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The Federal Reserve Is Too Late To The Real-Time Payments Party

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OBSERVATIONS FROM THE FINTECH SNARK TANK

Customers of community banks and credit unions should be on the look-out for the following letter coming from their financial institution:

Dear Valued Customer:

The fees you've been paying for overdrafts, payday loans, and check-cashing services are a thing of the past! Or at least, they will might be four to five years from now when the Federal Reserve completes the development of a new real-time payments system (if the project is completed on time).

The system the Fed runs now closes on the weekends (just like us!) and can take several days to settle payments. The new system, to be called FedNow, will allow real-time bank-to-bank payments, all day every day.

According to Federal Reserve Board Governor Lael Brainard, "Immediate access to funds could be especially important for households on fixed incomes or living paycheck to paycheck, when waiting days for the funds to be available to pay a bill can mean overdraft fees or late fees that can compound."

So hang tight for the next few years and we'll let you know when the new system is in production.

As always, thank you for your business.

Signed,
Bank/Credit union CEO

A Win For Community-Based Financial Institutions?

The Fed's announcement was heralded as a victory for community banks and credit unions who are, understandably, wary about playing ball with the large bank-owned The Clearing House, which already processes payments in real-time.

According to Independent Community Bankers of America (ICBA) CEO Rebeca Romero Rainey:

The Fed’s decision to develop a real-time settlement system will benefit consumers and serve as a launchpad to future payments innovations. A Fed-operated system will avoid the risk of having only one, for-profit settlement service run by the nation’s largest financial institutions. This will expand access to more banks.”

Rob Nichols, President of the American Bankers Association (ABA) weighed in:

Every bank and their customers will benefit from a seamless and ubiquitous [real-time payments] system. The reality is that any Fed-built system will take some time to build, so in the meantime, ABA will continue to encourage all banks to consider whether to connect to the existing Real-Time Payments network offered by The Clearing House. We believe any Fed system must be fully interoperable with the RTP network, [and] remain accessible only to chartered financial institutions.”

The credit union community cheered the Fed's move, as well. According to NAFCU Chief Economist and Vice President of Research Curt Long:

NAFCU welcomes news of the Federal Reserve’s decision to launch a faster payments system. NAFCU also supports private sector solutions and hopes that interoperability between the Federal Reserve and private operators can be achieved.”

Despite their public approval of the Fed's decision to build a RTP system, community banks and credit unions must know, deep down, that this doesn't address three big challenges:

  1. Consumer fees;
  2. Competing payment alternatives; and
  3. The battle for the consumer relationship.

Will Real-Time Payments Really Put a Dent in Overdraft Fees?

Moebs Services estimated that in 2018, despite an overall decline in transaction volume, overdraft revenue hit $34.5 billion, up $100 million from 2017. According to the firm, the revenue uptick was the result of overdraft price increases--from an average of $30 to $32 for banks, and from $29 to $30 for credit unions.

If financial institutions raised prices in order to offset declining transaction volume, why won't they do so again if and when faster payments further cuts into overdraft volume?

In addition, according to a 2017 survey from Dave.com, 30% of respondents who had overdrawn on their accounts did so because they forgot to pay a bill, while nearly a quarter said it was because they came up short before payday.

Faster payments isn't going to help those consumers.

The purported benefits of faster payments on overdraft fees--and other fees like payday loans and check cashing services--are overstated.

If banks and credit unions are serious about helping consumers reduce the amount paid out in overdraft fees, they can have immediate impact by changing prices and policies--and not waiting for the Fed to implement a new system.

The Evolving Payment Landscape

Fortunately for banks there's little going on in the way of innovation and change in the payments space.

That was sarcasm, folks.

As the Fed takes it sweet time over the next four to five years to build a faster payments system, there's a payments party going on, with guests like:

  • Facebook. The social network's announcement of Libra and corresponding mobile wallet Calibra could significantly change consumers' payment behavior.
  • Walmart. The retailer's application for a patent on its own cryptocurrency could likewise change consumer behavior, but also impact cross-border remittances and B2B payments within Walmart's supplier ecosystem.
  • Apple. The growth of Apple Pay and the launch of Apple Card are moves by the technology firm to capture a larger percentage of the payment activity among consumers and its ecosystem.
  • Amazon. I don't even know what the platform has up its sleeve but it's certainly positioned to wreak havoc on the payments landscape.
  • PayPal. In March, PayPal announced the launch of Instant Transfer, which lets consumers receiving money via PayPal to instantly move it into their bank accounts to access as cash or however else they want to use it.
  • Other fintech startups. Other emerging services--for example, early wage access providers--are gaining traction, as well, to address the shortcomings of the existing not-so-fast payment system.

Amazon and Google allegedly favor a Fed-backed RTP system, but that "support" is just opposition to the big banks' offering. The Big Tech firms know it will take years for the Fed to come up with something and will use that window to come up with alternative systems.

The Battle for the Customer Relationship

Karen Webster of pymnts.com writes:

The focus on instant payments today and using new rails to move money faster seems to be a battle for control of the bank account, and who gets to make money by moving funds into and out of it. Banks think the current efforts around faster payments put them in control of how that all goes down. Instead, it could put them at great risk."

Spot on. It's already happening in the form of deposit displacement: the displacement, or diversion, of funds from traditional accounts (i.e., checking) to alternative accounts.

The proliferation of tools and accounts like health savings accounts, P2P services, robo-advisors, merchant mobile wallets, and AI-driven savings tools have diminished the importance of the checking account in consumers' financial lives.

Will faster payments reverse that trend or accelerate it? My money is on the latter.

The Fed is a Rock

Community-based financial institutions are between a rock and a hard place. They can choose to wait for the Fed to develop a system, or participate in The Clearing House.

We're heading down a path where either: 1) FedNow is deployed in five years and consumers realize few of the promised benefits, calling into question the wisdom of spending all that time and money to develop the system, or 2) the benefits are realized through other means, which will also call into question the wisdom of building the system.

Here's hoping for a speedy deployment of FedNow. I can't help but think it should be called FedTooLate.

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