Correcting the Record on Real-Time Payments

Correcting the Record on Real-Time Payments

Where to start with the inaccuracies and misimpressions in the recent BankThink piece by Thomas Hoenig and Bruce Summers, “Real-time-payments Monopoly Puts Financial System at Risk”?

First, in an article raising the specter of monopoly power in The Clearing House’s real-time payments system, they fail to mention that the Justice Department has already reviewed that system for antitrust purposes and found it to be pro-competitive.  In 2017, the Department issued a Business Review Letter, which is DoJ lexicon for no-action relief in the antitrust space.  For those who wish a better understanding of how the system works, and why it is not the menace described by Hoenig and Summers, it is a very helpful summary.

Further, they fail to mention that the Clearing House system, which they speak of only in the conditional or future tense, is actually open, operating, and serving business and retail customers. They phrase the policy question as whether the Federal Reserve “should stand back and award the payments services network to The Clearing House.” The Clearing House is hardly waiting for an award; rather, the industry overall is investing billions of dollars to deploy the Clearing House system (known as RTP), and build new products that utilize its rails. The RTP network currently reaches over 50% of U.S. DDAs, is on path to achieve near-ubiquity by 2020, and is already processing transactions. No award necessary.

Now for some true irony.  The authors duly note that the system operates as a utility and meets the criteria in the Fed’s Request for Comment relating to safety, efficiency, transparency, and the like.  However, Messrs. Hoenig and Summers say that they are “struck most by the overarching principle that ‘[t]hese principles apply so long as the RTP network is the only provider of faster real-time clearing and interbank settlement.’”  Leaving aside the oddity of being more struck by the exception than the rule, why indeed would the Clearing House wish to preserve such an exception?  The answer is quite clear:  the only event that would disrupt RTP’s current fixed fee pricing model — where all banks pay the same fee per transaction, without volume discounts or monthly minimums, — is the entry of the Federal Reserve into the market.  Why?  The Monetary Control Act prohibits the Federal Reserve from offering its payment services at a loss – that is, at taxpayer expense or to the detriment of private sector actors.  It must recoup its own costs and costs that a private sector operator incurs even if it does not – e.g., compliance costs and taxes.  Given the massive expense the Fed would incur in building and operating the system, it would need to capture huge volumes of payments in order to break even – the kind of volumes generated only by the large banks currently participating in the Clearing House system.  Why would they switch to the Fed?  Only if they received significant pricing discounts.  The Fed would be forced to offer those incentives – and the Clearing House would then be forced to do the same or lose its largest customers.

But, this entire debate elides a crucial problem with the authors’ professed concerns about competition.  A crucial, universally agreed, goal of any real-time payment system is ubiquity – that is, the ability of one person to pay another regardless of which banks they use.  But, the likelihood of a notional Fed-run system being interoperable with the RTP network is low, and zero for the near future. In Europe, for instance, the European Central Bank’s TIPS system does not interoperate with other European systems, notably the private sector system RT1 operated by EBA Clearing.  Further, even if full interoperability were possible, its governance process is such that it would slow or stifle private sector innovation, as has been the case with ACH.  So, competition and ubiquity are in heavy conflict in a way the authors completely fail to acknowledge.

But that doesn’t mean that with ubiquity there will be no competition.  There are plenty of alternative payment systems – ACH (debit), check, card networks, even cash – for customers to use if they do not need or want a real-time payment.

Meanwhile, RTP is working exactly as utilities should.   RTP is priced to maintain its systems; the Clearing House retains no income except as necessary to fund R&D and to meet capital requirements.

One final note, to lend perspective.  The Clearing House Interbank Payment System (CHIPS) has a market share of 96 percent in international payments, which clears and settles about $2.0 trillion per day.  It has done so since 1970, without incident or controversy.