House Financial Services Committee Hearing on the Future of Real-Time Payments

House Financial Services Committee Task Force on Financial Technology

“The Future of Real-Time Payments”

Thursday, September 26, 2019

 Key Topics & Takeaways

• FedNow: Chairman Stephen Lynch (D-Mass.) noted that the Fed expects to launch FedNow in 2023 or 2024 and questioned whether the U.S. could afford to wait that long given the velocity of change in technology. George replied that the Fed is just beginning the process of collecting input for the design and features of the system, and that while proposed dates help to set expectations, the Fed is very interested in moving as quickly as possible.
• The Payments Modernization Act: Ayanna Pressley (D-Mass.), who authored the legislation under consideration, said her bill would hold the Fed accountable for developing a system that prioritizes consumer protection and fraud prevention, saying the pressing need for a faster payments system cannot be met by the private sector alone.

Witnesses

• Esther George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City
• Harsh Sinha, Chief Technology Officer, TransferWise
• Bob Steen, Chairman and Chief Executive Officer, Bridge Community Bank, on behalf of the Independent Community Bankers of America (ICBA)
• Rodney Williams, Cofounder and Chief Commercial Officer, LISNR
• Carol Benson, Founding Partner, Glenbrook

Legislation

• Discussion Draft: the Payments Modernization Act of 2019

 Opening Statements

Chairman Stephen Lynch (D-Mass.)

In his opening statement, Lynch said faster payments provide benefits to consumers and businesses, as well as security challenges. Commenting on what he called a “revolution” in consumer payments, he said innovation is a meeting of two cultures – the rules-based culture of banking and the “move fast and break things” culture of technology startups. He noted that the Federal Reserve (Fed) announced in August its intent to launch a 24-7-365 real-time payments system called FedNow.

Ranking Member French Hill (R-Ark.)

In his opening statement, Hill stated that the U.S. must continue to be a leader in innovation, and that the payments arena is completely evolving with new technologies and greater investment. He noted   that new payment applications are working around the existing system, but the U.S. needs a system that is broader, more innovative and with bigger reach.

Rep. Patrick McHenry (R-N.C.)

McHenry noted that there have been many payment innovations in China and warned that if the U.S. does not build real-time payment systems on its own, then China will.

 Testimony

Esther George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City

In her testimony, George discussed the Fed’s plan to launch FedNow, a new system to support faster payments. She said the decision to build the system was made after considering three criteria: 1) that other providers alone could not be expected to provide a service with reasonable scope, effectiveness or equity; 2) that there is a clear public benefit to the Fed creating its own system, particular to the integrity of the U.S. payments space; and 3) that the Fed must be able to fully recover its cost over the long run. She said the Fed’s role as an operator of payments systems has long been judged as effective in promoting efficiency and resiliency.

Harsh Sinha, Chief Technology Officer, TransferWise

In his testimony, Sinha said it is currently difficult to move payments across borders and currencies, and so his firm has created its own network that serves 71 countries. He said their technology relies on technical and regulatory understanding of payments systems around the world, and that they strongly agree the Fed should build a real-time payments system that would be based on the ISO 20022 standard, and that the Fed should also extend FedWire hours to allow 24-7-365 settlement.

Bob Steen, Chairman and Chief Executive Officer, Bridge Community Bank, on behalf of the Independent Community Bankers of America (ICBA)

In his testimony, Steen said it is imperative that the U.S. develop a robust real-time payments system to stay competitive with the rest of the world, and that this is important to financial institutions of all sizes. He argued that the U.S. payments system should not be entrusted to a monopoly operated by the largest banks, referring to The Clearing House, and spoke in strong support of a Fed-built system.

Rodney Williams, Cofounder and Chief Commercial Officer, LISNR

In his testimony, Williams described his company as an ultrasonic proximity company that enables a universal and secure proximity mobile payment method using mobile phones’ speakers and microphones. He said the company’s technology relies on financial regulatory infrastructure that is due for innovation, and stressed how faster payments would benefit the underbanked and low-income communities by helping them avoid delays in the availability of their funds that drive them to predatory lenders. He argued that the Fed should lead in building a real-time payments system infrastructure.

Carol Benson, Founding Partner, Glenbrook

In her testimony, Benson said faster payment systems improve efficiency and user experiences, as well as to promote financial inclusion. She argued that any system should aim to be ubiquitous and noted that most countries are meeting this goal with a single national platform that all banks access. However, she continued, the U.S. is clearly choosing a different model with multiple providers now that the Fed has announced the development of FedNow. She stated that to achieve ubiquity in a multiple-network model, the systems must be interoperable, and opined that there is “no real technical challenge” to interoperability, but rather a governance issue.

Question and Answer

FedNow

Lynch noted that the Fed expects to launch FedNow in 2023 or 2024 and questioned whether the U.S. could afford to wait that long given the velocity of change in technology. George replied that the Fed is just beginning the process of collecting input for the design and features of the system, and that while proposed dates help to set expectations, the Fed is very interested in moving as quickly as possible.

Hill commented that the Fed is required to earn a return on all investments in infrastructure under the Monetary Control Act and asked whether the Fed currently offers volume discounts and differential pricing in payments systems. George answered that pricing is aligned to market practices and is transparent.

Rep. Warren Davidson (R-Ohio) argued that the Fed had previously signaled to industry that it would not involve itself in a real-time payments system, which led to the industry investing significant money in the private system, but now the Fed will “take it over” by launching FedNow. He said he is skeptical of the Fed’s system and that it would crowd out private investment and would be “killing the market.”

Davidson asked whether FedNow would include volume pricing, to which George answered that pricing has not been set because the system is still being designed.

Rep. Bryan Steil (R-Wis.) asked what the impact on pricing would be for community banks if FedNow deviates from a flat fee structure. Steen stated that his bank currently does not use flat fees, and that he is satisfied with the current pricing structure that has brought down costs significantly.

Interoperability

Hill noted that definitions and rules are challenges to interoperability, in addition to technical concerns. Benson agreed that these are separate issues and that rules are more challenging to put in place.

Rep. Cindy Axne (D-Iowa) commented that given the Fed’s system has not been built yet, claims that it would not be interoperable with The Clearing House’s RTP Network “seem very premature.”

The Payments Modernization Act

Axne said the benefits of real-time payments systems are why she chose to co-sponsor the Payments Modernization Act, which would require the Fed to launch its own system within three years.

Rep. Ayanna Pressley (D-Mass.), who authored the Payments Modernization Act, said her bill would hold the Fed accountable for developing a system that prioritizes consumer protection and fraud prevention, saying the pressing need for a faster payments system cannot be met by the private sector alone.

Rep. Denver Riggleman (R-Va.) noted that FedNow would not be launched until 2023 according to the Fed’s plan and commented that the Payments Modernization Act with its three-year deadline “could be a complete disaster.” He then spoke in support of his own bill, H.R. 3928, the Federal Reserve Accountability and Justification Act, which he said would codify the Fed’s own policy statement into a formal rulemaking and provide clarity on the pricing for its real-time payments system.

Consumer Protection

Lynch noted that when the United Kingdom adopted its own faster payments system, there was an initial spike in fraud, and asked how this could be avoided. Sinha answered that we can learn from the U.K.’s implementation of security measures such as authentication measures.

Rep. David Scott (D-Ga.) commented that consumers today should always be on guard against fraud and asked whether FedNow would have any advantages to consumers’ ability to recoup funds from payments initiated without proper authorization. George said this is an area that would need work, and that the Fed will work with the industry on fraud mitigation standards.

For more information on this meeting, please click here.