November marks a year since The Clearing House (TCH) processed the country’s first payment to clear and settle in real time, a step that represents a major leap forward for the country’s payments system. Completed on TCH’s RTP network – the first new payments infrastructure to be introduced in more than 40 years – this transaction stands as the first of the billions of real-time payments that will follow. Likewise, this first payment also signaled the start of a new wave of innovation that will be driven by financial institutions on top of this important new payments rail.
Built for the digital age, RTP has been built to meet the demands of the modern economy by delivering 24/7/365 clearing and real-time settlement, along with extensive messaging and data-handling features. With these capabilities, financial institutions are already starting to use RTP to deliver innovative products and services to add speed, safety, and efficiencies to the financial transactions conducted by all Americans while also improving efficiency for U.S. commerce.
That first payment transmitted a year ago and the ongoing expansion of the RTP network since are the result of a multiyear effort to develop and launch a modern payments rail that meets the demands of the modern digital economy. This process has involved not just the technical build-out of what is likely the most advanced payments network in the world but – importantly and as part of this process – industrywide engagement to ensure that the RTP network meets the needs of all financial institutions and their customers. Not only have TCH member banks provided input and direction on the development of RTP, but during every stage of the development process TCH sought out and received essential input from regional banks, community banks, credit unions, and technology providers to ensure that RTP has been designed and built to serve all institutions, regardless of size.
In addition to providing various means for financial institutions to connect to RTP, this universal approach is evident in the pricing – the RTP network’s low, flat-pricing schedule is the same for all participants, regardless of institution size, with no discounts, volume commitments, or monthly minimums for participating institutions. Further, throughout the process of developing the RTP network, corporate financial professionals and consumer interest representatives have provided guidance on end-user needs.
The arrival of real-time payments in the U.S. through the RTP network has benefited immensely from the strategic vision of the Federal Reserve’s U.S. payment system improvement initiative and the broad-based collaboration of the Federal Reserve-sponsored Faster Payments Task Force (FPTF). The Federal Reserve’s work in this area has helped drive a national understanding of how real-time payments will benefit consumers, businesses, and the nation’s economy.
TCH’s effort to deliver a real-time system to the U.S. through RTP began in 2014 before the FPTF was formed. Following the formation of the FPTF, TCH served as an active participant in this effort in order to ensure that RTP was fully synchronized with the FPTF’s goals and recommendations to bring real-time payments to the U.S. Along these lines, TCH developed RTP to incorporate the 36 criteria identified as necessary for a successful U.S. real-time payment system. Likewise – and, consistent with FPTF’s challenge to implement a fast, efficient, safe, and secure new payment system by 2020 – TCH is working toward this important goal by increasing awareness with corporate customers and all financial institutions on our collective real-time future. Likewise, RTP provides for multiple avenues through which financial institutions of all sizes can connect to the system.
ASSESSING OUR PROGRESS
There is a great deal to be optimistic about when looking at the current environment for real-time payments in terms of the progress made since this initiative was launched several years ago, and even since the first real-time payment was made over the RTP network a year ago. Over the past year, much has been accomplished:
BY THE END OF 2018, HALF OF U.S. ACCOUNT HOLDERS WILL BE READY FOR RTP PAYMENTS, AND SYSTEMWIDE UBIQUITY IS WITHIN REACH. Just one year after launch, the RTP network is on a path to reach nearly 50% of U.S. accounts, and it’s expected to have near-universal reach by the FPTF’s 2020 goal. TCH is working to assist institutions of all sizes to connect to the RTP network – whether directly, or through a service provider such as a core processor, a banker’s bank, a corporate credit union, or other electronic channel providers.
COMMERCIAL CUSTOMERS ARE USING THE SYSTEM FOR EVERYDAY PAYMENTS. The first users of the RTP network are companies using the system to pay suppliers, employees, contractors, agents, and partners. With RTP, both payers and payees benefit from the speed of payment, immediate confirmation, and the transparency provided by the system. More parties are seeing these benefits accrue as adoption of real-time payments expands.
LEADING-EDGE COMPANIES ARE EXPERIMENTING WITH INNOVATIVE NEW PAYMENT APPLICATIONS. As one corporate user has noted, “Solving a pain point is interesting and valuable, but disrupting a business by revolutionizing the payment experience will create a network effect for RTP.” This innovation is underway, leading the way for a potential wave of new business models and payments that will take place on top of the RTP rail.
FINANCIAL INSTITUTIONS AND THEIR TECHNOLOGY PARTNERS ARE LAYING THE FOUNDATION FOR CONSUMER PAYMENTS INNOVATION. When designing and building the RTP network, TCH brought together commercial and retail digital payment experts to develop a new model for consumer bill payments that leverages RTP’s capabilities, such as requests for payment and immediate payment confirmation. These applications will soon be coming into use, while others in the industry are developing ways to reduce the friction of account-to-account transfers and online account opening. In the not-too-distant future, RTP transactions will become the foundation for more-efficient P2P payments, and other uses are limited only by the creativity of the network’s financial service providers.
OUR COMMITMENT TO DELIVERING UBIQUITOUS REAL-TIME PAYMENTS IN THE UNITED STATES
On the first anniversary of the RTP network going live, TCH is pleased with the progress achieved in bringing real-time payments to the U.S. and excited about the wave of real-time payments innovation that is unfolding. With this in mind, it’s important to revisit our strong commitment to the goals that inspired the launch of this system, including:
DELIVERING A PAYMENTS SYSTEM FOR THE DIGITAL AGE
As the first payments rail built for the digital age, RTP’s purpose is to provide an essential real-time payments infrastructure that delivers key new levels of speed, safety, and rich messaging in the U.S. while also serving as the core infrastructure on top of which payments innovation will take place. With RTP, financial institutions can develop new, innovative customer-centric products on top of the system’s modern infrastructure.
ACHIEVING UNIVERSAL REACH FOR THE SYSTEM
The RTP network is designed with all financial institutions in mind. Since TCH began working toward bringing real-time payments to the U.S., we have worked diligently to ensure that financial institutions of all sizes have had a voice in RTP’s development. Systemwide ubiquity remains an essential priority for RTP, and TCH remains fully committed to achieving the FPTF’s goal of system ubiquity 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 FED-RUN REAL-TIME SYSTEM?
Finally, as we use the one-year anniversary of RTP’s launch to take stock of the system’s progress to date, we also take note of the Federal Reserve’s recently issued request for comment on 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, operators of real-time systems in other parts of the world have not yet figured out how to be truly interoperable. For example, when the ECB’s TIPS network launches, participants will not be able to send payments to recipients through EBA Clearings’ RT1 network, as acknowledged by both operators. 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.