How Do You Define Success?

You might think a fledgling payments network that launched in July with 35 participating financial institutions and within less than six months had multiplied that number nearly tenfold could be considered at least a tentative success.

Granted, there’s a long way to go for the Federal Reserve’s FedNow real-time payments platform, the network referred to above. The Fed said last month it had 331 lenders operating on FedNow (see our lead story in the “Trends & Tactics” section on page 6), but after all there are somewhere around 9,000 financial institutions in the United States.

The Wall Street Journal last month jumped on that discrepancy to highlight several weaknesses in the Fed’s real-time ambitions. After all, Fed officials, some of them quoted by the Journal, themselves have pointed out that it will take years before real-time payments become a routine for everyday Americans.

Bank executives quoted in the article referred to the “complex, time-consuming, and expensive” behind-the-scenes work banks must put in to make real-time payments a reality for customers. On top of this work comes further complexity, with the need to adopt or develop “user-experience software” and “fraud controls.”

Then there’s the investment, amounting to more than $1 billion, some of the nation’s biggest financial institutions have already poured into building the Real Time Payments network operated by a bank-owned company, The Clearing House Payments Co. The fruits of that investment are such that banks backing FedNow must reckon with RTP, a service offered by The Clearing House Payments Co. RTP launched in 2017, and claimed some 483 client banks onboard as of the middle of last month. Yet, some of TCH’s backers are also investing in FedNow.

But there’s another way to look at all this investment in competing systems. For all of the talk of expense, time-to-fruition, and double investment, there’s a long history of development of multiple platforms for U.S. payments processing. In the middle of the 1980s, for example, there were somewhere around 300 networks moving debit card transactions, first for ATMs and then, soon, for direct debit at the point of sale. Needless to say, that business has since rationalized.

In credit cards, there are four major networks moving transactions, with the private-label systems of major merchants arguably constituting yet more networks.

Also, as it turns out, there’s significant cross-over in bank participation in FedNow and RTP. As of mid-December, some 137 of FedNow’s participating 331 banks and credit unions had also signed up for RTP, according to TCH. Banks participating jointly in FedNow and RTP will benefit from their experience with the latter system—and that can redound to the benefit of FedNow.

—John Stewart, Editor john@digitaltransactions.net