Fed’s Real-Time Payments System to Compete With Wall Street

(Bloomberg) -- The Federal Reserve, rebuffing an intensive Wall Street lobbying campaign, plans to create a real-time payment system that will compete with a venture formed by big banks.

The FedNow Service, set to begin operating by 2023 or 2024, will modernize the payments infrastructure by allowing money to be moved almost instantly at every hour of every day, the regulator said in a statement Monday. The system could give consumers and businesses more flexibility in managing money and making time-sensitive payments, the Fed says.

“Immediate access to funds could be especially important for households on fixed incomes or living paycheck to paycheck, when waiting days for the funds to be available to pay a bill can mean overdraft fees or late fees,” Fed Governor Lael Brainard said in a speech at the Federal Reserve Bank of Kansas City, where she announced the plan.

The Fed voted 4-1 to seek comment on its proposal, with the lone dissenting vote coming from Randal Quarles, who as vice chairman for supervision is the agency’s top official overseeing Wall Street.

“We see important benefits from the resilient and competitive market that would result from the FedNow Service providing an alternative.”
-- Fed Governor Lael Brainard

The Clearing House, a group of financial giants including Citigroup Inc. and Wells Fargo & Co., introduced its Real-Time Payments service in 2017, aiming to improve the antiquated U.S. processing system. The companies pitched their idea as a kind of utility and have been lobbying lawmakers and the Fed to abandon consideration of a government-run system.

“We see important benefits from the resilient and competitive market that would result from the FedNow Service providing an alternative,” Brainard said. “We have provided vital support to the sole private-sector provider of real-time settlement for faster payments, and we will continue to do so.”

But Quarles argued the government “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 said in a statement after the vote. “In this case, I do 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.”

‘Innovative Capabilities’

Bank Policy Institute President Greg Baer, whose Washington-based group lobbies on behalf of Wall Street lenders, said last week that the 24 firms involved in Real-Time Payments “have individually or collectively paid hundreds of millions of dollars to build that system.” The Clearing House’s service has been widely available in big-bank accounts but has been slower to reach the customers of community lenders.

While the Fed works for years on this, “our focus will remain on ensuring that the RTP network has reach to all depository institutions,” the Clearing House said in a statement on Monday. “Consumers and commercial customers are demanding real-time payment capabilities now, and depository institutions on the RTP network are already offering these innovative capabilities.”

Brainard noted the Fed’s history of “healthy competition with private-sector providers” and said the central bank is uniquely placed to provide this service -- especially in guaranteeing access for thousands of small banks. In addition to improving the financial plumbing for consumers, Brainard said, it will help small businesses turn sales proceeds into payments to suppliers quickly, reducing or eliminating the need for expensive short-term financing.

She also suggested Facebook Inc.’s recent announcement of plans to create a digital currency -- Libra -- may have been a factor in the Fed moving forward, noting that private companies are looking to establish payment systems that bypass banks and fiat currencies. The Fed is on the record being wary of Libra and its potential for privacy and money-laundering abuses.

‘Overwhelmingly Favorable’

Recent remarks from Fed Chairman Jerome Powell had been taken as a signal the central bank was leaning toward doing its own system. He said last week that support for his agency getting involved had been “overwhelmingly favorable,” and he underlined the fact that the Fed had long been in the payments business.

When the agency asked for input last year on whether it should move forward, community banks generally supported the government alternative so they wouldn’t have to rely on Wall Street. The Fed had also been encouraged by lawmakers including Senator Elizabeth Warren, who joined other Democrats last month to introduce a bill that would have required the central bank to take the step.

“I’m glad the Fed has finally taken action to ensure that people living paycheck-to-paycheck don’t have to wait up to five days for a check to clear,” Warren said in a statement, praising the agency announcement alongside Senator Chris Van Hollen and House Democrats.

Republican Opposition

In recent encounters with Fed officials on Capitol Hill, Republican lawmakers had frequently argued against letting the government go head-to-head with the private sector.

On Monday, however, groups representing small lenders and retailers were happy with the central bank’s decision. Faster, easier payments would be a boon for retailers, including Amazon.com Inc., which has said that a real-time system could be an alternative to “high-cost” credit-card networks.

The Fed will gather public comments for 90 days on how it should build FedNow.

--With assistance from Jenny Surane.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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