We live in a rapid-paced world in which we can send a message across the world in seconds or have almost anything delivered to our door within 24 hours. However, our ability to send and receive payments has greatly lagged the digital revolution, as anyone who’s been forced to wait a day (or more) for the funds in a deposited check to be available or received a late fee for a utility bill mailed a week ahead of time.
For millions of American households this is more than just a mere inconvenience — the delay in accessing bank deposits can force them to resort to check-cashing centers, payday lenders or other costly financial intermediaries to manage their expenses.
The good news for consumers and businesses alike is that the unseen but important infrastructure that enables us to send payments to one another is now set to deliver the real-time capabilities that we take for granted elsewhere.
The arrival of real-time payments capabilities in the United States brings our financial system to date with the rest of the world, where such payments are increasingly the norm; the United Kingdom, Singapore, Poland, Mexico, Australia, and over 25 other countries have systems that clear and settle payments immediately.
Until now, our inability to do likewise owes to the fact that our payments infrastructure is more than 40 years old, built long before the advent of the internet or smartphones. Card networks and fin-tech companies have worked to fill in the gap, but neither erases the need for a core payments infrastructure that truly operates in real time.
Today, these real-time payments capabilities are being delivered through the RTP network built by The Clearing House, an industry-utility owned by 24 of the country’s largest banks, which has run bank payments systems for the United States since before the Civil War. Launched in late 2017, the RTP network connects to more than 50 percent of all U.S. bank accounts today and is on pace to reach the vast majority of Americans by the end of next year.
However, the Federal Reserve may delay or derail this evolution by entering this market by launching its own system. Having two systems would create several problems: First, these two systems would likely be interoperable, which would mean that banks would either need to invest in two distinct systems or else simply be unable to transact immediately with entities with accounts at a bank on the other system.
A bigger problem is that the Fed is the wrong entity to build a real-time system. As a cumbersome public bureaucracy it is inherently slow and has a long deliberative process, and it has already said it would need several years to have its system up and running. That reality would likely result in significant delay for the arrival of real-time payments in the United States.
Finally, there is an inherent conflict of interest with the Fed serving as both the regulator and competitor to the private sector payments system: it would be as if the FDA both manufactured and approved new pharmaceuticals, for instance.
The Fed should stick to its mission of controlling inflation and promoting economic growth and allow the private sector to modernize the U.S. payments system, an effort that is already well underway.