2020 Vision

Will the U.S. payments industry reach its goal of ubiquitous real-time payment capability by 2020? In part, the answer may depend on how “ubiquitous” is defined.

When the Federal Reserve’s Faster Payments Task Force wrapped up its work in July 2017, it set what seemed to be a challenging but perhaps ultimately achievable goal: ubiquitous real-time payment capability in the United States by 2020.

Little did anyone then understand just how ambitious that goal would turn out to be—mainly because a major complication in reaching it would come from the Fed itself.

When it comes to payment systems, the Fed typically casts itself in the role of referee and organizer. With real-time payments, indeed, it filled that role by organizing task forces on faster payments and on security, and shepherded through the work of those groups to what appeared to be a satisfactory conclusion, including that 2020 goal.

Then, last fall, the Fed announced it would investigate the idea of taking a more active role by providing a gross settlement (RTGS) service for real-time transactions. Such a role is far from unheard-of for the Fed. After all, it operates one of the two switches for the nationwide automated clearing house network. And by late spring, the RTGS idea remained that—an idea, with the Fed continuing to mull over formal comments it received from the industry.

But critics say just the notion itself has been enough to freeze banks in place that would possibly have jumped on a real-time platform by now.

“No two ways about it, a lot of folks are taking their time to see what the Fed ends up doing,” says Steve Ledford, senior vice president of product and strategy at The Clearing House Payments Co. LLC, which began offering real-time processing to financial institutions late in 2017 and has 15 on the service so far. “We’re hoping the Fed will make its intentions known so we can all get moving forward.”

A Pragmatic Approach

Industry observers see the Fed service, should it materialize, as a potentially attractive option for smaller institutions, since it could exert competitive pressure on pricing. TCH is owned by 24 large banks. But that makes the Fed’s long silence on the subject frustrating for operators besides TCH.

“I do think it’s causing smaller financial institutions to wait and see if they want to participate in the Fed service. That could take years,” says Lou Anne Alexander, group president for payments at Early Warning Services LLC, the Scottsdale, Ariz.-based company that runs the Zelle person-to-person payments service. Early Warning is owned by seven major banks, including several that also have stakes in TCH.

The Fed took comments from the industry after its proposal appeared last October in the Federal Register. For the time being, it’s officially staying mum, though Fed vice chairman Randal Quarles in May answered Congressmen’s questions about the possible real-time facility during a hearing of the House Financial Services Committee.

While he was at pains to stress that the contemplated Fed operation would not exercise any unfair advantage over private-sector players, Quarles cast no further light on the regulator’s ultimate direction.

“If the Federal Reserve were … to have an offering in the faster-payments area there are statutory standards that we have to meet to ensure that it would be on a level playing surface with the private sector,” Quarles told the panel, according to a transcript. “But no decision has been made.”

Now, some players are sticking to the idea of “ubiquity” for faster payments but aren’t necessarily eyeing 2020 as the deadline for achieving it. The U.S. Faster Payments Council, for example, is focused on helping to achieve ubiquity, but Kevin Christensen, who took over the cross-industry group in January as acting executive director, says he can’t say when that is likely to happen.

The FPC emerged in November as an outgrowth of the Governance Framework Formation Team, which was created to help implement the conclusions of task forces the Fed had set up to introduce real-time payments. TCH, JPMorgan Chase & Co., and Walmart Inc. are among the FPC’s 19 founding members. Christensen is a senior vice president at the Johnston, Iowa-based Shazam debit network, an FPC sponsor.

For now, the group is taking a pragmatic approach to the question of the Fed’s possible involvement. “The Fed is one key stakeholder,” Christensen says. “We’re going to bring together organizations that want to achieve the goal of faster payments. Whether [it’s] an operator or not, we’ll work with the Fed.”

‘The Last Mile’

Still, not all banks are frozen in place waiting for a decision from the Fed. TCH in June announced it had signed FirstBank, a $19-billion asset bank based in Lakewood, Colo., for the RTP platform. And in May, it proved it could attract small banks by recruiting Hudson, Mass.-based Avidia Bank, which at $1.6 billion in assets ranks around number 400 among the nation’s financial institutions.

How many more will go with TCH remains to be seen, though Ledford promises that “others are in the pipeline.” Critics say one reason the Fed decision will be important is that small and mid-size banks are hoping the regulator will offer a competitive offset to TCH, particularly on pricing. But TCH makes no bones about its stance, promising in its FirstBank announcement “flat” pricing to all comers “regardless of size,” and no “volume discounts” or “minimum volume” requirements.

“Our comment [to the Fed] is that its RTGS is not needed, we’re actually serving the market,” says Ledford.

But if the question of when ubiquity will arrive is uncertain, so is the very definition of the term. “Ubiquity is one of those easy-to-say words, but certainly not all agree on what it means,” notes George Warfel, a payments consultant who served on the Faster Payments Task Force, and a former columnist for Digital Transactions. “If ubiquity means any place anybody can buy a hamburger anywhere in the world, you’ve got a huge problem.”

Some in the industry measure the approach to ubiquity by the number of all bank accounts that can handle real-time transfers. Early Warning, for example, looks at the fraction of U.S. demand-deposit accounts capable of sending funds instantly. Right now, that’s about 68%, Alexander says.

“I still have that aspirational goal to get there by 2020,” she says. By “there,” she means 80% of DDAs. “I’m optimistic,” she adds. “It’s not real easy. It’s the last mile.”

‘A Variegated Definition’

One factor that could make recruitment for real-time payments “not real easy” is the fear that faster processing also could bring faster fraud. The window for authenticating receiving accounts, experts say, is fleeting. “It’s all about verifying and authenticating in real time before you hit the send button,” says David Barnhardt, executive vice president of product at Giact Systems LLC, an Allen, Texas-based vendor of fraud-prevention technology.

Systems like the one TCH has built rely on a credit-push model, which can contain risk because it’s not possible for malefactors to use debits to suck funds out of victims’ accounts. “A credit-transfer system has fewer ways you can be defrauded than a debit-transfer system,” says Ledford. “And we’ve learned a lot about how to authenticate online and mobile accounts.”

The FPC’s Christensen sees this as the model for the real-time industry. “Most payments are going to be credit push,” he says. “Not to say down the road there can’t be debits, but this is a first step.”

That may help reassure some FIs sitting on the fence. But among some observers concern remains that the much-vaunted 2020 goal is steadily slipping into the realm of impracticality. Observers like Warfel, though, counsel a more detached approach. “Ubiquity gets defined by the market,” he says. “We’re much closer to a variegated definition, an option of instant payment when you need it.”

For others, such pragmatism may be fine, but for now a dose of urgency would be appreciated. “The time for waiting is over,” says TCH’s Ledford. “We need to have every FI in the country on a faster-payments system.”