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New Risks and a New Direction for Real-Time Payments

Thursday, August 01, 2019 (RemoteDepositCapture.com / Patti Murphy)

Pressure is mounting for the Federal Reserve to build and operate a real-time payment system, as a new white paper explains hidden risks in “credit-push” approaches to real-time payments.
When the Federal Reserve convened the inter-industry Faster Payments Task Force in 2015, its stated objective was to move the economy toward ubiquitous real-time payment systems by 2020, preferably led by the private sector. With 2020 just 6 months away the Fed is now conceding that deadline will not be met. “We are working on it, but it will not be ready by 2020,” Fed Chairman Jerome Powell said in a July 10 appearance before the House Financial Services Committee.
 
Now a group of lawmakers is proposing the Fed take the lead in building and operating a real-time payment system. It’s a proposal that seems to resonate with community banks and merchants.
 
Legislation introduced in both the House and the Senate would amend the Expedited Funds Availability Act (EFAA) to require that funds deposited at financial institutions be made available for withdrawal in real time, and it would instruct the Fed to build and operate a payment system that supports real-time payments.  The legislation specifically references the Monetary Control Act, which requires the Fed to oversee U.S. payment systems.
 
The Payments Modernization Act of 2019 was introduced in July in the Senate by Senators Chris Van Hollen (D-MD) and Elizabeth Warren (D-MA) and in the House by Representatives Ayanna Pressley (D-MA) and Jesus “Chuy” Garcia (D-IL).
 
“For far too long, consumers and small businesses have unfairly shouldered the costs of our slow payments system – despite the fact that we have the technology to update it and a clear and urgent need to do so. I’ve pushed the Federal Reserve to develop a system that has the necessary guardrails, but progress there has been too slow,” Sen. Van Hollen said in introducing the bill.
 
Community Banks, Merchants, Want Fed-Operated Network
The Clearing House – a consortium of large banks that offers check, ACH and wire transfer services in competition with the Fed – has built a real-time payment system, known as RTP. Currently, 16 banks transact payments across RTP, according to TCH. However, any real-time payment network, in order to be truly real time, needs to support real-time gross settlement (RTGS) across all financial institutions. This is something only the Fed can provide, and only when the Fed is open for business, which is about 252 days a year.
 
TCH President and CEO Jim Aramanda has described RTP as “the first new core payments infrastructure to be built in over four decades and the first ever designed and built for the digital age.” In a June 12 public statement he said TCH is working with third-party processors and others to make way for “a wave of smaller banks and credit unions to come onto the RTP network.”
 
The Independent Community Bankers Association of America (ICBA) remains unconvinced. The trade group wants the Fed to step up to the plate, and build and operate a real-time payment network. And so do many merchants.
 
“A Fed-operated real-time settlement system is consistent with the roles it already serves in providing integrity, safety, transparency, equitable access and ubiquity for checks, ACH payments and wire transfers to nearly 11,000 financial institutions of all sizes and charter types,” ICBA President and CEO Rebeca Romero Rainey wrote in a July 24 letter to Fed Chairman Powell and members of Congress. “The Federal Reserve’s development and operation of a real-time gross settlement system would also insert needed competition into real-time payments.”
 
Seven trade groups representing millions of merchants made a similar plea in a July 27 letter to members of Congress. “Faster payments in the U.S. will become foundational to the operation of our economy, and this new utility must not be solely owned and operated by the nation’s largest financial institutions,” the letter stated. “Only the Federal Reserve is positioned to stand up a truly ubiquitous, equitable and competitive RTGS system that benefits all players,” the trade groups insisted. The letter was signed by the Food Marketing Institute, the Merchant Advisory Group, the National Association of Convenience Stores, the National Association of Truck Stop Operators, National Grocers Association, National Retail Federation and the Retail Industry Leaders Association.
 
Hidden Risks in Faster Payments
Most of the work around faster payments has been focused on credit push payments (think ACH credit payments) rather than debit pull payments (think checks). The rationale, as articulated by the Fed and its Faster Payments Task Force, is that credit push payments are risk free and more efficient than are debit pull payments. Not everyone agrees, however.
 
“That’s a spurious argument,” said David Walker, President of Tiller Endeavors. “There are probably risks out there that nobody has even thought about.”
 
Walker, in a new white paper, discusses one set of risks: the need for directories that support the routing and posting of payments to correct accounts. But the existence of directories could trigger entirely new risks. One obvious set of risks could arise from the concentration of banking information on every consumer and business in one or a small set of directories. “Unfortunately, we have learned that every data base can be hacked and what more appealing target than the universally accessible location of where all the money is,” the white paper states.
 
The need for directories also raises important liability issues, Walker noted. For example, who is liable for timely and accurate creation and maintenance of directories and in what amounts? Could liability potentially be shared among more than one party to a payment based on comparative negligence? And what about liability for fraud, errors, omissions, etc.?
 
One way to address these risks is through new federal law and regulations that specify the allocation of liabilities, Walker suggested. But that could be a slow and arduous process. Another option is for the private sector to develop a uniform set of agreements (or rules), similar to rule sets created by ECCHO for interbank check image exchange. Without agreements to guide the adjudication of disputes, parties will have to rely on expensive litigation with the additional risk of the uncertain allocation of liabilities. The Faster Payments Council (successor to the Faster Payments Task Force) is ideally situated to create these rules, but has yet to commit to that, Walker explained.
 
“Risks and losses are not the same and knowing the risks associated with directories, the industry should take action to mitigate these risks prior to broad acceptance and implementation of faster payments,” the white paper states.

The Hidden Risks of Faster Payments, a white paper prepared by Tiller Endeavors, is available for downloading at RemoteDepositCapture.comClick here to download a free copy now.


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