Hi everyone, happy Tuesday! This a follow up post to FedNow : Inside the Fed's plans to launch a real time payments service.
Last week I covered India's success with UPI and the Federal Reserve's plans to develop and launch FedNow, a public real time payments settlement system which is expected to be available in 2023 at the earliest. Today, we take a look at RTP ®(Real Time Payments) network and how it compares against the Fed's proposed plan to develop FedNow as a publicly owned counter to RTP.
In November 2017, The Clearing House(TCH) launched RTP, a real time real time payments system in association with 25 partner banks. It also is considered a replacement in treasury operations for the ACH (Automated Clearing House) which takes one to two days for processing. The Clearing House is a private company owned by major banking institutions(see image).
RTP aims to provide funds to the payee in real time within seconds of a successful transaction on a 24/7 basis. RTP aims to be a core component of the payments system infrastructure just as ACH & wire transfers. In this, payments are made from the bank account of an individual or business to another bank account directly. RTP also supports the financial institutions customer facing systems to provide services like bill payments and P2P payments. Messages such as requests for payment, payment confirmations, requests for additional information, and remittance detail are used to create frictionless customer-facing interactions. RTP is a rapid payments and interbank settlement system which aims to provide transparency and certainty using immediate confirmation notices that a payment has been sent, received, and instantly settled, both sides can see if a transaction went through. This capability was developed using software from Vocalink which built UK’s faster payments system and is now owned by Mastercard since 2016. RTP is also meant to replace legacy payments systems and provide increased security for all transactions. Though the challenge lies in the fact that it is real time so unlike cheques and other traditional payments systems the risk lies on the banks to ensure no fraudulent transfers occur(for which they get only seconds) as reversing transactions is not possible once executed.
The Federal Reserve faster payments task force established a goal in July 2017,that any consumer or business with an american bank account must be able to send and receive payments securely in real time by 2020.
RTP although supported by all big banks and financial systems as mentioned above, is opposed by small and community banks which instead support the development of a publicly owned real time payments system like FedNow which would provide them direct access to the system unlike RTP which is private and forces them to depend on their core processors like Fiserv, FIS, etc for access to the system.
According to Fortune,
The Clearing House’s real-time payments infrastructure claims a 51% share among U.S. checking accounts, FedNow is expected to target a more universal reach across the nation’s banking system.
Now FedNow which is still in planning stages also has support of retail and tech giants such as Amazon, Google which have indicated their preference for FedNow publicly with Google writing to the Fed offering help in sharing expertise learned from operating the UPI powered Google Pay service in India. FedNow is thoroughly opposed by the large banks which are a part of RTP as for them it will mean extra costs and unnecessary competition and if big tech gets it's way then a certain breakdown of the monopoly they have on the current payments systems.
FedNow's publicly ownership would also reduce the chances of a private monopoly being developed in the real time payments space giving competition to RTP as it rightly deserves. The Fed's payments service would essentially drive down costs for smaller banks and financial institutions and ensure universal access to it's services.
RTP in reality is a closed system in which every institution will have to deal with a private company to gain access. In comparison to it, FedNow aims to be open with instant checks to combat fraud , in which any institution can offer payments services where any person can transfer money from one bank account to another bank account in real time.
In case this was forwarded to you, sign up here.
If you like what you are reading, take a minute to share Finmetrics.