The Future of Payments

11 BANKING PERSPECTIVES QUARTER 4 2018 by 2020. Importantly, we continue to actively work with financial institutions of all sizes to advance the shared interest of making faster payments an achievable reality for all financial institutions and their customers now. • PROVIDING FOR NEW LEVELS OF PAYMENTS SAFETY, STABILITY, AND RELIABILITY Because TCH is a regulated financial market utility that has been providing core payments services to financial institutions for 165 years, safety and soundness have been key considerations in RTP’s development. LOOKING AHEAD TO 2020 This past year has been an exciting period of building the foundation for the RTP network and for real-time payments in the U.S. As we look ahead to 2019 and the critical year of 2020, we expect to see significant and continued progress with each passing month. This progress will come in the form of new financial institutions going live on the system, payments volume expanding, enhanced use by corporations, and real-time payments adoption by businesses and consumers. We also fully expect that consumer and business customers of all financial institutions – big and small – will quickly come to expect to have real-time payments functionality from all of their financial institution partners. And we are confident that we are about to witness a tremendous wave of innovation, including in ways that we cannot currently imagine. A FEDERAL RESERVE-RUN REAL-TIME SYSTEM? Finally, as we use the one-year anniversary of RTP being live to take stock of the system’s progress to date, we also take note of the Federal Reserve’s recently issued a request for comment (RFC) inquiring whether it should build a real-time system of its own. The Federal Reserve’s role in promoting real-time payments in the U.S. has been pivotal in expanding the country’s understanding of the importance of introducing a modern payments rail for the digital age. Likewise, the criteria that the FPTF established for a successful real-time system have provided a critical guide, developed with input from every corner of the payments ecosystem, that TCH has continually measured against in developing the RTP network. That said, the Federal Reserve’s recent consideration of launching its own real-time clearing and settlement system raises some serious questions. Specifically, introducing another real-rime payment system to the market runs the risk of fragmenting participation in real-time payments, with some financial institutions on the Federal Reserve’s network and others on the RTP network. The risk of fragmentation is identified by the Federal Reserve itself in its RFC, but is largely dismissed, especially at the network level, perhaps because of the Federal Reserve’s belief that its system would interoperate with other payment systems. But it is not at all clear that a new Federal Reserve system would be capable of interoperating with the RTP network. A payment network like the RTP network that provides for real-time clearing and interbank settlement, with the immediate release of funds to the payee, is a very different type of payment network than the ACH network, the only interoperated payment network today. Importantly, attempts to link real-time networks in other parts of the world have not been successful. Whether interoperability between two discrete real-time systems can be achieved in the U.S. without seriously degrading the RTP service or introducing unacceptable levels of operational and legal risks, along with the serious technical challenges requiring significant additional expenditures, is far from certain. And then, of course, there is the question of timing. It would take time for the Federal Reserve to design and build a new network, even if it leverages its current communication channels. The technical aspects of building a new system are, alone, likely to delay achievement of ubiquity. For all of these reasons, the Federal Reserve’s inquiry calls for a critical assessment of whether a Federal Reserve-run system would help or hinder the arrival of ubiquitous real-time payments in the U.S. The RTP network is in-market and is advancing the shared goal of making access to real-time payments universally available to virtually all accounts by 2020. Establishing why a Federal Reserve-run system is necessary and not, in fact, counterproductive to achieving the shared goal of bringing real-time payments to the U.S. in a timely way is the question that the Federal Reserve needs to answer as it continues to ponder its appropriate role in faster payments. n As we look ahead to 2019 and the critical year of 2020, we expect to see significant and continued progress with each passing month. UPFRONT