Banks Confront Fed on Faster Financial Payments

Big banks are fighting a likely U.S. government effort to speed up how money moves through its payments system, arguing this could derail a private network they have developed.

The battle is dividing financial firms and policy makers at a time when payments are becoming a potential flashpoint between banking and big tech.


has announced plans to launch a cryptocurrency-based payments system on the back of its social network, while Chinese giants

Alibaba Group Holding


Tencent Holdings

have developed digital payments systems that dominate in that country.

The latest skirmish revolves around plans by the Federal Reserve, announced last year, to look at ways to update its payments system to process transactions almost instantly. The Fed is expected to announce whether it will build a new network as early as this week. Currently, the government’s system doesn’t operate on weekends and can take days to process certain transactions such as bill payments and direct deposits.

“The United States is far behind other countries in terms of having real-time payments,” Fed Chairman Jerome Powell said at a Wednesday press conference.” He added that while the Fed hasn’t made a decision on whether to move forward, the central bank has a long history of providing payments services to banks.

“In many places, the Fed operates alongside private-sector operators,” he said. “So it wouldn’t be unusual or out of keeping with how we’ve done things in the past.”

The Fed’s network operates alongside private alternatives such as credit- and debit-card networks and the bank-operated instant-payments system, which together process trillions of dollars in transactions each year.

Fed chief Jerome Powell on Wednesday said the U.S. is ‘far behind other countries in terms of having real-time payments.’


Andrew Harrer/Bloomberg News

Big banks, including


U.S. Bancorp


JPMorgan Chase

& Co., have collectively invested about $1 billion into their own instant-payments system, launched in 2017 and operated by Clearing House Payments Co.

Lawmakers are divided over the potential for competing systems.

“On the one hand, we could call this competition. On the other hand, this could be a takeover.” said Sen. Thom Tillis (R., N.C.), who signed a July 22 letter from a bipartisan group of lawmakers asking the Fed to explain the rationale behind its plans.

‘It’s a mistake to entrust this system to the biggest banks.’

—Sen. Chris Van Hollen (D., Md.)

Others want the Fed to move quickly. Sens. Elizabeth Warren (D., Mass.) and Chris Van Hollen (D., Md.) in late July proposed legislation that would require the Fed to develop the new system and require banks to make funds immediately available to depositors.

“The costs of the slow payments system are borne by American consumers, especially those who have to live paycheck-to-paycheck,” Sen. Van Hollen said. “It’s a mistake to entrust this system to the biggest banks.”

The banks say an updated Fed system could delay widespread adoption of instant payments because thousands of financial institutions might wait for the central bank to roll out its new technology instead of connecting to the existing private option now. The Fed has been exploring the question of speeding up the payments system since at least 2013.

“We have a real-time payments network. It’s operating,” said Steve Ledford, senior vice president for product and strategy at the company that operates the bank’s network. “If the Federal Reserve decides to launch its own network, it’s just delaying the access to faster payments to everybody.”

‘If the Federal Reserve decides to launch its own network, it’s just delaying the access to faster payments to everybody.’

—Steve Ledford of Clearing House Payments Co.

Several former Fed officials have said the U.S. should have a modern and publicly owned payments infrastructure.

The Federal Reserve “is best able among operators to step forward and conduct payments activities during extreme economic and political stress,” Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, said in a December 2018 letter to the Fed.

Banks behind the private payments system are worried about a big, public-sector rival. The Fed, by law, doesn’t seek to make a profit but has to cover its costs by charging banks for the services it provides. In this case, it would have to show it can break even on creating and running the updated system. The big banks fear this would cause the Fed to compete for customers by offering volume discounts to users, which would force them to follow suit.

The banks also say they were blindsided, arguing they developed their instant-payments system under the assumption the Fed wouldn’t compete with it. While the Fed hasn’t taken a public position about who should be involved in modernizing the payments system, it launched a task force in 2015 that rounded up competing technical proposals from the private sector.

‘There’s just a fear that the big banks really don’t have a need for the smaller banks and would rather just control all components of banking in the country.’

—Kathy Strasser, COO of River Valley Bank

Small- and medium-size banks—along with technology companies such as


’s Google and retailers such as




—have encouraged the Fed to move ahead. Otherwise, they worry, they may end up at the financial mercy of their competitors.

Clearing House has sought to bring smaller banks on board by promising to not disadvantage them by discounting prices by volume. But it also suggested it could modify pricing if it stopped being the sole player in the instant-payments market.

“There’s just a fear that the big banks really don’t have a need for the smaller banks and would rather just control all components of banking in the country,” said Kathy Strasser, chief operating officer at River Valley Bank, a $1.4 billion institution in Wisconsin. Ms. Strasser said her institution isn’t ready to join a real-time network yet but would ultimately favor a Fed-run option.

Clearing House also said it would be harder to make two payment systems compatible if both are operating instantaneously. The networks currently communicate with each other, allowing funds to settle between any bank.

Asked about the compatibility issue at a July congressional hearing, the Fed’s Mr. Powell said the central bank “will need to work to make that happen at least to the level that it’s functional.”

“It may not be perfect,” he added.

Share Your Thoughts

What benefits or drawbacks do you see to the Fed offering a faster-payments system competing with the private sector? Join the conversation below.

Write to Lalita Clozel at

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