If the Federal Reserve decides to compete in the developing market for real-time payments, it will face considerable obstacles, one of which has to do with whether such competition is really needed, according to an official with The Clearing House Payments Co. LLC.
The Clearing House, which is recruiting financial institutions for its own real-time processing system, has made significant investments in building what it is pricing as a low-cost service, argues Peter Davey, a former Capital One executive who is vice president and head of innovation at New York City-based TCH.
That could put the Fed in a bind as it confronts the problem of what would almost certainly be a very long-term return on that investment, Davey says. “If the Fed were to go build something, they’d have an uphill battle,” Davey tells Digital Transactions News.
The Fed took at least some observers and market participants by surprise early this month when it announced it was looking into the idea of building an always-on real-time gross settlement system along with a liquidity tool that it says could boost banks’ participation in real-time payments. The regulator, which up to now has been seen as a kind of moderator and organizer in the movement toward real-time processing, is taking comments on its new proposal until Dec. 14.
Competition between the Fed and TCH is not unknown. The two operate rival switches for the nation’s automated clearing house network, for example.
Davey says TCH intends to answer the Fed’s call for comments. “We will respond back with a prudent response,” he says, including its own thoughts on the matter and those of its 25 owner banks. TCH’s owners include the nation’s money-center banks but also regional institutions such as Huntington, Comerica, and Bank of the West.
TCH’s service, RTP, is built on technology from Mastercard Inc.’s Vocalink unit and went live a year ago. RTP had commitments from 36 financial institutions as of the end of the third quarter, and nine are currently live. More are in the process of onboarding before the end of the year, which will enable at least 50% of the eligible demand-deposit accounts in the country to receive an RTP transaction.
Davey points out that real-time payments via TCH will be hard to compete with on price. Transactions, he says, are priced for “cost recovery.” A credit-push transaction (when the payer initiates an instant payment), for example, is priced at 4.5 cents. A request for payment is a penny. “You’re not talking about huge tolls,” Davey says. That pricing, he adds, applies to all participating institutions, with no special arrangement for the owners. “There are not dividends paid back to the owner banks,” he adds.
While TCH’s system runs on programming designed by Vocalink, which is best known for having built the United Kingdom’s nationwide real-time system, TCH owns the code, Davey points out. “Vocalink maintains it, but we own and operate our own payment rails. The source code is ours,” he notes.
Facing a considerable long-term investment and pricing aimed at recouping costs, any effort from the Fed would confront a formidable economic hurdle, Davey argues. “I can’t imagine they can come out with a model that would let them recoup their costs in a [reasonable] time period,” he says.
On top of that, the TCH model already meets requirements the Fed promulgated when it was organizing the payments industry’s effort to bring real-time payments to the United States, Davey says. “The Fed will have to figure out, is there a role [for them] to play. They have a long road to go if they put their hat in the ring,” he says.
Davey commends the Fed, however, for its willingness to share its thinking on real-time payments, whether as a referee in the game or as a potential active participant. “They’ve been open with us as to what they should do, if anything,” he says.