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Faster payments would be a policy win. It's up to the Fed to seal the deal.

Nov 03, 2023

My kids — and this is true of all other little kids I know — can be selectively lazy. When it's time to go to the pool or a birthday party, their shoes are on, bags are packed and they're ready to go. When it's time to go to the dentist, they turn into the people on TV commercials who can't make an egg or carry a box of spaghetti. This phenomenon can be explained as a matter of insufficient motivation — going to the pool is fun, going to the dentist is not. But like it or not, kids have to go to the dentist sooner or later, and stalling does nothing but delay the inevitable.

The same phenomenon is true of government agencies when Congress mandates that they issue some or other regulation to solve a problem. Agencies can take a long time to develop regulations even when sufficiently motivated, but they can also get into trouble if they drag their feet when they're not. They can also get away with not doing stuff they're supposed to do for a long time — even indefinitely.

One thing that the Federal Reserve has gotten away with for quite some time is mandating that payments clear within one business day. The Expedited Funds Availability Act requires precisely that, and has done so since the law was passed in 1987. But Regulation CC — the implementing regulation of that law — applies that standard to certain deposits, checks and wire transfers and requires banks to disclose the terms of their payment processing schedules so that customers can plan accordingly and be considered fairly warned if and when they receive overdraft and/or non-sufficient funds fees.

I was a child and unfamiliar with the world of payments in 1987, but if the technology to settle payments in one business day either didn't exist or was prohibitively expensive for all banks to implement back then, I would believe it. And if the Fed was concerned that updating that rule within the last five years would have amounted to a mandate for all banks to use the big-bank-owned Real Time Payments network, I would likewise deem that a plausible explanation.

But after much hemming and hawing, the Fed has finally debuted its own faster payments network, FedNow, which boasts some 35 banks and credit unions and 16 core service providers on its rolls. Clearly there is room to grow, but that's not a bad start — especially when some of the members are the biggest banks in the country.

The work of bringing faster payments to the United States, however, is not yet done. The last remaining step to making FedNow a success is revising Regulation CC to require banks to execute transactions using the fastest means available to them.

For many banks, that method may very well be the old tried-and-true ACH batch clearing networks — it is the fastest available, after all, if you have not joined RTP or FedNow and have no intention of doing so. But making banks use faster payments for everyday transactions would change customers' expectations about what is possible in the payment settlement world.

By contrast, not issuing such a mandate would relegate faster payments — this shiny new service that the Fed has either been deliberating about whether to build or building for a decade or more — to being a premium service reserved for special occasions or emergencies. That is because bank customers are used to payments taking several days to clear and accustomed to paying extra money when charges come in when they have insufficient funds.

There is a legitimate question of costs associated with joining RTP or FedNow, and the separate but related question of transaction costs, which almost no matter what are greater than what banks have been used to with the horse-and-buggy ACH networks. But costs associated with joining RTP or FedNow are at the very least negotiable, and the transaction costs will similarly benefit from the greater volume that would follow from expanded membership.

It's worth noting that the Fed does not think it has the authority to tell banks what networks they have to use. Speaking in Kansas City in 2019, former Fed vice chair Lael Brainard said the central bank does "not have regulatory authority over the pricing set by a private-sector system or to require a private-sector system to extend the service to banks of all sizes, particularly the last mile." Acknowledging that some other countries have given their central banks that authority, Brainard said "this is not the approach that Congress has taken," instead leaving the Fed with a "role as an operator."

And it is true that EFTA doesn't mention pricing or faster payments — the terminology in the statute primarily deals with checks and wire transfers. But it does say that "wire transfers … shall be available for withdrawal not later than the business day after the business day on which such cash is deposited or such funds are received for deposit." And who decides what counts as a wire transfer? "The term 'wire transfer' has such meaning as the Board shall prescribe by regulations," the statute says.

Let's set all of that aside and assume for a moment that the Fed does not actually have the power to do what I'm suggesting they do. If that's the case, the Fed should be telling Congress that it's up to them to help make faster payments a reality, because so long as all of this is optional, banks will slow-walk embracing faster payments because it is more profitable to do so.

In other words, it's a matter of insufficient motivation. If the Fed wants banks to embrace a faster-payments future — and realize the tangible, life-changing benefits that such a future would be for consumers — it's going to have to make them do it.