledger in
``real time,'' without the need for an intermediary. I hope
that the Fed will explore this use of DLT in constructing
FedNow.
Q.2. Wall Street has been very successful recently in beating
back many of the reforms we put in place to prevent another big
bank bailout, including, for example, the Volcker Rule and the
swap-margin rule. Why were these rules put in place and how do
the recent changes exacerbate the risks to our financial
system?
A.2. The Volcker Rule was put in place to prevent banking
organizations benefiting from low-cost FDIC-insured bank
deposits, from engaging in reckless speculation of the kind we
saw during the financial crisis. Unfortunately, what started as
a good faith effort to simplify the regulations implementing
the Volcker Rule turned into a ``ploy to weaken core elements
of the reform.'' as Paul Volcker wrote to Jerome Powell in an
Aug. 20 letter. Making the weakening of the Volcker Rule more
problematic is the previous effective repeal of Dodd-Frank
(DFA) protections against the use of FDIC-insured banks to
support deal-making in high risk derivatives. Originally, DFA
prohibited insured banks from holding uncleared swap positions.
(Uncleared swaps can be among the riskiest. When a
clearinghouse refuses to be the central counterparty to a
derivative instrument, it is because it does not understand the
risk of the instrument and how to manage it.) In 2014, in
response to industry lobbying, Congress gutted this swaps
``push-out'' rule. The 2014 change allowed broker-dealer
affiliates of big banking organizations to transfer the risks
of their uncleared derivative transactions to FDIC-insured
subsidiaries. This increased risk to the FDIC deposit insurance
fund, but fattened banks' derivatives profits. (Derivatives
customers agree to more favorable terms when FDIC-insured banks
act as their counterparties because the insured banks are safer
than noninsured broker-dealers which generally have lower
credit ratings, weaker capital requirements and less stable
funding.) These increased risks to the FDIC are now exacerbated
by the changes to the Volcker Rule and swap-margin rule. The
Volcker Rule still had an overarching prohibition against the
use of swaps and other instruments for speculative proprietary
trading. And the original swap-margin rule at least required
affiliates to post initial ``margin'' or collateral against the
swap exposure when it was transferred to the insured bank.
Those safeguards no longer apply.
This is a good example of how a series of stand-alone
changes represented to be ``minor tweaks'' to the existing
framework work in combination to substantially weaken
postcrisis reforms.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM SHEILA C. BAIR
Q.1. In your written testimony and previous writings, you have
described the impact of the Federal Reserve developing a real-
time payments (RTP) system on the resiliency of the financial
sector. \1\ The largest financial institutions, via The
Clearing House (TCH), currently have an effective monopoly over
the real-time payments in the United States via the for-profit
settlement service RTP network.
---------------------------------------------------------------------------
\1\ Yahoo Finance, ``Why the Fed Is Right To Step in and Finally
Make Real-Time Payments Happen'', Sheila Bair, September 4, 2019,
https://finance.yahoo.com/news/fednow-real-time-payments-sheila-bair-
175320549.html.
---------------------------------------------------------------------------
Does this current market structure create additional
systemic risk in the financial sector?
Do you believe that the protections against credit risk
included in the design of the RTP network are sufficient to
eliminate the systemic risk associated with a single point of
failure in the RTP market?
A.1. The credit risk protections are untested in a crisis. We
don't know how well they will work. In addition, they are
designed to protect the other banks funding the joint account
from exposure to the default of a participating bank, not the
defaulting bank's customers who would lose access to RTP. Most
importantly, they do not provide protection from operational
disruptions which could be caused, for instance, by management
error or a security breach. FedNow would provide a second
system to ensure continuity of real-time payments if RTP was
compromised or failed for whatever reason. Moreover, given the
Fed's broader role of providing liquidity support in times of
financial stress, it would be in a better position to support
payments in times of crisis.
Q.2. If not, why not, and how would the creation of FedNow
address these systemic risk concerns?
A.2. The Fed has a strong proven track record in managing
through crises and by its nature, it cannot fail. Its FedNow
system would not need to depend on the financial backing of
large banks to provide liquidity. Though the Fed has not
decided on the basic architecture, presumably real-time
interbank payments will occur with the Fed acting as the
central intermediary or possibly through a distributed ledger
where payments can be transmitted directly from the sender's
bank account to the recipient's bank account. (The Fed has said
it is researching DLT as one approach.) In either case, there
is no need for intermediation by TCH or the large banks that
own its system. If interoperability is achieved, then this
transition to FedNow in the case of an RTP disruption should be
seamless. Absent interoperability, presumably all major banks
would belong to both systems. Critics of FedNow have argued
that the need to participate in two real-time payments systems
imposes unnecessary costs on the payments system. I would argue
that having this redundancy for something as essential payments
is well worth any incremental cost and is common in other
payments system such as ACH.
Q.3. In your written testimony, you also stated that a
potential future failure of the largest banks would result in a
``conundrum similar to the one [taxpayers] faced in 2008: bail
the banks out or expose households and businesses to
disruptions in essential payment services.''
Does the current market structure create additional moral
hazard with respect to the incentives for policymakers to enact
another bailout in the event of a failure of one of the largest
institutions?
A.3. Yes. The economy cannot function without a well-
functioning payments system. If we were solely reliant on TCH's
RTP system and it failed because of the failure of one or more
of its major members, the Fed's operational flexibility would
be limited. It could well find itself forced into a bailout to
keep the banks and RTP functioning. With FedNow, the Fed would
have independent operational capability to maintain continuity
of payments outside the RTP system. Denying the Fed an
operational role in real-time payments--as TCH has advocated--
would leave it on the sidelines and then force it to prop up
RTP if there was a problem. Contrast this to the kind
operational capabilities the Fed had during 9/11 when it was
able to seamlessly step in and provide broad support for the
market.
Q.4. If so, please describe how FedNow would help address those
concerns.
A.4. As mentioned above, FedNow would be a parallel system that
optimally would be interoperable with RTP though during the
hearing, TCH's witness was inconsistent on the question of
whether TCH would discuss with the Fed steps necessary to
achieve interoperability. Absent interoperability, presumably
all major banks would be members of both systems or have the
ability to fall back on it if RTP failed.
Q.5. How would a real-time payments network dominated
exclusively by the private sector impact the ability of the
Federal Reserve to stabilize the financial system in the event
of a future crisis?
A.5. See above.
Additional Material Supplied for the Record
REVISED STATEMENT OF GEORGE SELGIN
Senior Fellow and Director, Center for Monetary and Financial
Alternatives, Cato Institute
September 25, 2019
Introduction
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee on Banking, Housing, and Urban Affairs, my name is George
Selgin, and I am the Director of the Cato Institute's Center for
Monetary and Financial Alternatives. I am also an adjunct professor of
economics at George Mason University, and Professor Emeritus of
Economics at the University of Georgia.
I'm grateful to you for allowing me to take part in this hearing on
``Facilitating Faster Payments in the U.S.'' The slow speed of many
payments in this country is a cause of serious inconvenience and
substantial losses to American businesses and consumers, and one that
places an especially great burden on people living paycheck-to-
paycheck, who can least afford to wait, sometimes for days, for checks
or employer direct deposits to clear. \1\ For that reason it is
essential that Congress do everything in its power to facilitate the
speeding up of payments in this country.
---------------------------------------------------------------------------
\1\ For some figures see Aaron Klein, ``How the Fed Can Help
Families Living Paycheck to Paycheck'', Brookings Series on Financial
Markets and Regulations, November 22, 2017, and idem., ``The Fastest
Way To Address Income Inequality? Implement a Real-Time Payment
System'', Brookings Series on Financial Markets and Regulations,
January 2, 2019. Available at https://www.brookings.edu/research/how-
the-fed-can-help-families-living-paycheck-to-paycheck/ and https://
www.brookings.edu/research/the-fastest-way-to-address-income-
inequality-implement-a-real-time-payment-system/, respectively.
---------------------------------------------------------------------------
To assist Congress in that endeavor, I wish to draw your
Committee's attention to some dangers posed by the Federal Reserve
decision to proceed with FedNow--a real-time retail payments service
that will compete directly with private-sector retail payments
services. Specifically, I wish to discuss four ways in which the Fed's
plan might hinder rather than facilitate the achievement of an
equitable, efficient, and safe U.S. fast payments system, and to
suggest steps Congress should take to guard against this outcome.
The Federal Reserve as a Payment Service Competitor
As a rule, competition is an effective--if not the most effective--
means for encouraging providers of services to price those services
equitably, to produce them efficiently, and to improve their quality
over time. However, these outcomes depend on the presence of a level
playing field on which all providers compete--that is, they depend on
the various providers having roughly equal legal privileges and
obligations. In the absence of a level playing field, the presence of
multiple providers alone does not guarantee good outcomes. Instead,
special care must be taken to guard against bad ones.
The Federal Reserve banks enjoy many legal advantages over private
suppliers of payment services. They command a monopoly of bank reserves
that serve as means of final payment; they are empowered to regulate
commercial banks and some other private-sector payment service
providers; and they are exempt from antitrust laws. Finally, although
the 1980 Monetary Control Act requires that the Fed charge prices for
its services that recover those services' capital and operating
expenses, it only needs to do so over a ``long run'' of unspecified
length, and then only according to accounting methods of its own
choosing that are not subject to external review.
These and other Fed privileges mean that, when it enters into
direct competition with private-sector payment service providers, it
does so on a playing field that it can easily slant in its favor. It is
owing to this that the Fed itself has established strict criteria it
must meet before offering any new payment service, including the
requirement that the service in question ``be one that other providers
alone cannot be expected to provide with reasonable effectiveness,
scope, and equity.'' \2\
---------------------------------------------------------------------------
\2\ See Board of Governors of the Federal Reserve System,
``Policies: The Federal Reserve in the Payments System'', available at
https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
---------------------------------------------------------------------------
In responding to the Fed's request for comment regarding
``Potential Federal Reserve Actions To Support Interbank Settlement of
Faster Payments'', I argued against the Fed's then-proposed retail RTGS
(Real Time Gross Settlement) payment service partly on the grounds that
it did not meet the Fed's own criteria for providing new payments
services. \3\ I also argued that the new service would delay progress
toward a ubiquitous U.S. fast payments system. I continue to hold these
views.
---------------------------------------------------------------------------
\3\ Available at https://www.cato.org/publications/public-
comments/re-potential-federal-reserve-actions-support-interbank-
settlement.
---------------------------------------------------------------------------
I also fear that, instead of preventing private-sector payment
service providers from engaging in anticompetitive behavior, the Fed
will itself engage in such behavior. In my testimony today, I wish to
draw attention to four particular anticompetitive dangers that the
Fed's entry into the fast payments business poses, and to recommend
steps Congress should take to guard against each.
Postponed Fed Settlement System Reform
The first danger is that the Fed will treat FedNow as a substitute
for a 24x7x365 expansion of the operating hours of Fedwire, its
wholesale RTGS service, and NSS (the National Settlement Service), a
separate multilateral settlement service that is also owned and
operated by the Federal Reserve banks. \4\ The availability of 24x7x365
Fed settlements is essential to achieving faster (though not
necessarily real-time) and safer payments on other payment services.
But instead of hastening to offer that service, the Fed may delay doing
so to limit private payment services' ability to compete with it.
---------------------------------------------------------------------------
\4\ The NSS serves ``depository institutions with Federal Reserve
master accounts that settle for participants in clearinghouses,
financial exchanges and other clearing and settlement arrangements.''
For further details see FRBServices.org, ``National Settlement
Service'', available at https://www.frbservices.org/financial-services/
national-settlement-service/index.html.
---------------------------------------------------------------------------
The danger here stems from the Fed's monopoly of final means of
payment, including bank reserves. Because of that monopoly, most
private noncash payments, including most check, card, and ACH
(Automated Clearing House) payments, can only be completed with the
help of either Fedwire or the NSS or both. Only once settlement takes
place can recipient banks credit funds to a payee's account without
assuming some credit risk. Because Fedwire and the NSS operate only on
weekdays, excluding holidays, and then with limited hours, retail
payment services that rely on them are correspondingly limited in their
ability to complete payments both quickly and safely at all times. \5\
---------------------------------------------------------------------------
\5\ The Fed has long recognized this potential benefit of making
its settlement services available 24x7x365. See Board of Governors of
the Federal Reserve System, ``Strategies for Improving the U.S. Payment
System'', January 26, 2015, p. 50. Available at https://
www.betterthancash.org/tools-research/resources/federal-reserve-
strategies-for-improving-the-us-payment-system.
---------------------------------------------------------------------------
Although it would also enhance the efficiency of private real-time
payments services, the main benefit of 24x7x365 Fed settlement services
would consist of a substantial reduction in delays on ``legacy''
payment networks. \6\ For example, today's Fedwire and NSS operating
hours currently stand in the way of National Automated Clearing House
Association's (NACHA) long-standing effort to enhance ACH's same day
payment services by providing for a third ACH ``processing window.''
Although NACHA had hoped to make this third window available by
September 2020, and the change required only a minor extension of
Fedwire and NSS operating hours, the Fed failed to prepare for the
change on time, forcing NACHA to postpone its planned reform until
March 2021. \7\
---------------------------------------------------------------------------
\6\ Because RTP settlements occur on the books of a special Fed
account jointly owned by RTP participants, it can operate 24x7x365.
However, its participants depend on Fedwire or the NSS to occasionally
replenish their individual RTP account balances. The settlement
services' limited operating hours raise participants' costs of using
RTP by obliging them to maintain larger non- interest earning RTP
account balances than they otherwise might, especially going into
weekends. Concerning the non- interest-bearing status of RTP account
balances, see below.
\7\ Jim Daly, ``Fed Delay Causes NACHA To Postpone a Third
Processing Window for ACH Transactions for Six Months''. Digital
Transactions, September 30, 2019. Available at https://
www.digitaltransactions.net/fed-delay-causes-nacha-to-postpone-a-third-
processing-window-for-ach-transactions-for-six-months/.
---------------------------------------------------------------------------
When the Fed requested public comment on whether it should
establish its own fast payments network, it also asked whether it
should either arrange to have Fedwire and the NSS operate 24x7x365 or
establish a new ``Liquidity Management Tool'' for the purpose of
allowing 24x7x365 transfers among commercial banks' Federal Reserve
accounts. Almost every response to this question favored having the Fed
pursue one of these proposed reforms (most respondents did not care
which), making the proposal much less controversial than the Fed's plan
to establish its own retail RTGS service. Yet despite this, and the
relative easiness and great potential benefits of the asked-for reform,
the Fed ultimately chose to do no more than continue to ``explore'' the
possibility of offering 24x7x365 settlement services, and to perhaps
seek comment upon the proposal yet again! \8\
---------------------------------------------------------------------------
\8\ 84 FR 39301. Available at https://www.govinfo.gov/content/pkg/
FR-2019-08-09/pdf/2019-17027.pdf. In early 2015 the Fed had said it
would begin exploring ``the technology, infrastructure and operational
and resource changes required to support weekend and/or 24x7 operating
hours'' of its settlement services during or soon after 2016. See Board
of Governors, ``Strategies for Improving'', pp. 21 and 51.
---------------------------------------------------------------------------
Why is the Fed dragging its feet on an almost universally favored
reform that could alone suffice to eliminate most of the more notorious
payment delays in this country? \9\ The Fed's actions seem at odds with
its overarching public mission. But they are what one would expect from
a firm endeavoring to compete successfully with rival payment service
providers. For example, when NACHA was first endeavoring to make same-
day ACH payments possible, its efforts were opposed by several large
banks. It was widely suspected, according to a contemporary report,
that this opposition stemmed from those banks' intent ``to build their
own proprietary electronic payment systems, which could give them a leg
up on smaller banks.'' \10\ The Fed's hesitation to make 24x7x365 Fed
settlements available to private payment service providers may likewise
reflect its own desire to give FedNow ``a leg up'' on other payment
networks. \11\
---------------------------------------------------------------------------
\9\ Because the most costly payment delays at present are those
that keep workers waiting not hours but days for payments to clear,
``The Fastest Way To Address Income Inequality'' stemming from such
delays is, with all due respect to Aaron Klein (op. cit.), not to have
the Fed implement FedNow, which will not be ready for several years,
but to have it offer 24x7x365 settlement services, which should take
much less time.
\10\ Kevin Wack, ``How Big Banks Killed a Plan To Speed Up Money
Transfers''. American Banker, November 13, 2013. Available at https://
www.americanbanker.com/news/how-big-banks-killed-a-plan-to-speed-up-
money-transfers. Although Wack here refers to TCH as NACHA's ``most
visible foe,'' it only appears that some of TCH's owner banks opposed
NACHA's plan. In a comment letter TCH itself submitted, in its capacity
as an ACH operator, to NACHA in February 2015, it expressed its overall
approval of NACHA's proposal. TCH's comment letter is available at
https://www.theclearinghouse.org/-/media/files/association-documents-2/
20150206-comment-letter-to-nacha-supporting-same-day-settlement.pdf.
\11\ NACHA itself seems to have anticipated this outcome. In its
own comment letter concerning the Fed's various proposals, it
complained that the Fed already appeared to be retreating from what
once seemed to be a commitment to further expand Fedwire and NSS
operating hours, while expressing its fear that it was doing so in
order to favor the establishment of its own real-time retail payments
systems, over measures that could further expedite payments on legacy
systems. See Jim Daly, ``NACHA Wants the Fed To Take a Broader View of
Faster Payments'', Digital Transactions, December 5, 2018. Available at
https://www.digitaltransactions.net/nacha-wants-the-fed-to-take-a-
broader-view-of-faster-payments/.
---------------------------------------------------------------------------
Whatever the Fed's motives, Congress should not allow it to delay a
badly needed enhancement of its settlement services any longer.
Instead, it should give the Fed 2 years within which to either place
its Fedwire and NSS services on a 24x7x365 operating basis, or
establish an alternative 24x7x365 Liquidity Management Tool. If
Congress does not do this, I fear that Congress will overlook the most
important of all steps it might take to dramatically and rapidly
enhance the speed of U.S. retail payments.
Volume-Based Pricing Favoring Large Banks
A second danger the Fed's entry into the fast payments business
poses is that, by resorting to volume-based pricing, the Fed will
ultimately put small banks that wish to offer fast payment services to
their customers at a disadvantage.
Because many are counting on the Fed to guard against rather than
introduce volume-based fast payment fees, some background is required
to understand why that expectation exists, and why just the opposite
might happen.
The only potentially ubiquitous real-time payments service that
exists at present, the RTP system established by TCH (The Clearing
House) in 2017, presently operates on a contractually binding flat-rate
basis, with no minimum volume requirements. \12\ But TCH's flat-fee
commitment isn't absolute: instead, it allows RTP to alter its pricing
policy in the event that the Fed enters into competition with it.
Noting this, Fed officials and others have argued that RTP cannot be
trusted to make certain that small banks continue to receive equitable
treatment, instead of finding themselves placed at a disadvantage
relative to their large competitors. That TCH is itself owned by 25 of
the Nation's largest banks makes the risk to smaller banks seem all the
more obvious. Consequently, the Fed and others argue, having FedNow
directly compete with RTP is the surest way to keep RTP from reneging
on its flat-fee commitment.
---------------------------------------------------------------------------
\12\ For RTP's pricing policies see https://
www.theclearinghouse.org/payment-systems/rtp/-/media/
00a1f095c9a049fea6c3e2e5fbc2c6ad.ashx.
---------------------------------------------------------------------------
But closer consideration of TCH's general pricing practices, along
with some history, suggest that the Fed's entry is more likely to have
just the opposite consequence. Regarding TCH's practices, in seeking a
statement from the Justice Department's Antitrust Division ``of its
present intention not to seek any enforcement action against'' the RTP
system it was then developing, TCH explained that it:
operates on a ``utility'' model, charging fees only to cover
the costs incurred in operating its CHIPS, EPN, and check
imaging systems and to support future innovation, and does not
pay dividends to its owner banks. \13\ Accordingly . . . TCH
owner banks . . . will benefit by participating in the RTP
system and enhancing their abilities to compete more
effectively among themselves and with non-TCH owner banks and
nonbank payment service providers. \14\
---------------------------------------------------------------------------
\13\ CHIPS (for Clearing House Interbank Payment System) is TCH's
large-value interbank payment service, while EPN (for Electronic
Payments Network) is its ACH (Automated Clearing House) operations
service. [This writer's note.]
\14\ Richart Taffet, ``The Clearing House Payment Company LLC's
Request for Business Review Letter'', October 11, 2016. Available at
https://www.justice.gov/atr/page/file/998216/download.
The veracity of TCH's claims is attested to both by the known
pricing practices of its established payment systems and by the Justice
Department's conclusion that RTP did not in fact pose ``significant
anticompetitive threats.'' \15\
---------------------------------------------------------------------------
\15\ Andrew C. Finch, ``The Clearing House Payments Company LLC
Business Review Request'', September 21, 2017. Available at https://
www.justice.gov/atr/page/file/998201/download.
---------------------------------------------------------------------------
FedNow, in contrast, does pose such a threat, as is clear from what
happened in the case of ACH payments. The Fed competes with TCH, and in
the past competed with other private-sector providers, in providing ACH
payment services. TCH initially charged flat ACH fees. But during the
1990s, the Fed, in an effort to compete more aggressively in an
increasingly national ACH market, resorted to volume-based ACH fees.
\16\ The Fed's move compelled TCH to follow suit to avoid losing the
business of its larger ACH customers. Yet TCH's ACH prices are still
more favorable to small banks than those charged by the Fed, which
charges many smaller banks five times the per-transaction fee it
charges its largest customers. \17\
---------------------------------------------------------------------------
\16\ Some years earlier, when the Fed first sought comment on its
plans to establish nationwide EFT (Electric Funds Transfer) services,
the Justice Department's Antitrust Division commented in favor of the
Fed's adoption of a nondiscriminatory pricing system, noting that a
discriminatory pricing system could prove to be ``as substantial a bar
to competition as exclusionary rules.'' Anatoli Kuprianov, ``The
Monetary Control Act and the Role of the Federal Reserve in the
Interbank Clearing Market'', Federal Reserve Bank of Richmond Economic
Review, July/August 1985, p. 31. Available at https://
www.richmondfed.org/-/media/richmondfedorg/publications/research/
economic_review/1985/pdf/er710403.pdf.
As Mark Weinberg has observed, whereas uniform average-cost pricing
generally ``maximizes net social benefits subject to the constraint
that total revenues from the sale of the product just equal total
costs,'' volume-based pricing, a form of price discrimination, does
not. Consequently the Fed's resort to the latter ``raises some
important questions,'' including whether ``the Reserve Banks' `business
interests' [are] in conflict with their public policy
responsibilities.'' ``An efficiency perspective,'' he continues,
``dictates that a loss of market share by the Federal Reserve is
neither good nor bad per se. What matters is the overall cost
efficiency of the market. If the Federal Reserve is replaced by
providers with lower costs, then such a change should be accommodated.
The goal of pricing policy, however, should be that only efficiency-
enhancing losses are experienced.'' John A. Weinberg, ``Selling Federal
Reserve Payment Services: One Price Fits All?'' Federal Reserve Bank of
Richmond Economic Quarterly, Fall 1994, pp. 3 and 8. Available at
https://www.richmondfed.org/-/media/richmondfedorg/publications/
research/economic_quarterly/1994/fall/pdf/weinberg.pdf.
\17\ Thomas Wade, ``How the Federal Reserve's Automated Clearing
House Informs the Fed's Proposed Real-Time Payments Entry'', American
Action Forum, July 11, 2019. Available at https://
www.americanactionforum.org/insight/the-federal-reserves-automated-
clearing-house/.
---------------------------------------------------------------------------
It was to protect itself from such potential Fed competition, and
not (as Fed officials have suggested) to be able to ultimately resort
to discriminatory pricing, that TCH made its flat-rate commitment
contingent on the Fed's not entering into competition with it. Were TCH
not to do this, it would risk having FedNow bid away its large
participants.
To avoid having volume-based pricing undermine the goal of
equitable real-time payments, Congress must do more than merely trust
the Fed not to engage in such pricing. At very least, it should insist
that the Federal Reserve Board follow TCH's example by making a public
commitment to refrain from offering volume-based discounts on FedNow
or, at very least, by publicizing a specific, anticipated FedNow
pricing policy, such as it presumably employed in assessing the new
service's feasibility and desirability. As then Richmond Fed economist
John Weinberg observed some years ago, ``When the Fed is one of several
competitors, it can contribute to the efficiency of the market by
adopting a clear pricing policy to which other sellers can react.''
\18\
---------------------------------------------------------------------------
\18\ Weinberg, op. cit., p. 20.
---------------------------------------------------------------------------
Prejudicial Treatment of Balances in Jointly Held Fed Accounts
The third danger stems from the Fed's ability to refuse to classify
bank balances held in jointly owned Fed accounts as reserves, and to do
so even when the accounts in question are ``intended to facilitate
settlement between and among depository institutions participating in
private-sector payment systems.'' \19\
---------------------------------------------------------------------------
\19\ For the Fed's rules for establishing such joint accounts see
82 FR 41951, available at https://www.govinfo.gov/content/pkg/FR-2017-
09-05/pdf/2017-18705.pdf.
---------------------------------------------------------------------------
Fed balances classified as ``reserves'' earn interest, while those
not so classified do not. Consequently, by refusing to classify the
jointly held Fed balances held by banks participating in a private
payments network as reserves, the Fed adds to the cost of participating
in that network, and hence to the relative attractiveness of other
networks, including those it itself operates, that aren't subject to
the same ``reserve tax.'' The Fed's status as bank regulator can thus
allow it to compete unfairly by ``raising [its] rivals' costs.'' \20\
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\20\ The seminal work here is Steven C. Salop and David T.
Scheffman, ``Raising Rival's Costs'', American Economic Review, May
1983, pp. 267-271. Available at https://www.jstor.org/stable/
1816853?seq=1#metadata_info_tab_contents.
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Although the Fed allows ``only an institution eligible to have a
Federal Reserve account under the applicable Federal statute and
Federal Reserve rules, policies, and procedures'' to be a joint account
holder, it reserves the right to determine whether balances in joint
accounts count as reserves on a balance-by-balance basis. \21\ Today,
the Fed administers three joint accounts serving to facilitate
settlements among participants in TCH's CHIPs, RTP, and EPN networks.
\22\ So far as I'm aware, it has not yet chosen to treat balances in
any of these accounts as reserves. Consequently those balances neither
bear interest nor qualify as ``High Quality Liquid Assets'' that can
satisfy Basel's LCR (Liquidity Coverage Ratio) requirements.
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\21\ 82 FR 41956.
\22\ Although most EPN ACH payments are settled using Fedwire, TCH
relies on a joint Fed account to assist in the settlement of items sent
by Fed ACH participants to EPN participants that choose to be
identified by UPIC (Universal Payment Indication Code) numbers only, so
as to avoid divulging confidential banking information.
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I can think of no economic reason why the Fed should not classify
all Federal Reserve bank balances held in joint accounts used in
settling payments as reserves, and to accord such balances the same
privileges as other reserve balances. RTP account balances, for
example, are no less liquid than banks' regular Fed account balances,
and serve the same purpose of supplying their owners with means for
settling payments. That banks choose to fund their RTP accounts rather
than their individual Fed accounts, so as to allow them to make real-
time payments instead of relying on slower ones, should not subject
them to any avoidable penalties.
Moreover, by refusing to treat RTP balances as reserves the Fed may
complicate its monetary policy operations unnecessarily by creating a
new ``autonomous'' determinant of the total stock of bank reserves. As
the Fed itself explains:
if joint account balances are not treated as reserves, they are
a factor affecting the supply of reserve balances, meaning, all
else equal, movements in joint account balances have similarly
sized but opposite effects on the supply of reserve balances,
which the Federal Reserve will need to offset to provide the
appropriate level of reserves in a scarce reserve regime. \23\
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\23\ See Federal Reserve System, ``Final Guidelines for Evaluating
Joint Account Requests'', at https://www.govinfo.gov/content/pkg/FR-
2017-09-05/pdf/2017-18705.pdf. Although the Fed presently operates an
abundant reserve regime, recent experience has illustrated, rather
dramatically, that under certain conditions the Fed may still have to
intervene to offset autonomous reserve losses. See Nick Timiraos and
Daniel Kruger, ``Fed Intervenes To Curb Soaring Short-Term Borrowing
Costs'', Wall Street Journal, September 17, 2019. Available at https://
www.wsj.com/articles/fed-to-conduct-first-overnight-repo-transactions-
in-several-years-11568729757.
In short, the Fed's ability to refuse to classify balances held in
joint accounts ``intended to facilitate settlement'' on private
payments system with which it competes represents a clear conflict of
interests. To resolve this conflict, and thereby assure that the Fed
competes fairly with rival payment service providers, Congress should
compel the Fed to classify all balances held in joint Federal Reserve
bank accounts as reserves, provided only that the accounts in question
are designed to facilitate settlements on private payments networks.
Congress should also have the Government Accountability Office (GAO)
occasionally review the Fed's handling of applications for such joint
accounts, to ensure that it continues to abide by its current
guidelines for granting them.
Abuse of Monetary Control Act Loopholes
Finally, I wish to point to the risk that the Fed will take
advantage of loopholes in the 1980 Monetary Control Act (MCA) to charge
prices for its FedNow services that fail to cover their full costs, as
that act requires. Thanks to its monopoly of paper currency, the Fed
earns substantial ``seigniorage'' revenue it can use to cross-subsidize
its other payment services to the extent that MCA loopholes allow it.
Although the MCA is supposed to rule out such cross-subsidies,
there are at least two defects in its provisions that can prevent it
from doing so. One concerns the Act's requirement that the Fed's
service fees cover its costs ``over the long run.'' Because it fails to
define ``the long run,'' the Act as written allows the Fed to interpret
the phrase as it pleases. In contrast, private-sector payment service
providers must generally be able to recover the cost of new services
rapidly enough to achieve a positive present value for those services.
Fed officials claim that they generally endeavor to recover the
Fed's expenditures for established services within a 10-year period,
but that they expect FedNow's ``first instance of long-run cost
recovery to occur outside'' that 10-year cost recovery period. \24\
However, they do not say how far outside, and the Fed incurs no
penalties for failing to recover its costs within any specific length
of time. \25\ It follows that the Fed's investment in FedNow needn't
have a positive present value, so that it can set FedNow fees below
what a private-sector provider of an equally costly service could
afford.
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\24\ 84 FR 39314.
\25\ GAO, ``Federal Reserve's Competition With Other Providers
Benefits Customers, but Additional Reviews Could Increase Assurance of
Cost Accuracy'', GAO-16-614, August 2016. Available at https://
www.gao.gov/assets/680/679388.pdf.
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A second MCA loophole leaves to the Fed itself the choice of an
internal cost accounting system by which the Fed allocates its
expenditures among its various activities, while failing to provide for
periodic and systematic external reviews of that accounting system to
assure its adequacy. In consequence the last external review of the
Fed's cost accounting system took place in 1984! External assessments
of the Fed's success in complying with the MCA's cost recovery
provisions, such as that undertaken by the GAO in 2016, \26\ are
therefore only as accurate as the Fed's own internal audits--a highly
unsatisfactory circumstance.
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\26\ Ibid.
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By closing these MCA loopholes, Congress can prevent the Fed from
underpricing its payments services, including FedNow. To do so, it
should insist that the Fed offer compelling proof that it will be able
to recover the costs of FedNow rapidly enough to give that project a
positive present value using an equitable and competitive fee
structure. Congress should also follow the GAO's 2016 recommendation
that it provide for periodic independent reviews of the Fed's cost-
accounting practices. \27\ Together these changes should go far in
assuring that the Fed competes fairly with private payment service
providers.
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\27\ Ibid., p. 64: ``Having [the Fed's] cost accounting practices
periodically subject to independent testing would provide greater
assurance that the Federal Reserve is complying with the Monetary
Control Act.''
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Conclusion
I conclude my testimony by observing that none of the steps I have
recommended to Congress would prevent the Fed from doing all that it
can possibly do to facilitate faster payments in the United States. My
recommendations will only serve to make sure that in competing with
private-sector payment service providers, the Fed plays by the rules,
as it must if it is to contribute to rather than hinder the speeding-up
of U.S. payments. A well-intentioned Fed should therefore have no
objection to them, while an ill-intentioned one will make them
indispensable.
STATEMENT OF THE AMERICAN BANKERS ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF THE CREDIT UNION NATIONAL ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF FINANCIAL INNOVATION NOW
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF FOOD MARKETING INSTITUTE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF NACHA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF THE NATIONAL ASSOCIATION OF FEDERALLY-INSURED CREDIT
UNIONS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF THE RETAIL INDUSTRY LEADERS ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]