[Senate Hearing 116-93]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 116-93

 
           FACILITATING FASTER PAYMENTS IN THE UNITED STATES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

    EXAMINING THE CURRENT STATE AND EVOLUTION OF THE U.S. PAYMENTS 
    ECOSYSTEM AND HOW THE CURRENT PAYMENTS SYSTEM WORKS OR COULD BE 
                                IMPROVED

                               __________

                           SEPTEMBER 25, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
                                
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                Available at: https: //www.govinfo.gov /               
                
                
                           ______

              U.S. GOVERNMENT PUBLISHING OFFICE 
 38-550 PDF            WASHINGTON : 2020                
                
                
                


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                Laura Swanson, Democratic Staff Director

                        Catherine Fuchs, Counsel

           Corey Frayer, Democratic Professional Staff Member

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                     WEDNESDAY, SEPTEMBER 25, 2019

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    36

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     3
        Prepared statement.......................................    37

                               WITNESSES

Esther George, President, Federal Reserve Bank of Kansas City, on 
  behalf of the Federal Reserve System...........................     5
    Prepared statement...........................................    38
    Responses to written questions of:
        Senator Brown............................................    71
        Senator Toomey...........................................    75
        Senator Warren...........................................    77
        Senator Sinema...........................................    80
Robert Hunter, Executive Managing Director and Deputy General 
  Counsel, The Clearing House Payments Company...................     6
    Prepared statement...........................................    44
    Responses to written questions of:
        Senator Brown............................................    81
        Senator Warren...........................................    82
Robert A. Steen, Chairman and CEO, Bridge Community Bank, on 
  behalf of the Independent Community Bankers of America.........     8
    Prepared statement...........................................    53
    Responses to written questions of:
        Chairman Crapo...........................................    84
        Senator Brown............................................    85
        Senator Warren...........................................    85
George Selgin, Senior Fellow and Director, Center for Monetary 
  and Financial Alternatives, Cato Institute.....................     9
    Prepared statement...........................................    56
Sheila C. Bair, Former Chair, Federal Deposit Insurance 
  Corporation....................................................    11
    Prepared statement...........................................    62
    Responses to written questions of:
        Senator Brown............................................    87
        Senator Warren...........................................    90

              Additional Material Supplied for the Record

Revised Statement of George Selgin...............................    92
Statement of The American Bankers Association....................    98
Statement of The Credit Union National Association...............   103
Statement of Financial Innovation Now............................   106
Statement of Food Marketing Institute............................   107
Statement of Nacha...............................................   110
Statement of The National Association of Federally-Insured Credit 
  Unions.........................................................   114
Statement of The Retail Industry Leaders Association.............   116

                                 (iii)


           FACILITATING FASTER PAYMENTS IN THE UNITED STATES

                              ----------                              


                     WEDNESDAY, SEPTEMBER 25, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today the Committee will turn its focus to facilitating 
faster payments in the United States. Faster payments are 
important and yield economic benefits for both consumers and 
businesses by providing them with greater flexibility when 
managing money and making time-sensitive payments on demand.
    Real-time payments offer efficiency and convenience, 
helping consumers to better manage their spending and avoid 
unnecessary fees and penalties, and helping businesses pay for 
goods and avoid other costly sources of funding.
    Unfortunately, the U.S. has lagged behind other countries 
in the development of real-time faster payments for retail.
    Recognizing this shortcoming, in 2015, the Federal Reserve 
organized a Faster Payments Task Force, made up of a diverse 
group of stakeholders, to encourage the development of a real-
time payment system in the United States.
    The Fed stated in its report on strategies for improving 
the U.S. payment system that it ``would not consider expanding 
its service provider role unless it determines that doing so is 
necessary to bring about significant improvements to the 
payment system and that actions of the private sector alone 
will likely not achieve the desired outcomes for speed, 
efficiency, and safety in a timely manner.''
    Responding to the mission of the Faster Payments Task 
Force, The Clearing House announced in 2016 its intent to 
launch a real-time payments system, which it officially 
launched in November 2017.
    Just prior to The Clearing House launching that system, the 
Faster Payments Task Force in July of 2017 issued a final 
report, which offered several recommendations for achieving a 
safe, ubiquitous, and efficient faster payments system in the 
United States.
    One of those recommendations was for the Federal Reserve to 
develop its own 24x7x365 real-time gross settlement system for 
retail payments and to assess whether there were other 
operational roles the Fed should play in faster payments.
    After determining the Federal Reserve Banks should develop 
a new real-time gross settlement service, on August 2, 2019, 
the Federal Reserve Board voted on the Fed's proposal. The lone 
dissenter was Vice Chairman for Supervision Randy Quarles.
    The Federal Reserve then issued a notice and request for 
comment on Federal Reserve Actions to Support Interbank 
Settlement of Faster Payments--a system referred to as FedNow.
    In Vice Chairman Quarles' dissent, he noted that, ``The 
U.S. private sector has a long history of providing efficient 
payment solutions to consumers and businesses.'' He added that, 
``The public sector should provide its own capacity only when 
the evidence of market failure is clear and alternative means 
to achieve public goals are not feasible. He added that he 
``does not see a strong justification for the Federal Reserve 
to move into this area and crowd out innovation when viable 
private sector alternatives are available.''
    Additionally, when providing a new payment service, the 
Federal Reserve is required to meet certain obligations and 
criteria before moving forward. Those criteria are: the Federal 
Reserve must expect that its providing the service will yield a 
clear public benefit; the service should be one that other 
providers alone cannot be expected to provide with reasonable 
effectiveness, scope, and equity; and the Federal Reserve must 
expect to achieve full recovery of costs over the long run.
    Throughout the Fed's process, some financial institutions 
have raised concerns about the Fed's analysis and its process, 
the cost and amount of time it would take to develop its own 
real-time payment system, its prospects for achieving 
interoperability, inherent conflicts of the Fed operating its 
own system, and prospects for negatively affecting existing 
real-time payment systems.
    Still, other financial institutions urged the Fed to move 
forward due to their concerns surrounding pricing, power, and 
competition in the marketplace.
    I strongly support better, safer, and faster payments in 
the U.S., including the work already done on existing solutions 
in the private market.
    I look forward to learning more about numerous issues 
during this hearing, including: clear demonstration of the 
market failure or problem that the Fed believes it must solve 
through the development of its own real-time payments system; 
how the existing real-time payments platform works, how it has 
been impacted by the Fed so far, and the consequences of the 
Fed developing a competing system; and how the Fed believes its 
proposed system could achieve interoperability, minimize 
negative effects to existing private sector participants, and 
fully recover its costs quickly.
    I look forward to hearing from each of you on your views on 
these payments in the U.S. and more about the existing and 
proposed platforms.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thanks, Mr. Chairman. Thank you to the very 
distinguished panel with us today.
    Whether it is Facebook thinking it can run its own currency 
or big banks wanting a monopoly over our payment system, we 
cannot allow corporations to take over critical public 
infrastructure so they can squeeze more profits out of working 
families.
    Whether you punch a clock or swipe a badge, every working 
American knows how important payday is. It is often the day you 
know you can pay your bills and make rent. But sometimes payday 
does not line up with the day your bills are due. If that means 
a delay in paying the bills, banks will pile on late fees and 
overdraft charges, so it is even harder for people to make ends 
meet.
    Recently, the Federal Reserve Board announced that it will 
develop a system to provide payments in real time. This is 
great news for millions of Americans who live paycheck to 
paycheck--for anyone who has waited for a check to clear or had 
to resort to a payday lender on Friday to tide them over until 
Monday. Faster payments will allow Americans to actually use 
more of the money they have already earned.
    But while some of us see a problem to solve for working 
families, the biggest Wall Street and foreign banks see 
opportunity. They see what they always do, and that is dollar 
signs. They see another way to squeeze more profits out of the 
rest of us.
    That is why they do not want the Fed to be involved. They 
built their own real-time payment system on top of existing 
Federal Reserve infrastructure, but we really do not know how 
it is governed, how much it will cost, or how they plan to skim 
more profits off the top.
    We cannot trust that the big banks will not charge more to 
community banks and credit unions. They have already changed 
their mind on their prices once, and there is no guarantee they 
will not change their minds again.
    Big banks oppose the Fed's efforts because they want to be 
the only game in town.
    We know what happens when we trust Wall Street.
    Eleven years ago this month, Lehman Brothers failed, 
sparking the worst financial crisis since the Great Depression. 
Many of the big banks now asking for this monopoly over the 
real-time payments system are the same Wall Street banks that 
wrecked our financial system and came begging for billions of 
dollars in taxpayer money to save them.
    They have not exactly cleaned up their act.
    These same banks, like Wells Fargo, Bank of America, and 
the President's favorite, Deutsche Bank, have been involved in 
scandal after scandal, creating fake accounts for customers, 
illegally foreclosing on servicemembers' homes, violating U.S. 
sanctions laws--on and on and on. It seems like there is a new 
scandal every day. Capital One just suffered a huge data 
breach, exposing millions of customers' personal data.
    Remember those overdraft fees and late fees and transfer 
fees that we are trying to protect workers from? It is these 
same big banks that slap on those fees. They created this 
problem; now they want to charge people to solve it.
    To make matters worse, the Administration is rolling back 
the safeguards that we put in place to protect working families 
from the risky Wall Street activities that crashed our economy.
    It was another financial crisis over 100 years ago that led 
us to create the Federal Reserve to clear payments and govern 
our currency. Congress recognized the high fees and abuses 
going on in our payment system and understood that we needed a 
publicly run--a publicly run--central bank to provide financial 
stability and fair access to the payment system. In the words 
of Representative Glass--later to be the Senator Glass of 
Glass-Steagall--they ``sought to tear down these tollgates upon 
the highways of commerce.''
    That is how we should think about the payment system--as 
the highways of commerce that support every dollar that fuels 
our economy. Just like roads and bridges, the payment system is 
critical public infrastructure, something that everyone--
everyone--should be able to use. We cannot let profit-motivated 
big banks--banks whose mission is to serve shareholders, not 
ordinary Americans--we cannot let them have a monopoly over it.
    This Committee has heard a lot this year about big 
corporations taking advantage of us through the smoke screen of 
new technology and innovation.
    In our data privacy hearings, we heard about big tech 
companies and financial firms manipulating us into sharing our 
personal data so they can profit.
    At our hearing, Facebook dodged our questions about its 
plan to run its own digital currency out of a Swiss bank 
account--showing yet again that we cannot trust them.
    We cannot allow big corporations to take over critical 
public infrastructure. You would think we should know that by 
now. The largest banks and tech companies are not acting in the 
interest of working Americans. Their interest is to turn a 
profit for themselves and their investors. I understand that.
    But the Fed's interest is not to make a profit. It is to 
make sure everyone, that all people can pay their bills on time 
and transfer money when they need it, whether they live in 
rural America or in a metro area.
    The Fed's real-time payment system will benefit working 
families, small banks and credit unions, small businesses, and 
the public as a whole. Everyone except Wall Street agrees.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Brown.
    Today's witnesses are: Ms. Esther George, president and 
chief executive officer of the Federal Reserve Bank of Kansas; 
Mr. Robert Hunter, executive managing director and deputy 
general counsel of The Clearing House; Mr. Bob Steen, president 
and chief executive officer of Bridge Community Bank, on behalf 
of the Independent Community Bankers of America; Mr. George 
Selgin, senior fellow and director of the Cato Institute; and 
the Honorable Sheila Bair, former Chair of the Federal Deposit 
Insurance Corporation.
    Again, I want to thank all of our witnesses for being here 
and sharing with us your expertise today. Your written 
testimony has been entered into the record. We will take your 
testimony in the order I introduced you, and you may start, Ms. 
George.

STATEMENT OF ESTHER GEORGE, PRESIDENT, FEDERAL RESERVE BANK OF 
      KANSAS CITY, ON BEHALF OF THE FEDERAL RESERVE SYSTEM

    Ms. George. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, thank you for this opportunity.
    Chair Powell has asked me to speak to you today in my role 
as the Federal Reserve Bank leader responsible for our payments 
improvement initiative since its beginning and as Chair of the 
Financial Services Policy Committee, which oversees the 
provision of payment services to depository institutions and 
the United States Treasury by the 12 Federal Reserve Banks. I 
am pleased to offer my statement for the record as well as an 
in-depth statement on the role of the Federal Reserve in the 
payments system and the recently announced proposal to support 
faster payments through the development of a new service called 
``the FedNow Service.''
    Since the Federal Reserve's founding more than a century 
ago, it has provided payment and settlement services as part of 
its core function of promoting an accessible, safe, and 
efficient payment system. Today the Federal Reserve is 
continuing this important operational role and preparing to 
support the modernization of our Nation's payment system with 
capabilities that allow payments to move quickly through a safe 
and efficient foundation, on top of which innovation and 
competition can flourish.
    This decision was made only after three established 
criteria were met.
    The first of these criteria is that other providers alone 
cannot be expected to provide the service with reasonable 
effectiveness, scope, and equity.
    Of notable importance related to this criterion is the 
Federal Reserve's ability to connect to more than 10,000 
financial institutions. Through these connections, our existing 
payment services allow banks of every size to serve the needs 
of thousands of communities across the United States with 
competitive, fair, and transparent access. Providing 
comprehensive nationwide reach is something that we believe 
will present significant challenges to other providers in the 
current market landscape. Coming from a region of the country 
with a significant number of small community banks serving 
rural areas of the central United States, I can tell you the 
Board's decision to provide this new service has been very well 
received.
    The second criterion is that there will be a clear public 
benefit, including promoting the integrity of the payments 
system and reducing payments system risk.
    The Federal Reserve must continue to play an important role 
in promoting the safety of the U.S. payment system by providing 
liquidity and operational continuity in response to financial 
turmoil, terrorist attacks, natural disasters, and other 
crises. The FedNow Service will allow the Federal Reserve to 
retain its ability to provide stability and support to the 
banking system, as well as promote the development and 
implementation of industrywide fraud mitigation standards. 
Development of the service will also enhance safety of the U.S. 
payment system by promoting resiliency through redundancy.
    The third and final criterion is that the Fed be able to 
fully recover its cost over the long run. The U.S. payments 
infrastructure today includes alternative payment choices and 
providers. The Federal Reserve and The Clearing House currently 
operate competing and interoperable services, which bring 
important benefits for resiliency and competition. In all of 
our services, we have been able to meet the requirements of the 
Monetary Control Act for cost recovery that ensures competitive 
fairness while fulfilling our public policy goals. We fully 
expect this will be the case with the FedNow Service.
    As was explained in a 2016 GAO study, the Federal Reserve's 
role as an operator has long been judged as effective in 
promoting accessibility, safety, and efficiency for the 
Nation's payment system and its customers.
    Last summer, the U.S. Treasury recommended that ``the 
Federal Reserve move quickly to facilitate a faster retail 
payments system.'' We are engaging now with stakeholders for 
their input on features of the FedNow Service through the 
Federal Register notice issued last month, and I am confident 
that together we can achieve our public policy objectives for 
broadly accessible, safe, and efficient faster payments.
    Thank you. I am happy to respond to your questions.
    Chairman Crapo. Thank you.
    Mr. Hunter.

  STATEMENT OF ROBERT HUNTER, EXECUTIVE MANAGING DIRECTOR AND 
  DEPUTY GENERAL COUNSEL, THE CLEARING HOUSE PAYMENTS COMPANY

    Mr. Hunter. Chairman Crapo, Ranking Member Brown, and 
distinguished Members of the Committee, my name is Rob Hunter, 
and I am the deputy general counsel of The Clearing House, 
based in our North Carolina facility. I have worked at The 
Clearing House for more than 10 years providing senior legal 
support to our payments systems, including our focus today, the 
RTP network, which I was privileged to be involved in 
developing. I am also the past Chair of the Subcommittee on 
Electronic Payments of the American Bar Association and have 
been involved in payments throughout my career.
    The RTP network is a new and exciting part of our national 
payment infrastructure. It was launched in 2017 by The Clearing 
House, is fully operational, and today reaches over 50 percent 
of the transaction accounts in the U.S. One of the most 
distinguishing features of the RTP network is that it operates 
in real time and all the time. There are no ``bankers' hours.'' 
It functions 24x7. The RTP network also delivers on the vision 
of faster, more efficient, and more secure payments that will 
benefit every American consumer and business.
    This innovation is consistent with The Clearing House's 
long history of providing core payments infrastructure that is 
efficient, safe, and reliable. Founded in 1853, for over a 
century-and-a-half The Clearing House has served as the leading 
private sector operator of payments infrastructure in the 
United States. On an average business day, The Clearing House 
clears and settles nearly $2 trillion over its wire transfer, 
automated clearing house, and check-clearing networks.
    Created to provide the payment services required by the 
Nation's economy, The Clearing House exists to serve depository 
institutions of all sizes. In fact, more than 80 percent of the 
participants in our ACH and check-clearing services are 
institutions under $10 billion in assets.
    The Clearing House prices its services on a cost recovery 
basis, and there is no special pricing for owner banks. The 
Clearing House also has a remarkable history of operational 
resiliency, clearing and settling payments every day without 
fail, through world wars, financial crises, and natural and 
manmade disasters, including 9/11 and the Great Recession.
    This morning, I would like to briefly focus on the 
Committee's request that I describe the RTP network and in 
doing so will focus on the Fed's Faster Payments Task Force as 
well as touch on FedNow. My written comments expand on these 
topics as well as other questions posed in your invitation 
letter.
    The payments landscape in the United States is highly 
competitive. Although there has been tremendous innovation in 
end-user products during the last decade, what has been lacking 
is modernization of what we often refer to as ``the payments 
rails that undergird the system.'' The Federal Reserve 
recognized the need for faster payments, used its convening 
power to urge the private sector to make real-time payments a 
reality, and established a Faster Payments Task Force. Not only 
did the industry respond by designing, building, and bringing 
to market the RTP network, investing over $1 billion to do so, 
but according to the ratings it received from the task force, 
it did so extremely well.
    Of the 16 different private sector proposals submitted to 
the task force, the RTP network was rated the highest, 
including in such key areas as accessibility and path to 
ubiquity or nationwide reach.
    As I speak to you today, the RTP network is operating, 
delivering the real-time capabilities that Americans want and 
need. Payment recipients receive final good funds immediately, 
and payment senders receive real-time confirmation that the 
funds have been received. The benefits to consumers, small 
businesses, and the Nation's economy are transformational.
    The Committee has requested our views on the Fed's decision 
to enter the real-time payments market. As provided in my 
written testimony, The Clearing House is concerned that the 
Fed's actions may hinder The Clearing House in achieving the 
full potential of the RTP network. When the Fed competes with 
the private sector, it must do so in a manner that minimizes 
the competitive advantages that a Government system would have, 
both inherently and as a direct byproduct of the Fed's role as 
supervisor, the supplier of liquidity to the financial system, 
and the central bank.
    This is not the usual competitive question of impact on 
profitability because The Clearing House does not seek to 
operate at a profit. Rather, it is a question of The Clearing 
House's ability to provide the most effective and efficient 
real-time payment system to consumers and businesses to the 
ultimate benefit of the overall economy.
    To help The Clearing House achieve this objective, we 
believe there are several actions that the Fed could take now 
before launching its FedNow Service that would help to create 
competitive equality between the private sector and the 
Government. These are detailed in my written statement.
    In conclusion, The Clearing House RTP network is the most 
advanced payment system in the world, and we are working hard 
to extend its benefits to banks and credit unions of all sizes 
so consumers and businesses across America can realize the 
benefits of faster, more efficient, and more secure real-time 
payments.
    We appreciate your interest in this topic, and I look 
forward to answering your questions.
    Chairman Crapo. Thank you.
    Mr. Steen.

    STATEMENT OF ROBERT A. STEEN, CHAIRMAN AND CEO, BRIDGE 
COMMUNITY BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS 
                           OF AMERICA

    Mr. Steen. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, I am Bob Steen, chairman and CEO of 
Bridge Community Bank in Mount Vernon, Iowa.
    I testify today on behalf of the Independent Community 
Bankers of America, where I have played an active role over the 
years, including serving on the Payment Committee. Thank you 
for the opportunity to testify today.
    I believe it is imperative that the U.S. develop a robust 
real-time payments system to meet consumer and business demand 
and stay competitive with the rest of the world. This system 
must create access for customers of all financial institutions, 
regardless of size, in every American community.
    How we achieve this goal is critical. A real-time payments 
system is too important to be entrusted to a private monopoly. 
The two dozen largest banks simply cannot own and operate the 
U.S. payments system. ICBA strongly supports the Federal 
Reserve's decision to build FedNow, a real-time payments system 
that will give direct access to all financial institutions and 
their customers.
    Bridge Community Bank is a $96 million community bank 
founded in 1903 and is owned by our 20 employees. We serve 
rural communities in growth markets in and around Cedar Rapids 
and Iowa City with small business, agricultural, and consumer 
banking. Our business model is relationship banking in which we 
serve the totality of a family's business and personal banking 
needs, both deposits and lending. The transaction account is 
the key to the customer relationship, and it is at the heart of 
community banking. We have long recognized that payment 
innovation is critical to the long-term prosperity and 
independence of our bank and community banking. This is why I 
have invested so much of my career in payment innovation and 
developed multiple payment projects in our small bank.
    Only the Fed can guarantee competition and choice. The U.S. 
does not need another closed-loop payment system in which some 
financial institutions participate and others are excluded. All 
financial institutions and all customers must have access to 
real-time payments, even those that live in small and rural 
communities exclusively served by community banks. I firmly 
believe this simply cannot happen without the Fed's role in 
real-time settlement.
    The Fed is uniquely positioned to provide access to all 
11,000 financial institutions because these institutions have 
access to a settlement account and a service connection with 
the Fed. The Fed already operates a universally accessible 
check, ACH, and wire transfer service.
    If history is any guide, the Fed will maintain affordable 
as well as universal access to faster payments. The Fed offers 
a fair and affordable pricing structure today, even to the 
smallest of the small financial institutions like our small 
bank.
    The Fed is trusted among community banks. Each community 
bank has a relationship manager and the opportunity for direct 
access to the payment system. I know our representative's name, 
I know his cell number, and he answers the phone. As a 
community bank, I know that I have direct and easy access to 
Fed support services even after our banking hours, and I place 
a high value on that access.
    As I stated at the outset, payments innovation, offering 
customers what they want when they want it, is critical to the 
prosperity and continued independence of our community banks. 
As a neutral real-time settlement network, FedNow will be 
critical in our ability to continue to innovate. For example, 
my bank, in partnership with another community banks, developed 
a mobile app called ``ExcheQ'' which allows a user to send 
money to anyone in the U.S. that has an account at any other 
financial institution without a payment application on the 
receiver's mobile device. Once FedNow is fully operational, 
ExcheQ will allow real-time transactions without being 
dependent on our core banking. That by itself is 
transformational. Once ubiquity is achieved through FedNow, new 
use cases and opportunities for innovation will emerge.
    The Fed's entry into real-time payments is part of a 
natural evolution from its involvement in check clearing, ACH 
payments, and wire transfers. The Fed has strengthened the 
payment system by providing safety, integrity, choice, and 
equitable access to all financial institutions. I am confident 
the Fed will bring the same critical benefits to real-time 
payments.
    Thank you again for convening the hearing, and I will try 
to answer any questions.
    Chairman Crapo. Thank you.
    Mr. Selgin.

STATEMENT OF GEORGE SELGIN, SENIOR FELLOW AND DIRECTOR, CENTER 
    FOR MONETARY AND FINANCIAL ALTERNATIVES, CATO INSTITUTE

    Mr. Selgin. Thank you, Chairman Crapo, Ranking Member 
Brown, and distinguished Committee Members. I am the director 
of Cato's Center for Monetary and Financial Alternatives, but 
before I came to Cato, I was for 30 years an academic economist 
specializing in monetary and payments theory and history.
    The slow pace of payments in this country is a disgrace 
that is taking a large toll on U.S. citizens and particularly 
on those who live paycheck to paycheck, so I very much 
appreciate this opportunity to address you and offer 
suggestions for helping to speed payments up in this country. I 
particularly want to discuss steps that Congress might take to 
assure that outcome.
    The Fed claims that the best way to solve the problem of 
expediting payments is for it to compete directly with existing 
retail payments networks and RTP, The Clearing House fast 
payments system, by establishing its own fast payments system, 
FedNow. And competition from the Fed certainly could help to 
promote faster payments, but it only will do so if the Fed 
competes on an even or level playing field with existing 
private sector service providers. However, the Fed enjoys many 
very special privileges that can allow it to slant the playing 
field in its favor, and when it does that, the outcome can be 
not to facilitate the achievement of faster payments but to 
hinder its achievement.
    I want to talk about several ways in which the Fed can 
slant the playing field in its favor that can harm progress 
toward faster payments. One of them is by failing to offer 24/
7/365 interbank settlement services. You have heard before and 
you heard from Senator Brown how many persons live paycheck to 
paycheck, and when their checks do not clear quickly or their 
payments do not clear quickly, then they wait days in order for 
funds to be made available to them, and many resort to payday 
lenders for that reason.
    Real-time payments can, of course, help solve that problem, 
but, actually, they are not necessary. Those workers would 
benefit just from having payments available on the same day, 
that is, having funds released on the same day. The problem 
they face is not that their funds are not released instantly. 
It is that they take several days sometimes to be released.
    Now, why is that? It is not because we do not have a real-
time payments system. It is because the Fed's own net 
settlement services, Fedwire and the National Settlement 
Service, do not operate on weekends, and do not operate on 
holidays.
    Now, the Fed has known about this problem and has talked 
about fixing it for years, and NACHA has encouraged it to do 
so, but it has been dragging its feet. And that means that it 
is making it harder for existing payment systems to compete 
effectively with it. I ask Congress to take the crucial step of 
making sure that the Fed fixes this problem.
    By the way, when it decided to launch FedNow, it amazingly 
decided not to proceed with 24/7 settlement services on its 
existing networks, and there is no excuse for that because 
support for that reform is unanimous.
    A second point--in my written testimony, I talk about 
four--concerns the pricing of settlement of faster payment 
services. You have all been told that the Fed needs to compete 
because it is worried that The Clearing House will abuse its 
monopoly, but, in fact, the facts are otherwise. The Clearing 
House, as it said--and I know this from studying its history--
does not charge in order to make profits. It is providing a 
service to its members through the payment facilities it 
administers for them. It does not pay dividends, and this has 
been true throughout its history. It is verifiable.
    The problem is that the Fed can charge volume discounts, 
and the TCH is planning to charge flat fees. Now, why does the 
TCH want to allow itself to go to volume discounts if it needs 
to? It is because in competing with the Fed in ACH services, it 
found the Fed resorted to steep volume fees in the 1990s, and 
it had to follow suit. The only reason it has a loophole in its 
pricing policy is that the Fed might resort to volume payments 
itself. Congress can prevent the Fed from doing that by making 
it make the same commitment to flat fees that are equitable to 
small banks as The Clearing House has made.
    I will stop there. There is more in my testimony along the 
same lines. Thank you.
    Chairman Crapo. Thank you.
    Ms. Bair.

  STATEMENT OF SHEILA C. BAIR, FORMER CHAIR, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Ms. Bair. Mr. Chairman, Members of the Committee, thank you 
so much. It has been a while since I have been before this 
Committee. It is nice to be back.
    I am here in a personal capacity as someone who has spent 
most of my career in financial services, most of that time as a 
regulator, and as you know, who had led the FDIC during the 
financial crisis. And I saw firsthand how concentrations of 
financial power in a handful of so-called too-big-to-fail 
institutions almost ran our economy into a ditch and forced 
trillions of dollars in Government support.
    To be sure, megabanks are safer now, but I do not think 
they are safe enough, and postcrisis reforms have been untested 
so far. We do not know how well they are going to work, and 
even now they are subject to unrelenting challenge by industry 
groups, including, I might add, TCH.
    The sector remains heavily concentrated. Over half of 
deposits are in the largest 15 institutions. Nearly half of all 
assets are concentrated in the top five. Given the continued 
dominance of megabanks in our financial system, do we also 
really want to cede to them control of the infrastructure 
supporting the next generation of payment services?
    You will be hearing competing arguments today about whether 
FedNow will promote or hinder competition, whether it will 
foster or inhibit innovation to meet demand for real-time 
payments, whether it will broaden access and equitable pricing 
or result in additional unnecessary costs. In evaluating these 
arguments, I hope we can all apply some basic common sense. 
Which kind of payment infrastructure is more likely to promote 
competition--a single system controlled by an entity that is 
owned by already dominant for-profit banks, or one that is 
supported by two parallel systems, one of which is operated by 
a Government agency whose mandate is to ensure equity and 
fairness in the provision of payment services?
    Which payments infrastructure will better promote 
innovation--one dominated by a single monopoly or one resting 
on two systems from which financial institutions and their 
FinTech partners can choose in offering their customer-facing 
platforms and services?
    Which payments infrastructure is most likely to promote 
resiliency--one solely built on the stability and operational 
integrity of large banks, behemoths which still operate with 
high levels of leverage and have failed in the past in times of 
stress, or one that can also rely on a system operated by a 
Government entity like the Fed with a proven track record of 
success in managing through the most distressed of economic 
conditions?
    And, finally, which payments infrastructure is most likely 
to achieve ubiquity in reach and access among all depository 
institutions, regardless of size or geographic location--one 
run by an organization whose owners are heavily located in east 
coast urban areas, or one which includes a second system, like 
the Fed, that has preexisting trust relationships with 
virtually every depository institution in the country?
    Some have tried to portray the Fed as a bureaucratic heavy, 
interfering with private sector innovations to provide real-
time payments, motivated not by public interest but self-
interest and preserving their power in the payment system. I 
frankly think that is nonsense. The truth is that the Fed had 
taken a measured, deliberative approach to whether they should 
build their own real-time interbank settlement system. They 
have waited for the private sector. They have let the private 
sector try to innovate to meet market demand for faster 
payments, and indeed, the U.S. has fallen behind.
    So while I congratulate TCH on developing the RTP system, 
the truth is it has not gained significant traction, and the 
overwhelming majority of public commenters who the Fed 
solicited said the Fed should build its own system. The Fed has 
worked hard to support TCH's efforts. It is not that the TCH 
RTP system is going to go away. And they are committed to use a 
process in building FedNow that will incorporate the views of 
TCH and others and hopefully eventually achieve 
interoperability. But, again, the Fed has determined based on a 
consensus that pretty much include everyone other than the big 
banks that their operational participation is required to 
ensure a next-generation payment system that is ubiquitous, 
fair, inclusive, and resilient.
    We saw in 2008 what happens when a handful of very large 
institutions are allowed to dominate basic financial 
infrastructure, and I for one never again want to see a gun 
placed against the head of taxpayers--bail the banks out or 
watch your economy go down. 2008 was bad enough. I shudder to 
think if those same banks had sole control of our payment 
system of the future. When it comes to payments infrastructure, 
two is definitely better than one. I think the Fed is right to 
step in, and I hope that the Congress will support them.
    Thank you.
    Chairman Crapo. Thank you.
    I am going to focus my questions on Ms. George and Mr. 
Hunter and just ask you each to respond to the concerns that 
have been raised by those who are worried about your particular 
approach. For example, Ms. George, first, what do you say to 
those who say that the Fed has an unfair advantage and would 
actually operate from an unbalanced playing field in a way that 
would reduce the effectiveness of both payment systems?
    Ms. George. I would point to the Federal Reserve's history 
in operating payment services across a variety of rails. There 
has been no instance when the Federal Reserve has not operated 
alongside with the private sector and we have been very 
transparent in meeting the requirements that we offer 
competitive and transparent pricing on our transactions.
    That history was confirmed with the GAO report which looked 
at this very issue of what the Fed's role has been, what has 
happened to innovation in the economy and consumer prices 
related to those payment services, and concluded that the Fed's 
role has been beneficial in operating in that space. So the 
history would support our intent, even with this new FedNow 
service, to continue in that tradition.
    Chairman Crapo. All right. Thank you.
    Mr. Hunter, what do you say to those who indicate that they 
do not understand why there would be a concern about having a 
competitive alternative in the payment system?
    Mr. Hunter. Thank you, Mr. Chairman. We are not against 
competition in the payment system, but if there is going to be 
competition in the payment system between us and the Fed, we 
want to make sure that that is a level playing field between 
the private sector and the Government.
    There are two particular issues that the Fed could address 
to ensure that there is a level playing field between the 
private sector and the Government. One was briefly touched upon 
by Mr. Selgin. The Fed has architected FedNow, what little we 
know about it, to effectuate settlement through master accounts 
at the Federal Reserve, which only the Fed can offer. Those 
accounts count toward reserve balances and they bear interest. 
The Fed could accord this same treatment to the RTP account 
that we use for settlement that is sitting at the Federal 
Reserve Bank of New York. So that is one issue.
    The other issue deals with the potential liquidity that is 
needed by the system on nights and weekends. The Federal 
Reserve has indicated that it is architecting its system so 
that the system itself will not enforce net debit caps on 
nights and weekends when the Federal Reserve--Fedwire Service 
is not available and NSS is not available. That can put banks 
in credit positions. It is an architecture that, frankly, the 
Federal Reserve under the requirements that we have for 
establishing the account is not available to us. We wouldn't 
probably do it anyway because we consider it unsafe and unsound 
for banks to get into large credit positions or potentially 
large credit positions during times when Fedwire and NSS are 
not available.
    As Mr. Selgin noted, the one recommendation that came out 
of the Faster Payments Task Force that was unequivocal and upon 
which everyone agreed in the comment letter process was for the 
Fed to extend the operating hours for Fedwire and NSS. It is 
the single most important thing that the Fed can do to 
encourage private sector competition, and we would urge the Fed 
to do that.
    In addition to that, we are committed to level pricing for 
banks of all sizes. We have made that commitment publicly. We 
understand the history of the ACH where we had a level pricing 
structure, but the Fed came in and offered steep volume 
discounts in order to try to lure banks away from The Clearing 
House's ACH service. That is the source of the caveat that we 
have made, and we wanted to be transparent with the market and 
indicate that we are committed to a level pricing structure. 
Whether you are the JPMorgan Chase or you are the little bank 
of Oak Ridge, North Carolina, where I live, you will pay 
exactly the same. But I think we need a commitment from the 
Federal Reserve to engage in that same level pricing structure 
so that community banks and banks of all sizes can pay the same 
amount regardless of the service.
    Chairman Crapo. All right. Thank you.
    Senator Brown.
    Senator Brown. Thanks, Mr. Chairman.
    Mr. Hunter, thank you for those last comments. Your website 
says The Clearing House is owned by 25 of the world's largest 
commercial banks. As we all know, painfully, 10 years ago a lot 
of those banks needed to be rescued by taxpayers. Do you know 
how much taxpayer money your member banks needed to stay 
afloat?
    Mr. Hunter. I do not, Ranking Member Brown, but I will tell 
you one sector of the economy that functioned flawlessly 
throughout the----
    Senator Brown. I know what----
    Mr. Hunter. ----clearing and settlement----
    Senator Brown. The answer to my question is $194 billion, 
and to think that you then want a monopoly on the payment 
system just does not seem wise.
    President George, let me start with you. Thanks for your 
work on this question. Does part of the Fed's proposal 
specifically benefit The Clearing House's real-time payment 
system?
    Ms. George. At the start of our work on looking at faster 
payments, we were very interested in making sure the private 
sector was able to participate in this effort and created a 
special account that would allow for them to operate their 
real-time payment system.
    Senator Brown. So, logically, then it is fair to say The 
Clearing House wants the Fed to support real-time payments but 
only in a way that helps their private payment systems owned by 
the big banks?
    Ms. George. We have worked alongside The Clearing House in 
many payment services, and it would be unusual for us not to 
work alongside them even in this new rail.
    Senator Brown. OK. Ms. Bair, sorry I missed the beginning 
of your statement. I heard people describe it behind me. I am 
in and out of--I apologize. I do not usually do this, but we 
are doing Agent Orange and burn pit, and it is a hearing that I 
asked Chairman Isakson to hold, and so I need to return. I 
apologize.
    As FDIC Chair during the crisis, you saw firsthand the big 
bank failures and the havoc they wreaked on our financial 
system and economy. How does the concentration of critical 
public infrastructure--and that is what this is--in the hands 
of the biggest banks pose a risk to our economy? What would 
happen to small banks, and what would happen to working 
families during a crisis if large banks controlled the payment 
system?
    Ms. Bair. Well, I think, first of all, I would like to say 
that if you count all Government support, including FDIC debt 
guarantees and Fed lending, we are well into the trillions. The 
taxpayer number was what you cited, but it was quite a 
massive----
    Senator Brown. Being conservative.
    Ms. Bair. Yes, you are being very conservative. Look, I 
think you have centralization of risk. You have a single point 
of failure. We have operational risk with just having one 
system. You also have--the system is backed by a joint account 
which is funded by these large banks, so if one or more of the 
large banks could no longer fund into the joint account, we do 
not know what will happen.
    I think eventually if there is a disruption to--if we have 
this monopoly payments provider and there is a disruption, the 
Fed is going to have to come in anyway, and it will probably be 
a lot more difficult and costly and potentially disruptive if 
they have to take two or three steps to come in to support and 
bail out the monopoly system that the large banks are running. 
So we need two systems. Nobody is saying that we should not 
have RTP. That is fine. But we need two systems, and it is much 
more than protecting, the public coffers. There are the equity 
issues in terms of the Fed's willingness to work with all 
parties and be accessible and priced fairly with all parties. 
That is also a significant policy benefit of having two 
systems.
    Senator Brown. Thank you.
    Mr. Steen, thanks for being here. I admire that you run an 
employee-owned bank where workers have a stake in the company. 
Thank you for that.
    With increasing consolidation in the industry and the 
growing number of nonbanks and FinTechs engaged in traditional 
banking, it seems to be harder--getting harder for community 
banks to compete. Why is the Fed's decision to operate a faster 
payment system so critical for community banks like yours, 
employee-owned, but obviously other community banks as part of 
the ICBA?
    Mr. Steen. Well, Senator, thank you. As I indicated in my 
statement, we believe that transaction accounts are the basic 
core relationship with our customers, and we believe we have to 
provide them the technology and the faster payment that they 
need. Many of our customers do need money sooner than they are 
getting it today. We provide availability early, as early as we 
possibly can. On Thursday night at midnight, they get their 
Friday pay. We do everything we can do to get them the money. 
But we can make it better, and we believe FedNow will do that.
    Senator Brown. Thank you to all of you.
    Chairman Crapo. Thank you.
    Senator Moran.
    Senator Moran. Mr. Chairman, thank you. Thank you for 
hosting this hearing, you and the Ranking Member. When you 
introduced Ms. George, you introduced her as the president and 
CEO of the Federal Reserve Bank of Kansas, and I appreciate 
your thriftiness in choice of words.
    [Laughter.]
    Senator Moran. I also would like to pay tribute to Ms. 
Bair, a highly respected Kansan, a native, and who is highly 
regarded. She had the benefit of working for a highly regarded 
Senator, and I appreciate your work throughout your life.
    Let me start with Ms. George. Generally, I would say in 
Kansas this proposal is popular with Kansas bankers. 
Interoperability is important in addition to prompt payment, 
and I want to see if you can assure me that whether a bank 
chooses FedNow or the RTP system to provide those faster 
payments, their business will flow to any institution in either 
network. Today both institutions run retail and wholesale 
payment services that are inoperable. Is the Fed committed and 
confident that it will be able to continue the same with these 
faster payments?
    Ms. George. Senator Moran, having interoperability will be 
a desirable outcome of this effort. We are focused on gaining 
nationwide reach. We think it is important that every financial 
institution gain access to real-time payment services, and then 
we can begin, as we design the system, to look at what the 
nature of interoperability will be. We are now asking for 
comments on features and design, including interoperability, 
and getting feedback on how that would work today relative to 
how it works with our other payment services.
    Senator Moran. Mr. Hunter, how do you see this issue?
    Mr. Hunter. Thank you, Senator. I appreciate the question. 
We do not envision that the systems will be interoperable. 
Real-time payments are fundamentally different in terms of how 
they work than the ACH or the wire transfer system, and if you 
look at Europe, for example, where the central bank came out 
with its own real-time payment system, it is not interoperable 
with TIPS, which is the private sector's real-time payment 
system. In a real-time payment system, clearing, which is the 
transmission of the payment message, happens alongside 
settlement. They are not bifurcated at all. They happen at the 
same time, and they happen instantaneously. So from the time I 
hit ``Send'' to send you money, Senator Moran, to the time that 
money is in your account and you have got access to it, it is 
literally milliseconds. Because of that architecture, which is 
architected in the way that the Federal Reserve's Faster 
Payments Task Force sort of set out the criteria, it wanted a 
real-time payment system, you cannot bifurcate those processes. 
So it is not like the ACH, which is interoperable for 
transmission of the message only, but settlement happens at a 
later time. Because clearing and settlement, transmission of 
the message, and final payment happen immediately, those two 
things are not separated. And you cannot interoperate in that 
regard. Both the sending bank and the receiving bank have to be 
on the same system. They have to be able to talk to each other 
instantaneously, and they have to work in such a way that those 
funds are transferred and available immediately. So we are not 
optimistic that these two systems will be interoperable.
    Senator Moran. Thank you for your comments.
    Again, Ms. George, Mr. Selgin's comments about holidays, 
weekends, and 24/7 caught my attention. What is the Fed 
response in that regard?
    Ms. George. So a real-time payment system will be operating 
24x7x365, and that will include holidays and weekends. The 
question that Mr. Selgin raised is one of how expanding hours 
for funds transfer might facilitate the private sector service 
in providing real-time payments. Because that is a systemically 
important system, we will have to look at and do the 
operational analysis on what it means to provide real-time 
expanded hours, and we have committed to do that in the public 
notice that we have put out to see what issues that raises, 
recognizing that there would be benefits to the private 
solution.
    Senator Moran. Mr. Hunter, let me return to you quickly. I 
think the RTP system has been up and running for about a year-
and-a-half. What benefits are consumers and businesses seeing 
as a result of that? And what can we expect in the future those 
benefits to then be?
    Mr. Hunter. Thank you, Senator. Let me start with consumers 
first and then go to businesses.
    For consumers, it really fundamentally is a safer, more 
efficient way to make payments. From the sender's side, they 
can get immediate confirmation that the recipient of that 
payment actually has the funds. So think about if you're paying 
your power bill and you are late and you want to make sure that 
payment gets there today, you have got immediate confirmation 
that you have been able to do so.
    We also have extensive rules in place so that consumers who 
use alias, so if you type in a phone number or you are using a 
directory of some kind, the consumer gets confirmation of the 
real name. So if somebody types in or fat fingers my email 
address, they are going to get a message back that says, ``Did 
you want to send that payment to Rob Smith?'' ``Well, no, I did 
not.'' So very, very important.
    In terms of folks who are being paid and have to go to 
payday lenders or check-cashing services, if their employers 
are using the RTP system to make payment, they will have 
immediate access to those funds. They will not have to go to 
those services anymore.
    On the business side, also incredibly transformational. 
They can get payments into the hands of a supplier, for 
example, for real-time inventory. They do not have to rely on 
credit anymore, and that supplier can ship those goods with 
confidence that they have been paid. They can attach just about 
anything that you can send over the Internet, an invoice, a 
picture showing that work has been done. So if you are a 
plumber and you want to convince your customer that, ``Hey, I 
have installed this faucet and it works. Here is the video. 
Here is the photo.''
    If you attach the invoice to what is called a ``request for 
payment,'' you can automatically associate that payment with 
the invoice and you do not have to do reconciliation on the 
back end.
    Senator Moran. Thank you. My time has expired. I will ask 
some other witnesses questions for the record.
    And I, too, need to join the Ranking Member in the Veterans 
Committee. I will try to return, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Jones.
    Senator Jones. Thank you, Mr. Chairman. And thank you to 
our panelists for being here.
    Ms. George, I would kind of like to focus a question here 
on timing. Frankly, it is a little embarrassing, I think, that 
we are so far behind, and the Fed's payment obviously is going 
to be a complicated, really technical endeavor, and I believe 
your deadline is like 2024, which is in technological terms 
seemingly a lifetime away. It is only short if you are planning 
on one of the legions who are running for President and you are 
already making your plans.
    What are you going to do, what is the Fed going to do--you 
know, benchmarks, do you have benchmarks already in place that 
you are going to be setting, that you are also going to deliver 
to Congress to keep us apprised of what is going on between 
2024 to make sure that you are on track? Do you have those?
    Ms. George. So we are beginning now to define what the 
features and design of this system could be, which will guide 
our delivery times, and we do intend to be very transparent 
with how that plan comes together, making available to the 
public our intentions, and we will certainly be coming back 
with future public comment as we design that system, and that 
will include our delivery and planned implementation.
    Senator Jones. I take it that you really do not--and I am 
not being critical, but the benchmarks have not been set yet. 
You have not set that timeline just yet but you plan on doing 
that sometime after the comments within the next, what, 6 
months maybe?
    Ms. George. We are working on that immediately, so we are 
beginning that phase even now. And as the comment period ends 
in November, we will be compiling the input that we get from 
the industry on how that system should look. That will inform 
our delivery.
    Senator Jones. All right, fine. Thank you.
    For the panel, anybody that can answer this, we have 
obviously seen these kind of payment systems in other 
countries. They have been up and running, and there has been 
the good, the bad, the ugly, I assume, with these. What lessons 
are we learning from examining those? What lessons are we 
taking that we can incorporate? What lessons are we learning 
where mistakes have been made, mistakes that we want to avoid? 
I will just kind of open that up to the panel.
    Ms. George. So I would be happy to start. Core to this work 
we have been doing has been looking at what other countries 
have done and their experiences, and we have learned from 
those.
    One thing that makes it challenging to compare is that we 
have a very complex and diverse financial system. Some 
countries have a smaller number of institutions, and so the 
issues have varied. I think one thing we have taken away from 
this is the importance of getting input from the financial 
institutions themselves to understand their ability to adopt 
the technology, to connect to it, and to think about security 
around that. Those have been the areas of our focus throughout 
this work.
    Senator Jones. OK. Mr. Hunter.
    Mr. Hunter. Yes, Senator, so we have had extensive dialogue 
with the payment system operators of real-time payments around 
the globe. One of the benefits of coming late to the market 
actually is the ability to learn from other countries and their 
experience.
    The design and operation of our payment system is 
absolutely informed by lessons learned around the globe. One of 
the things that you will see in our payment system is that it 
is credit-push system only, and let me explain what that means. 
There are no debit pulls, so if somebody gets a hold of your 
account credentials, sometimes they can try to defeat bank 
fraud systems and draw money out of your account. With the RTP 
system, the only way that you can send a payment is you have to 
authenticate into your banking platform and you have to 
affirmatively tell the bank, once you have been authenticated 
by the bank, that you want to push money out to somebody else, 
so nobody can pull money out of your account.
    We have incorporated what is called ``ISO 20022 
messaging''. That is a little bit technical. But it is a global 
messaging standard that at some point in time in the future, if 
we want to, you know, connect these real-time payment systems 
around the globe, it is a messaging standard that allows us to 
try to do that.
    Also, the way that we settle, in terms of the settlement 
account that we use at the Federal Reserve Bank of New York and 
the prefunding of that account eliminates credit risk from any 
institutions. So to Ms. Bair's point, if an institution fails 
to fund that account, their payments do not flow. There is 
absolutely no credit risk to the system or any other financial 
institution as a result of the failure of any bank.
    Senator Jones. All right. Anybody else want to take a shot 
at that or respond?
    Mr. Steen. I would just use an example of our small bank. 
We have leveraged real-time payment over the SPEI network in 
Mexico, where a family member could arrange for a payment in 
Mexico from having lunch in Solon, Iowa, from a mobile device 
to an ATM withdrawal in real time. So we learned that things 
are possible, and those funds are prefunded in Mexico, so there 
is no credit risk. But it would be much better if we could link 
up our real-time capability on this side of the border.
    Senator Jones. All right. Yes, sir?
    Mr. Selgin. The British system, which is often treated as a 
model of an early fast payments system, offers an interesting 
example of the challenges involved when you do not have central 
bank settlement services that are working on weekends. And here 
it is a challenge for real-time payments.
    What that means is that they can have transactions in real 
time all weekend, but they do not actually finally settle up 
until the CHAP system, which is their equivalent to Fedwire, is 
open again on Monday. Now, that means that for banks that are 
releasing funds, funds are made available instantly, but there 
is credit risk assumed. The way they solved that problem in 
England is through something called the ``liquidity and 
loan''--pardon me, ``liquidity and loan-sharing agreement,'' 
and all the banks contribute collateral to a fund so that if 
any bank were to fail over the weekend, there is this fund that 
they can draw on.
    In the U.S., you could not do that with all the banks 
involved. You could not possibly get them all on an agreement 
like this, and that is a reason why 24/7 settlement on Fedwire 
really is important to avoid risk. In our case, what the Fed 
would do if it did not have those facilities for Fedwire with 
its FedNow system, is incur the risk, which means we would 
incur the risk of these overdrafts that essentially would be 
taking place sometimes for long weekends.
    Chairman Crapo. Thank you.
    Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. And thank you to 
the witnesses.
    I just want to see if we can get a little bit more clarity 
about something that has come up. Mr. Hunter, my understanding 
is that the RTP has made an explicit commitment to provide flat 
fees on the transactions. As I understand it, that means 
regardless of the size of the transaction, the volume of the 
transaction, the size of the institution, all transactions 
would be treated the same, with one caveat, and that caveat is, 
if the Fed operates a parallel system and starts to offer a 
discriminatory pricing structure, that the RTP may have to move 
in that direction under that--is that about right?
    Mr. Hunter. That is correct, Senator. It is similar to what 
happened in the ACH.
    Senator Toomey. OK. So, Ms. George, let me ask you a 
question. Has the Fed made an explicit commitment that its 
system will, guaranteed, offer only a flat fee payment--fee 
structure?
    Ms. George. We are in the process of designing the system. 
We have not identified the pricing that will be associated with 
it, although once we do, we will make that public.
    I would just say on the issue of pricing, volume pricing is 
common in the marketplace today, and it is often a way to take 
high fixed costs and make sure that you are able to maintain 
the adequacy of the system. Pricing today has allowed for 
market share to expand with private sector operators and has 
been viewed as being a fair pricing structure through numerous 
reviews.
    Senator Toomey. Thanks. This is very interesting because 
what we have is the existing system is committing to not 
introducing a discriminatory pricing mechanism. The Fed is not 
making that commitment at this point, and, in fact, our 
representative from the Fed is observing that sometimes there 
are benefits in having pricing discrimination, which I 
acknowledge that is entirely possible. But for those who are 
concerned about which of these two is going to have 
discriminatory pricing, it is a little bit ironic. It is the 
RTP that is committed not to doing so.
    Another concern that I have is interoperability. Mr. 
Hunter, I am going to give an example that I think of--and 
maybe I have got this wrong, so maybe you could help me, make 
it clear. Let us say an Allentown manufacturer has 1,000 
employees, and they are scattered around the country. They 
inevitably have different banks that they use for their 
personal banking. The Allentown manufacturer has a bank that 
they use to process their payroll, and the Allentown 
manufacturer would like to be able to deliver payroll in real 
time so that their employees get the money instantaneously when 
it is available.
    If some of the employees use banks that are part of a Fed 
system while the Allentown manufacturer has a bank that is 
plugged into the RTP system and the two systems are not 
interoperable, is it still possible for everybody to get their 
paycheck in real time on time? Or does that create a problem?
    Mr. Hunter. So it is certainly not easy, Senator. What the 
manufacturer would have to do is they would have to work 
through two different banks, and it would have to format the 
payroll according to the specifications of either system. So it 
will have to work through a FedNow bank to reach the endpoints 
on FedNow and their customers, and it will have to work through 
an RTP bank to reach the endpoints on that system, those banks 
and their customers. So it creates a lot of inefficiency and 
probably added expense.
    Senator Toomey. Added cost, added inefficiency to have a 
second bank playing this role. One of the things I hear from 
time to time is that the RTP has not achieved ubiquity yet. 
With the likelihood that there will be a Fed-run alternative in 
the not too distant future, could that be contributing to the 
reason that some banks are holding back in participating with 
the RTP system?
    Mr. Hunter. So, Senator, we certainly saw a chilling effect 
of the original Fed proposal, which came out 11 months after we 
launched. So I think the initial reaction to that was we do not 
know what the Fed is going to be doing, we need to wait and 
figure that out.
    Since the Fed has come out with the FedNow proposal and 
indicated that they will not be in the market for another 4 or 
5 years, I think it is really sort of splitting the market, and 
it remains to be seen how financial institutions are going to 
react. There are certainly some financial institutions who have 
indicated that they do not feel that they can or should wait 4 
or 5 years to bring the benefits of real-time payments to their 
customers. There are others who may wait.
    Senator Toomey. One last quick question. This is for Mr. 
Selgin. Back in 2013, as I understand it, the Fed launched what 
they called the ``Strategies for Improving the U.S. Payment 
Systems'' and stood up the Faster Payment Task Force. And, 
effectively, the Fed, it seems to me, was calling out the 
private sector to improve the payment infrastructure.
    The private sector responds, spends over a billion dollars 
on this project, more money individually to integrate with this 
system, and went live in 2017. And then 2 years later, the Fed 
announces it is going to stand up a competitor.
    Given that sequence of events, do you think that has a 
chilling effect on the private sector's willingness to invest 
in the future and innovation certainly in the payment space but 
perhaps in other spaces as well?
    Mr. Selgin. I should think so, Senator. Mr. Hunter can 
answer better than I can, but I cannot see how it could have 
but a chilling effect. This effort by The Clearing House was 
undertaken entirely in response to that initiative and with the 
Federal Reserve's blessing and ultimately with its complete 
approval of the scheme that The Clearing House had come up 
with. Then only after that and after the system was up and 
running did the Fed decide it was going to compete head on in 
this same payment service.
    I want to add, since it is relevant, that the idea that 
what is happening with what The Clearing House is doing is 
taking over an infrastructure that belongs to the public 
sector, that is a complete misunderstanding of the history of 
payments in this country. The Clearing House is much older than 
the Federal Reserve, and in many countries, not just the United 
States, most payments services are provided by the private 
sector, many of them at least, sometimes in combination with 
central banks but often alone. Central banks have their 
specialty, which is providing cash and also the ultimate 
settlement services. And as I said earlier, the Fed is not 
doing that last job very well because it is limiting--after 
years of being asked to do otherwise, still limiting the 
availability of final settlement services. And by doing that--
and this is extremely important--it is not the case that you 
need fast payments, in the sense of instantaneous payments, to 
solve the problem of it taking days for workers to have their 
checks clear, et cetera. That problem can be solved just by 
making the existing Fed wholesale settlement systems 24/7/365. 
The plan that would solve that problem that the Fed is now 
pursuing will take 5 years. That is all those people waiting 
for those checks to clear or those payments to clear will have 
to wait for at least that many years, except to the extent that 
they can turn to RTP. And that should not be the case. That is 
a terrible dereliction of the Federal Reserve's duties to the 
public.
    Senator Toomey. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Cortez Masto.
    Senator Cortez Masto. Thank you, Mr. Chairman. And thank 
you all for being here this morning.
    President George, let me start with you. I want to follow 
up on the questions that Senator Brown had asked. Do you think 
it is important to consider the possibility that the Fed would 
have to bail out one or more of the TCH banks if they were the 
only real-time payment system?
    Ms. George. I think our experience is that we do not, for 
the smooth functioning of the U.S. payment system, want a 
single point of failure. And history has shown during times of 
stress that having the central bank as a provider of payments 
has served the country well.
    Senator Cortez Masto. OK. And as we talked about cost 
recovery, because that is part of the conversation as well, and 
because of your concern, because you do not want that single 
point of failure, should that factor into the Fed's cost 
recovery estimate?
    Ms. George. It will factor into--any cost of our system is 
required under the Monetary Control Act to be fully recovered, 
and we intend to do that with FedNow Service.
    Senator Cortez Masto. Thank you. And so, Ms. Bair, Chair 
Bair, can you add your thoughts on the potential risk of a 
bailout in the conversation we are having today?
    Ms. Bair. Yes. I think as President George said, you have a 
single point of failure if you have just one system. Payments, 
it is kind of important. You disrupt payments, you get a 
catastrophic situation with commercial activity and consumer 
activity as well. It is not clear to me--the RTP system is 
untested. They have designed it to prevent credit risk. I give 
them that. But they maintain a centralized ledger, and we have 
got to have confidence that that centralized ledger will 
prevent negative balances in their joint account.
    It is possible, as acknowledged, it is possible for a large 
bank to lose the capacity to continue to fund the joint 
account, so maybe the other banks participating in the joint 
account are still OK. My question is: What happens to the 
customers at that bank who are using it?
    So I think there are a lot of unanswered questions about 
how resilient it will be during a crisis, and so nobody is 
saying we should not have RTP. Good. I am glad we have RTP. But 
we should have another system, too. Competition is always good, 
and the Fed is much better equipped to continue to function and 
its track record is such to operate in good times and bad under 
extremely stressed conditions. And if we just had this one 
system, if it does disrupt, the Fed is going to have to come in 
anyway with a much messier and inefficient way of trying to 
stabilize the system again.
    Senator Cortez Masto. Thank you. While I have you here, we 
have been have conversations here in this Committee on this 
issue, and, Chair Bair, in your testimony you urge the Fed to 
fully explore the use of digital currency.
    Ms. Bair. Right.
    Senator Cortez Masto. Including cryptocurrency based on a 
distributed ledger technology and effectuating real-time 
settlement between banks. Why do you think the Fed should 
consider developing a central bank digital currency that could 
eventually be used by members of the public to transfer money 
directly between----
    Ms. Bair. Well, it is still a maturing technology, but it 
is maturing rapidly. And, clearly, having a distributed ledger 
that all banks would have access to, you do not need an 
intermediary. You do not need a TCH. You do not need a 
centralized ledger in that single point of failure. The digital 
transfer is directly from one--the sending bank to the 
recipient bank. So, yes, I think it needs to be explored. It is 
still maturing. No other central banks have done it, but a lot 
of other central banks are looking at it, and I hope that is 
something that the Fed will continue to explore as they build 
this system.
    It also helps address some of the interoperability issues 
that we were discussing earlier, but I would like to just--you 
know, Mr. Hunter has insisted that RTP cannot be interoperable, 
and I would just note that that kind of reinforces their 
monopoly position if his view is that their system--real-time 
payments is somehow incompatible with interoperability. And 
interoperability is a two-way street, and I would hope that TCH 
would sit down with the Fed and try to agree on common 
standards and figure out a way these systems can most 
efficiently interact. If he wants to say, no, nobody else can 
play, then, you know, if you do not have the Fed, then that 
just solidifies their monopoly position as a single provider of 
this crucial function.
    Senator Cortez Masto. Thank you.
    President George, to what extent is digital currency and 
the future of it being--are you considering that as you move 
forward with this payment system?
    Ms. George. The Federal Reserve and other central banks are 
looking closely at how this evolving technology is affecting 
the financial system and will continue to do so.
    Senator Cortez Masto. Are you watching what is going on 
with Libra?
    Ms. George. We are watching that also, so the full range 
from distributed ledger to digital currency is very much under 
study as we see how those unfold.
    Senator Cortez Masto. Thank you. Thank you all again for 
being here.
    Chairman Crapo. Thank you.
    Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman, for holding this 
hearing, and thank you all for being here.
    Mr. Steen, I want to let you know that I joined with a 
group of Republicans and Democrats that recognize that small 
banks and community banks have regulatory burdens on them that 
we thought were inappropriate. That is why we joined together 
against the objections of the Ranking Member of this Committee 
to provide you all with regulatory relief. This may be an issue 
where you and I want the same ends, but maybe achieve it 
through a different means, and that is really what I want to 
talk about.
    Ms. Bair, you mentioned in your opening statement that this 
was a measured and deliberative approach to decide to come up 
with a payment system. I understand that a part of that is 
engaging an outside firm to try and figure out what is wrong 
with RTP and The Clearing House, and that the conclusion that 
those outside consultants made was that most of it is working 
right, some of it needed to be addressed.
    And so I am wondering why we seem to be going with this 
alla prima approach versus trying to address some of the 
legitimate concerns Mr. Steen and others would have with using 
RTP.
    Mr. Hunter, Ms. Bair also mentioned in her opening 
statement about the private sector approach could subject--in a 
future crisis subject us to bailouts. Under what scenario would 
The Clearing House or RTP be in a position to where it would 
need to get--I understand the investing--I know the banks that 
stood this up, and I understand them. But I am trying to 
understand under what scenario--I understand that you performed 
very well during the crisis. I do not think that you required a 
bailout. I do not think that there were any outages. I do 
believe that Fedwire has experienced some outages and does have 
some resiliency challenges that they need to deal with, and 
availability. But under what scenario would you actually be 
subject to a bailout request?
    Mr. Hunter. Senator, there is no circumstance where we 
would be subject to a bailout request. I mean, we have detailed 
processes in place to deal with banks that are on our systems 
that have been worked out with the FDIC for resolution of those 
banks, and Ms. Bair may not be aware of those given her 
position at the FDIC. But we worked very, very closely on bank 
resolutions, and there is no risk to the system. They are 
architected in such a way that that just does not happen. So 
those circumstances, Senator, simply do not exist.
    Senator Tillis. Another question really going back to the 
measured and deliberative approach. It is my understanding--
and, Ms. George and Mr. Hunter, maybe you can illuminate, but 
under--the Bank Service Company Act of 1999 provides fairly 
significant or broad authority but for some reason it appears 
as though the Fed does not think that it has the authority to 
engage with the private sector, to engage with The Clearing 
House or RTP to address some of the concerns you may have, 
maybe concerns that Mr. Steen has.
    So why wouldn't a part of that deliberative approach be a 
discussion about expanding the regulatory perimeter so that you 
could address those concerns with a private sector solution? I 
will start with you, Ms. George.
    Ms. George. Thank you, Senator. The Board of Governors 
explored this issue and highlights it in the Federal Register 
notice that they believe those authorities were not adequate. 
And, clearly, the Federal Reserve----
    Senator Tillis. OK, but why not a discussion about 
expanding the authorities to the extent that you could address 
what we are now thinking about a major undertaking that will 
take 5 to 7 years. I am a technology person. I think it is 
probably plus 5, closer to 7, and a lot of cost. So why 
wouldn't there have been a discussion of if you have concluded 
that you do not have sufficient regulatory authority to come 
back and come to Congress and ask what that may be?
    Ms. George. I think because our experience under our 
existing authorities of Congress of providing these services as 
an operator have been so effective throughout history that it 
led us to rely on those existing authorities and provide the 
competition that has served the country well, and that was the 
conclusion I think that you see in the Board of Governors' 
analysis.
    Senator Tillis. Mr. Hunter.
    Mr. Hunter. Senator, thank you for the question. The 
Federal Reserve--not only the Federal Reserve but, frankly, the 
OCC and the FDIC have broad regulatory authority over The 
Clearing House. Basically any regulatory authority they have 
over a bank that they supervise is the same regulatory 
authority that they have over The Clearing House, and I quote 
extensively from the Bank Service Company Act in my written 
testimony, and I would direct you to those statements.
    But in addition to that, as Congress has enacted in this 
country, we have detailed competition laws that we are subject 
to and the Federal Reserve is not, but the private sector is 
subject to, and the Department of Justice stands ready to 
enforce. So when you talk about anything related to pricing or 
monopoly power or acting in an anticompetitive way, which the 
Federal Reserve speculates that the private sector could 
potentially do at some point in time, those are illegal 
activities under the laws of this country. We have never 
engaged in those activities. But if we ever did or if any other 
private sector ever did, there are laws in this country that 
protect against that.
    Senator Tillis. I have a number of questions. I, too, have 
to go to the Veterans Committee. This is very important to me 
because I think in some respects--I view the current Fed 
proposal as a $100 saddle on a $10 horse. I think there are 
some things that we may be able to do to address some of the 
concerns and make sure community banks are treated properly to 
avoid potential future discriminatory practices on pricing, 
resiliency questions, interoperability questions, the kinds of 
things that you are going to have to get into. So I will be 
submitting a number of questions for the record for you all, 
and I appreciate you all being here.
    Chairman Crapo. Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. I thank all of 
you for your testimony today.
    Moving as fast as possible to real-time payments has been a 
priority of mine. I have talked to lots of witnesses that have 
come before this Committee on this matter because the lack of a 
real-time payment system is costing millions of Americans 
billions of dollars every year. So, President George, I commend 
you for your leadership in this issue. I know it is an issue 
you have thought about a lot, and you have been very thoughtful 
in developing these proposals.
    I have listened to the testimony. A lot of ground has been 
covered. I do think the fundamental question gets down to this 
issue of competition, and I realize that The Clearing House 
says it welcomes competition on the one hand, but on the other 
hand, all the testimony here today is let us not have a 
separate FedNow system. And it seems to me that keeping that 
monopoly position in the hands of the 15 biggest banks is not 
necessarily in the long run the best deal for consumers. And a 
little competition is a good thing, in my view.
    Mr. Steen, you represent lots of financial institutions, 
and you are obviously looking out for your consumers and your 
customers here, and you have expressed a real fear in your 
testimony and earlier statements about handing over this kind 
of monopoly power to this kind of monopoly. And you actually 
raised before this hearing the same issue that Senator Toomey 
raised here, which is when the Fed said it might get into this 
space, The Clearing House then said, well, you know, we made 
this promise about not engaging in--you know, not changing 
pricing in a discriminatory way, but, you know, we are going to 
have to reconsider that, which, in fact, in my view just 
underscored the need to have an alternative here.
    You are someone who is working this issue on the ground 
every day. If you can just--you know, how would you explain to 
one of your customers coming into your bank why you think it is 
important for the FedNow system to be put into operation?
    Mr. Steen. Well, Senator, thank you. You know, my customers 
are looking to us to provide them the fastest payment possible, 
and I need to ride that train. And the one constant in my 
career has been the Federal Reserve. From a pricing standpoint, 
they have demonstrated when technology improves, they lower my 
cost, and they explained that to us and we understand it.
    So I just know that we cannot lose that, and I know 
accessibility to every small financial institution is just so 
critical, and we are one of those. And so I am absolutely 
confident the Fed is doing the right thing, and we have been 
asking them to do it. I was on the task force. I was on a 
steering committee. I was in the directive work group, and I 
have been pounding the table for them to do this all the way 
along the way. And they are, and I am confident it will move 
along very quickly. I saw what they did in Check 21 and how 
fast that revolution took place, and I was part of that. So I 
am confident we can accomplish this.
    Senator Van Hollen. Thank you. And I would point out, as 
the Chairman knows it was a 4-1 vote on the Board of the 
Federal Reserve.
    Ms. Bair, you have been in the middle of this during really 
tough times in terms of, you know, financial institution in our 
country. In response to a question, you just pointed out that 
this suggestion that we could not make these systems 
interoperable was kind of like the statement on monopoly and 
discriminatory pricing, another example actually of why it is 
important to have an alternative, right? Because, otherwise, 
the system with monopoly power can use that leverage in certain 
ways. Can you expand upon your concern there?
    Ms. Bair. Yeah, because I think it is important to 
understand we are talking about interbank settlement. So there 
are a lot of banks working with financial technology companies 
trying to come up with new, innovative ways to help people send 
and manage payments that are customer-facing, but you still 
have the problem of getting the money from one bank to another. 
And so if you have a monopoly provider for that piece of it, 
all these other innovators that are working on customer 
interfacing services and applications will have to go to that 
single provider. This is why--you know, I know the big banks 
love this, but pretty much nobody else does. There is no trust. 
The small banks do not trust them. The financial technology 
companies do not trust them because this will be giving them 
monopoly pricing power. And they may say today, ``We will not 
do it. We will be fair and equitable.'' But the Fed has no 
authority to regulate rates.
    I also agree with President George that the best way to 
address this is through competition and giving smaller 
institutions, giving financial technology innovators working 
with those institutions an alternative, giving them two places 
to work with, to deal with, to support their innovations.
    And I would also say that the problem of trust is one of 
the reasons why I do not think RTP has gotten traction. If 
there was trust, if it was a great service, who cares whether 
the Fed is going to come in anyway? People will be jumping for 
it. But that is not happening. The public comment process has 
overwhelmingly said that pretty much everybody outside the big 
banks who own TCH want an alternative system.
    Senator Van Hollen. Thank you. Look, I think the history 
shows that competition actually spurs innovation, not stifles 
innovation.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman.
    This debate--and I have not made up my mind on this. This 
debate reminds me a lot of the debate we are having in health 
care about whether the U.S. Government should set up its own 
health insurance program to compete with the private sector. 
That is just an observation.
    The second observation, Mr. Steen, I have great respect for 
the Fed, and I would remind you, though, that it was the Fed, 
or at least people influencing the Fed who decided in 2008 that 
the community banks were just as responsible as the too-big-to-
fail banks for the meltdown, which was patently untrue, and 
some people around here decided to try to regulate you and your 
colleagues half to death, which I think hurt the banking 
system. So I would just caution you, up here in Washington do 
not trust anybody pretty much.
    President George, let me ask you this, and this is honestly 
a question. I do not mean the question to suggest an answer. 
Tell me what is wrong with RTP. Is it not working? Can it not 
work? What is your concern?
    Ms. George. So I have no insight to the functioning of RTP, 
but we have encouraged private sector innovation in this space, 
and for many years----
    Senator Kennedy. May I stop you a second? If you have no 
insight into RTP, then why do you want to set up something to 
compete with it?
    Ms. George. Because our interest in making sure under our 
public policy goal that access is broadly achieved for this 
service and extends to some 10,000 institutions in this 
country, and we have an existing network, reach, and 
relationship with those institutions.
    Senator Kennedy. I get that, and I am sorry to interrupt 
you. But what I want to understand--I mean, doesn't the Fed 
have enough to do? It would just seem to me that if RTP can 
work--if you want to compete with it, that may be the right 
approach. But what I am trying to understand is why. I 
understand you have the power to do it, but why does it make 
sense to spend taxpayer money for the Fed to go set up a 
competitor for something that may be working? Unless it is not. 
If it is not working, tell me.
    Ms. George. The information we received from the faster 
payments task force came to the Fed and said we need the Fed to 
get into providing real-time payments with the private sector.
    Senator Kennedy. Why?
    Ms. George. The reason was to achieve broad reach. We have 
many community banks in this country that are in rural and 
remote areas that would not otherwise be profitable places to 
provide services. They need these services for their 
communities. They need to be able to attach to systems that 
might otherwise be out of their reach.
    Senator Kennedy. OK. May I stop you a minute? I am not 
trying to be rude. Our time goes so fast.
    Ms. George. Yes, sir.
    Senator Kennedy. So why don't--I mean, the Fed has the 
power to punish banks the rest of their natural lives. You and 
I both know that. I know you do not put it in those terms, and 
I am not suggesting anything untoward. So why don't you turn to 
RTP and say, ``Look, here are some changes we would like to 
respectfully ask you to make? You do not have to make them, but 
our advice is you should.'' They are not going to ignore you, 
are they?
    Ms. George. I think our experience is operating alongside 
the private sector has produced the best outcomes for the 
payment system.
    Senator Kennedy. But my question is if you see a way to 
improve--I am trying to understand. If you see a way to improve 
RTP, why don't you just sit down with them and say, ``Folks, we 
want you to extend your reach. We want you to give us 
jurisdiction over the prices you are going to charge, and we 
want to make sure that you make your service available to 
everybody''? Boom, problem solved.
    Ms. George. The Board of Governors----
    Senator Kennedy. Then you save a bunch of time and money, 
and you do not have to set up a competing system, because 
taxpayers are going to pay for what you are going to set up. 
And I know you have enough to do.
    Ms. George. We certainly have enough to do, and we are 
intent on fulfilling our public policy authorities as Congress 
has granted us in this arena, which is to make sure that that 
system is accessible, that it is provided equitably, and that 
it is safe. And we will continue to operate alongside the 
private sector in achieving those outcomes for the public.
    Senator Kennedy. OK. Can I ask one more, Mr. Chairman, 
since it is just--oh, I am sorry. I do not want to cut in 
Senator Smith's time.
    Senator Smith. Go ahead, Senator Kennedy. One more. Just 
one more.
    [Laughter.]
    Senator Kennedy. Well, Ms. Bair is raising her hand.
    Ms. Bair. Well, I did. I just wanted to strongly support 
what President George said and indicate that I hear what you 
are saying about--so, first of all, you do not have regulatory 
authority, I think, so there is no direct authority to do rate 
regulation and access controls and all the kinds of things----
    Senator Kennedy. Yeah, but then--the banks are not----
    Ms. Bair. If I could just----
    Senator Kennedy. ----ask them to do something.
    Ms. Bair. I wish that was true. But as a Republican, as 
somebody who considers herself market oriented, I think 
competition is a much better discipline on pricing equity and 
efficiency and broadening customer bases than trying to 
prescriptively regulate this, so----
    Senator Kennedy. Well, that is one point of view. Another 
point of view is you just want to expand Government.
    Ms. Bair. No, I do not think that is what the Fed--look, I 
worked with the Fed for a long time, and I criticized, you 
know, other parts of the Fed. I advocated for limits on the 
Fed's bailout authority. They probably were not happy with me. 
Chairman Crapo remembers that in Dodd-Frank. So another 
context, you know, sure, the Fed has got a lot of power. But 
this is like the bread and butter of what they do, and they are 
the only ones who can come in with an alternative parallel 
system because of the costs and the resources that are required 
to do this. If you just rely on private enterprise, there will 
be a single monopoly provider without the regulatory authority 
to impose pricing and access controls. So I do think the Fed is 
absolutely--this is in the public interest to do, and it will 
be more efficient than just trying to regulate it with 
authority they do not have. And I think big banks push back 
quite a bit against the Fed and the FDIC, so I would not say 
that they always do what the regulator asks them to.
    Senator Kennedy. Thank you, Mr. Chairman. I am sorry, 
Senator.
    Chairman Crapo. Senator Smith.
    Senator Smith. Thank you, Mr. Chairman. I just realized I 
might have accidentally taken some of your authority by ceding 
time to Senator Kennedy without your permission.
    Chairman Crapo. No problem. You are welcome.
    Senator Kennedy. You are on double-secret probation.
    [Laughter.]
    Senator Smith. I want to thank all the panelists for being 
here today, and I am sorry I missed the back-and-forth with my 
colleagues, because, as you have no doubt heard, we have lots 
of committee hearings today. I am sure the ground has been well 
plowed here.
    Let me just ask a question of President George. President 
George, the Fed operates several payment systems already, and I 
am wondering what you have learned about fraud prevention from 
that experience. You know, there are many upsides to real-time 
payments, but, of course, one of the possible downsides is 
real-time fraud. So could you just share a little bit about 
what you have learned about that?
    Ms. George. The security of the payment system is essential 
and I think, as you have noted, in particular when payments are 
moving this quickly. We would see as part of our initiative--
and as we did with the faster payments task force--thinking 
about security and what fraud mitigation standards will be 
important. And I think that will include education efforts, the 
banking system making sure that their customers understand what 
role they play in that.
    Senator Smith. Thank you.
    Would anybody else like to comment on that fraud question?
    Mr. Hunter. Absolutely, Senator. So we take consumer 
protection very seriously. We worked closely with the CFPB in 
our design and establishment of this system, and we have 
learned a lot about fraud from our interactions with other 
real-time payment systems around the world.
    Fundamentally, the way we have architected this system is a 
much better, much more safe, much more secure experience for 
consumers and businesses because these are credit-push payments 
only, so the consumer or the business have to actually 
authenticate into their banking system, and the only way that 
they can make a payment is to push those funds out. There are 
no debit pulls where, if somebody gets a hold of your account 
information and they can defeat the fraud control systems of 
the bank, they can get money out of your account. So, 
fundamentally, this is a much more safe, much more efficient, 
much more sound way for consumers to make payments.
    And if I can, Senator, I just want to say that, you know, 
we will certainly work and have discussions with the Fed about 
interoperability. I do not mean to imply to anyone that we are 
not concerned and would not want to get there. When we talked 
about designing the system, we had hoped that interoperability 
could be achieved. We are not optimistic. But we are certainly 
willing to do everything possible to discuss with the Fed and 
try to reach that result.
    Senator Smith. Thank you.
    Just another question that is very specific. It was raised 
to me specifically from Minnesota credit unions, of which we 
have many, and they are very important to communities in 
Minnesota. Small credit unions are trying to figure out--you 
know, they do not have staff available 24 hours a day to 
monitor transactions and troubleshoot problems. And so my 
question to the panel is: How can small institutions prepare to 
handle a payment system that would be on 24 hours a day? What 
would be the solutions, just the operability solutions for 
small institutions?
    Mr. Hunter. Senator, if I may, we have worked very, very 
closely with third-party service providers, and one of the 
things that we have recognized is that they are going to need--
banks like Mr. Steen's bank, other community banks, we want all 
of those banks to be on the RTP network because the network is 
only as valuable as the banks that it can reach. So third-party 
service providers, bankers' banks, corporate credit unions, 
other institutions that provide critical services, back-office 
services to small community banks and credit unions have been 
on our radar ever since we designed the system.
    What you have seen are large banks who handle their own 
technology coming onto the system to date. What you have not 
seen but is equally important and was maturing is the work that 
we have done with those third-party service providers to bring 
small financial institutions onto the system. They have begun 
to be in a position to activate those core back-office systems, 
and they are going to start bringing on small community banks 
and credit unions in the next several months.
    Senator Smith. Thank you.
    President George, would you like to respond?
    Ms. George. This is a real issue for small institutions, 
credit unions, small banks, and we will be working carefully 
around standards, which I think help them in adhering to things 
that protect them and protect their customers.
    Senator Smith. Thank you. And just one last question. Let 
us say I am just a person--which I am--and I am trying to--and 
I can see that real-time payments, you know, whether I am a 
small business--you know, this is going to be helpful to me. So 
can anybody explain to me, what is the harm of more 
competition? To me, how am I harmed as an individual if there 
is more competition rather than less competition in this 
market?
    Mr. Hunter. So, Senator----
    Senator Smith. I am going to just ask Ms. Bair about this.
    Ms. Bair. Well, I think consumers are helped. It will 
result in more innovation, more competition, better pricing, 
wider access. I think absolutely two systems will support 
consumers and their ability to have a choice of real-time 
payment services and for all banks of all sizes and depository 
institutions, including credit unions of all sizes, to be able 
to participate. And this is the future. We will have real-time 
payments, and so the challenge is to make sure everybody is 
included. Having these two systems is the best way to do that.
    Mr. Hunter. Senator, if I may, we----
    Senator Smith. I am sorry, but I think Mr. Selgin was going 
to speak; then I will let you----
    Mr. Selgin. Yes, I was going to say I am not one of those 
who opposes competition between the Fed and the private sector, 
including The Clearing House. What I am concerned with is that 
the competition has to be fair. If any of the players can cheat 
or can compete unfairly, to put it a little bit more mildly, 
that can upset the competitive process that normally leads to 
good results. That is why we have the Antitrust Division, for 
example, to make sure private firms do not compete. In the 
Fed's case, we have to take--there are other precautions that 
are needed. Some are taken already, but there are many ways in 
which presently the Fed can compete unfairly, and a few have 
been mentioned. One of them is not paying interest on reserves 
held in joint accounts that serve the same purposes as other 
reserves--not classifying funds in those accounts as reserves. 
They should be classified that way.
    Another is by not making its essential clearing services, 
settlement services on Fedwire and on NSS available 24/7. That 
allows other non- real-time payments systems to compete more 
effectively by having faster payments, but not necessarily non- 
real-time payments, and there is competition on that margin, 
too.
    So there are a lot of steps Congress can take to assure 
that competition is played on a level playing field between the 
Fed and the private sector. That is the key, not preventing 
competition.
    Mr. Hunter. And, Senator, if I may, we are not against 
competition. Let me make that perfectly clear. What we are 
concerned about is an unlevel playing field between the private 
sector and the Government.
    We are also concerned that if we cannot figure out 
interoperability--and no systems worldwide interoperate in 
real-time gross settlement payments like we have set up here. 
Nobody has figured out how to do that yet. That will lead to a 
very suboptimal result in this country for consumers and 
businesses where the participants and their customers on one 
system are not going to be able to complete payments to the 
participants and their customers on another system.
    Senator Smith. Thank you, Mr. Chair.
    Chairman Crapo. Thank you. And that completes the 
questioning, although I am going to ask for a brief response 
from all of you on an issue that Senator Cortez Masto raised. 
But first let me thank you all for bringing this perspective 
here.
    We had the obvious divergence of opinions on the Committee 
here about this issue. I find it interesting. I think Senator 
Kennedy probably focused on the dichotomy of we all believe in 
competition; we also all talk about how we believe in not 
having the Government be too large and having the Government 
step in. Here what we are talking about is the Government 
competing with the private sector, and that kind of puts an 
interesting twist on the competition discussion.
    And then the reverse of that is the discussion about, well, 
you have a monopoly if you only have one provider in the 
private sector, and so how do we deal with that? These are 
difficult questions, and as you can see, we have different 
perspectives on that on the Committee. I encourage the Fed as 
it moves forward here, which apparently it is doing, to take 
these kinds of considerations carefully into mind, and 
hopefully we will be able to work this out.
    The question I want to address, however, is the one of 
digital currencies. As you are all aware, this Committee right 
now is dealing with the Libra proposal from Facebook, which is 
only one of the more recent utilizations of blockchain 
technology on the Internet but in the context of creating a 
digital currency, and we have many examples of this 
technological development on the Internet, Bitcoin and many 
others. But they raise the question, as I understand it, of 
whether we are moving technologically to a whole different 
world than the one which we spent this entire hearing 
discussing, and that world is digital currency-related 
technology, which perhaps our central banks as well as all of 
our financial institutions, small banks and large banks alike, 
credit card companies, every kind of transaction, need to be 
more focused on. And I would just a very huge question and ask 
you all to respond very briefly, and I really mean--perhaps 
what you could do is respond to me on this, just your thoughts 
about this issue in general, in writing following the hearing.
    But am I correct that we need to start looking at this 
entire transition to--or whether there really is a transition. 
Is this a technological change that we should consider as being 
transformative in the way that we deal with currency and with 
financial transactions? Why don't we just go down the line? Ms. 
George.
    Ms. George. Thank you, Senator. It is a very important 
issue, I think, because it is hard to forecast where this is 
going, and it is one of the reasons that we study carefully 
what it means, because one thing we know is we have invested 
heavily in trying to have a banking system that is sound, that 
serves the economy, that serves the American public. And, of 
course, with that has come safety nets, consumer protections, 
thinking about access to credit, many of those things.
    As we look at what disruption may come to the existing 
framework, I think that is why it is important we study, to see 
how will any of those safeguards be disrupted, how will they 
apply in a new world with different technologies. At this 
stage, it requires us to be very cautious and look carefully to 
make sure that we gain the benefits of innovation, gain the 
benefits that can come from new technological approaches 
without undermining, I think, what has been hard- earned-and-
won safeties for the economy.
    Chairman Crapo. Thank you.
    Anybody else want to comment?
    Mr. Hunter. Senator, Mr. Chairman, I appreciate the 
question. We certainly share Ms. Bair's and other folks' 
concern about unregulated and largely unsupervised social media 
companies getting into setting up de jure currencies that could 
threaten the prominence and the value of the U.S. dollar.
    That said, we have looked at digital currencies or 
blockchain as a technology throughout its development and 
deployment across the U.S., and it really is not terribly fit 
for purpose when you think about using it as a payment system. 
It takes an enormous amount of processing power. It is 
relatively slow. It does not sort of process the number of 
transactions that you need to process and the speed and the 
volume that you need to really serve the country.
    I think it is one of the reasons why--I mean, this concept 
has been around for a long time. You do not really see it being 
deployed and used a lot for a payment system, and it is sort of 
deployed around the edges. It has not really caught on. 
Blockchain is a great solution for the Register of Deeds Office 
where you want records that go back until the beginning of time 
and you can create lots of information. But it is not terribly 
fit for purpose in the payment space.
    Chairman Crapo. All right. Anyone else?
    Mr. Steen. I do have some thoughts on that, and I would 
like to submit them to you.
    Chairman Crapo. I would appreciate that.
    Ms. Bair. I appreciate the question. I think you are right 
to focus on it. And something like Facebook's Libra would take 
payments completely outside of the banking system. We would 
lose substantial control. So whether it is technologically 
feasible or not, I mean, Facebook is a pretty smart company and 
has spent a lot of time on it. They seem to think it would. I 
think the lack of any kind of regulatory structure around that, 
you know, I would encourage the Committee to continue looking 
at that because the last thing we want is to lose control of 
our fiat currency, which is why I think ultimately central 
banks, including the Fed, need to get ahead of this technology 
and capture it themselves so that they cannot be disrupted by a 
large nonbank entity like a Facebook.
    Mr. Selgin. Yes, I would add, Senator, we have all been 
talking about the benefits of competition in the payments 
system, and these digital currencies are part of that potential 
competition, and they are a particularly important part because 
they represent some very intriguing innovations that have not 
come from Government, but have come from the private sector. We 
do not know the full potential benefits that may be had from 
these technologies ultimately.
    Mr. Hunter is quite correct that so far they have not been 
particularly useful for payments, although people think of them 
as being used in that connection. They have a lot of 
disadvantages. But I think it is desirable that they, too, be 
part of the process.
    As for central banks providing digital currencies 
themselves, well, it must be said that the paper notes that the 
Federal Reserve issues are the horse and buggies of the modern 
payments system and that digital substitutes for these could 
well be an improvement. But there once again we would want the 
Fed to be competing with private sector providers and not 
monopolizing the provision of these substitutes. And there is 
no reason why you could not have some private digital monies 
that are dollar-based, and we have things that are close to 
that so far. The main thing is that competition has to be 
allowed to work itself out amongst parties participating on a 
level playing field.
    Chairman Crapo. Well, thank you, and I appreciate these 
insights. I would welcome any further insights that you would 
like to share with me on this issue. It seems to me that this 
is--unless it becomes clear that it is such a cumbersome 
innovation that just cannot be utilized in the payments system 
or in the currency systems of the world, it seems to me that 
this could be truly a disruptive influence in--and I do not say 
that in a negative sense. I mean in the context of its impact 
on literally currency transactions of all types in the world. 
And some of those impacts could be very positive impacts; some 
could be very dangerous impacts. You think of things from 
eliminating cost to consumers in the system to expanding 
opportunity for money laundering and all kinds of other 
different potential impacts of the expansion of this new type 
of innovation. So I would love your thoughts on it as we move 
forward. This is obviously another issue that the Committee is 
currently struggling with.
    With that, I want to conclude this hearing. Again, I thank 
you for all of your input and welcome your further input on 
this.
    For Senators who wish to submit questions for the record, 
those questions are due to the Committee by Wednesday, October 
2nd. I would ask the witnesses if you would all respond to 
those questions as promptly as you can, we would appreciate it. 
And, again, thank you for being here.
    This hearing is adjourned.
    [Whereupon, at 11:49 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today, the Committee will turn its focus to facilitating faster 
payments in the United States.
    Faster payments are important and yield economic benefits for both 
consumers and businesses by providing them with greater flexibility 
when managing money and making time-sensitive payments on demand.
    Real-time payments offer efficiency and convenience, helping 
consumers to better manage their spending and avoid unnecessary fees 
and penalties, and helping businesses pay for goods and avoid other 
costly sources of funding.
    Unfortunately, the U.S. has lagged behind other countries in the 
development of real-time faster payments for retail payments.
    Recognizing this shortcoming, in 2015, the Federal Reserve 
organized a Faster Payments Task Force, made up of a diverse group of 
stakeholders, to encourage the development of a real-time payment 
system in the United States.
    The Fed stated in its report on strategies for improving the U.S. 
payment system that it ``would not consider expanding its service 
provider role unless it determines that doing so is necessary to bring 
about significant improvements to the payment system and that actions 
of the private sector alone will likely not achieve the desired 
outcomes for speed, efficiency, and safety in a timely manner.''
    Responding to the mission of the Faster Payments Task Force, The 
Clearing House announced in 2016 its intent to launch a real-time 
payments system, which it officially launched in November 2017.
    Just prior to The Clearing House launching that system, the Faster 
Payments Task Force in July 2017 issued a final report, which offered 
several recommendations for achieving a safe, ubiquitous, and efficient 
faster payment system in the United States.
    One of those recommendations was for the Federal Reserve to develop 
its own 24x7x365 real-time gross settlement system for retail payments 
and to assess whether there were other operational roles the Fed should 
play in faster payments.
    After determining the Federal Reserve Banks should develop a new 
real-time gross settlement service, on August 2, 2019, the Federal 
Reserve Board voted on the Fed's proposal. The lone dissenter was Vice 
Chairman for Supervision Randy Quarles.
    The Federal Reserve then issued a notice and request for comment on 
Federal Reserve Actions to Support Interbank Settlement of Faster 
Payments--a system referred to as FedNow.
    In Vice Chairman Quarles dissent, he noted that ``The U.S. private 
sector has a long history of providing efficient payment solutions to 
consumers and businesses.''
    He added that ``The public sector should provide its own capacity 
only when the evidence of market failure is clear and alternative means 
to achieve public goals are not feasible. In this case, [Vice Chair 
Quarles] does not see a strong justification for the Federal Reserve to 
move into this area and crowd out innovation when viable private-sector 
alternatives are available.''
    Additionally, when providing a new payment service, the Federal 
Reserve is required to meet certain obligations and criteria before 
moving forward. Those criteria are: the Federal Reserve must expect 
that its providing the service will yield a clear public benefit; the 
service should be one that other providers alone cannot be expected to 
provide with reasonable effectiveness, scope and equity; and the 
Federal Reserve must expect to achieve full recovery of costs over the 
long run.
    Throughout the Fed's process, some financial institutions have 
raised concerns about the Fed's analysis and process, the cost and 
amount of time it would take to develop its own real-time payment 
system, its prospects for achieving interoperability, inherent 
conflicts of the Fed operating its own system and its prospects for 
negatively affecting existing real-time payment systems.
    Still, other financial institutions urged the Fed to move forward 
due to their concerns surrounding pricing, power and competition in the 
marketplace.
    I strongly support better, safer, and faster payments in the U.S., 
including the work already done on existing solutions in the private 
market.
    I look forward to learning more about numerous issues during this 
hearing, including: clear demonstration of the market failure or 
problem that the Fed believes it must solve through the development of 
its own real-time payments system; how the existing real-time payments 
platform works, how it has been impacted by the Fed so far and the 
consequences of the Fed developing a competing system; and how the Fed 
believes its proposed system could achieve interoperability, minimize 
negative effects to existing private sector participants, and fully 
recover its costs quickly.
    I look forward to hearing from each of you on your views of faster 
payments in the U.S., and more about the existing and proposed 
platforms.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you, Chairman Crapo, and thank you to our witnesses.
    Whether it's Facebook thinking it can run its own currency, or big 
banks wanting a monopoly over our payment system, we can't allow 
corporations to take over critical public infrastructure, so they can 
squeeze more profits out of working families.
    Whether you punch a clock or swipe a badge, every working American 
knows how important payday is. It's often the day you know you can pay 
your bills and make rent. But sometimes payday doesn't line up with the 
day your bills are due. And if that means a delay in paying the bills, 
banks will pile on late fees and overdraft charges, so it is even 
harder to make ends meet.
    Recently, the Federal Reserve Board announced that it will develop 
a system to provide payments in real time. This is great news for 
millions of Americans who live paycheck to paycheck--for anyone who has 
waited for a check to clear or had to resort to a payday lender on 
Friday to tide them over until Monday. Faster payments will allow 
Americans to actually use more of the money they've already earned.
    But while some of us see a problem to solve for working families, 
the biggest Wall Street and foreign banks see what they always do--
dollar signs. They see another way to squeeze more profits out of the 
rest of us.
    That's why they don't want the Fed to be involved. They built their 
own real-time payment system on top of existing Federal Reserve 
infrastructure, but we really don't know how it's governed, how much it 
would cost, or how they plan to skim more profits off the top for 
themselves.
    We can't trust that the big banks won't charge more to community 
banks and credit unions. They've already changed their mind on their 
prices once, and there's no guarantee they won't change their minds 
again.
    These big banks oppose the Fed's efforts because they want to be 
the only game in town. They want a monopoly.
    We know what happens when we trust Wall Street.
    Eleven years ago this month, Lehman Brothers failed, sparking the 
worst financial crisis since the Great Depression. Many of the big 
banks that are now asking for a monopoly over the real-time payments 
system are the same Wall Street banks that wrecked our financial system 
and came begging for billions in taxpayer money to save them.
    And let's be clear--they haven't exactly cleaned up their act.
    These same banks, like Wells Fargo, Bank of America, and Deutsche 
Bank, have been involved in scandal after scandal, creating fake 
accounts for customers, illegally foreclosing on servicemembers' homes, 
violating U.S. sanctions laws--it goes on and on. It seems like there's 
a new scandal every day. Capital One just suffered a huge data breach, 
exposing millions of customers' personal data.
    And remember those overdraft fees and late fees and transfer fees 
that we're trying to protect workers from? It's these same big banks 
that slap on those fees. They created this problem, now they want to 
charge people again to solve it.
    To make matters worse, this Administration is rolling back the 
safeguards we put in place to protect working families from the risky 
Wall Street activities that crashed our economy.
    It was another financial crisis over 100 years ago that led us to 
create the Federal Reserve, to clear payments and govern our currency. 
Congress recognized the high fees and abuses going on in our payment 
system and understood that we needed a publicly run central bank to 
provide financial stability and fair access to the payment system. In 
the words of Representative Carter Glass, they ``sought to tear down 
these tollgates upon the highways of commerce.''
    That's how we should think about the payment system--as the 
highways of commerce that support every dollar that fuels our economy. 
Just like roads and bridges, the payment system is critical public 
infrastructure--something that everyone should be able to use. We can't 
let profit-motivated big banks--banks whose only mission is to serve 
their shareholders, not ordinary Americans--have a monopoly over it.
    This Committee has heard a lot this year about big corporations 
taking advantage of us through the smokescreen of new technology and 
innovation.
    In our data privacy hearings, we heard about big tech companies and 
financial firms manipulating us into sharing our personal data so they 
can profit.
    Facebook dodged our questions about its plans to run its own 
digital currency out of a Swiss bank account--showing yet again that we 
can't trust them.
    We cannot allow big corporations to take over critical public 
infrastructure. The largest banks and tech companies are not acting in 
the interest of working Americans. Their only interest is to turn a 
profit for themselves and their investors.
    But the Fed's interest here is not to make a profit--it's to make 
sure everyone can pay their bills on time and transfer money when they 
need it, whether they're in a rural town or a big city.
    The Fed's real-time payment system will benefit working families, 
small banks and credit unions, small businesses, and the public as a 
whole--and everyone except Wall Street agrees.
    Thank you, and I look forward to hearing from our witnesses.
                                 ______
                                 
                  PREPARED STATEMENT OF ESTHER GEORGE
   President, Federal Reserve Bank of Kansas City, on behalf of the 
                         Federal Reserve System
                           September 25, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for this opportunity.
    Chair Powell has asked me to speak to you today in my role as the 
Federal Reserve Bank leader responsible for the Federal Reserve's 
payments improvement initiative since its beginning and as chair of the 
Financial Services Policy Committee (FSPC). The FSPC oversees the 
provision of payment services to depository institutions and the United 
States Treasury by the 12 Federal Reserve Banks. I am pleased to offer 
my statement for the record as well as an in-depth statement on the 
role of the Federal Reserve in faster payments and the recently 
announced proposal by the Federal Reserve to support faster payments.
    Over the past decade, cell phones and other online capabilities 
have made it more convenient to send and receive payments. Although 
these mobile apps appear to provide for an immediate transaction, the 
underlying infrastructure is not designed to immediately move money 
between banks, creating notable delays between the initiation of a 
retail payment and its receipt.
    To support the demand for real-time payments in the United States 
and to address this gap, last month, the Federal Reserve's Board of 
Governors (Board) announced that the Federal Reserve Banks would 
develop a new service called the FedNow Service.
    Since its founding more than a century ago, the Federal Reserve has 
provided payment and settlement services as part of its core function 
of promoting an accessible, safe, and efficient payment system for the 
Nation. Today, the Federal Reserve is continuing this important 
operational role and preparing to support the modernization of our 
Nation's payment system with capabilities that allow payments to move 
quickly through a safe and efficient foundation, on top of which 
innovation and competition can flourish.
    This decision was made only after three established criteria were 
met.
    The first of these criteria is that it is a service that other 
providers alone cannot be expected to provide with reasonable 
effectiveness, scope and equity.
    Of notable importance related to this criterion is the Federal 
Reserve's ability to connect to more than 10,000 financial 
institutions. Through these connections, the Federal Reserve's existing 
payment services allow banks of every size to serve the needs of 
thousands of communities across the United States with competitive, 
fair, and transparent access. Providing this degree of comprehensive 
nationwide reach is something that we believe will present significant 
challenges to other providers in the current market landscape. Coming 
from a region of the country with a significant number of small 
community banks serving rural areas of the central United States, I can 
tell you the Board's decision to provide this new service has been well 
received.
    The second criterion is that there will be a clear public benefit, 
including promoting the integrity of the payments system and reducing 
payments system risk.
    The Federal Reserve must continue to play an important role in 
promoting the safety of the U.S. payment system by providing liquidity 
and operational continuity in response to financial turmoil, terrorist 
attacks, natural disasters, and other crises. The FedNow Service will 
allow the Federal Reserve to retain its ability to provide stability 
and support to the banking system, as well as promote the development 
and implementation of industrywide fraud-mitigation standards. 
Development of the service will also enhance safety of the U.S. payment 
system by promoting resiliency through redundancy.
    The final criterion is that the Federal Reserve be able to fully 
recover its cost over the long run. The U.S. payments infrastructure 
today includes alternative payment choices and providers. Today, the 
Federal Reserve and The Clearing House operate competing and 
interoperable services, which bring important benefits for resiliency 
and competition. In all of our services, we have been able to meet the 
requirements of the Monetary Control Act for cost recovery that ensures 
competitive fairness while fulfilling our public policy goals. In this 
regard, even as we develop the FedNow Service, the Federal Reserve will 
continue to explore ways to support the market's existing private-
sector real-time payment service including through expanded Fedwire 
Funds Service and National Settlement Service hours as described in the 
recent Federal Register notice.
    As was explained in a 2016 GAO study, the Federal Reserve's role as 
an operator has long been judged as effective in promoting 
accessibility, safety, and efficiency for the Nation's payment system 
and its customers.\1\ \2\ Last summer, the U.S. Treasury recommended 
that ``the Federal Reserve move quickly to facilitate a faster retail 
payments system, such as through the development of a real-time 
settlement service, that would also allow for more efficient and 
ubiquitous access to innovative payment capabilities.'' \3\ We are 
engaging now with stakeholders for their input on features of the 
FedNow Service through the Federal Register notice issued last month.
---------------------------------------------------------------------------
     \1\ ``Federal Reserve's Competition With Other Providers Benefits 
Customers, but Additional Reviews Could Increase Assurance of Cost 
Accuracy'', U.S. Government Accountability Office. August 30, 2016. 
https://www.gao.gov/products/GAO-16-614
     \2\ ``The Federal Reserve in the Payments Mechanism'', Federal 
Reserve System. January 1998. https://www.federalreserve.gov/boarddocs/
press/general/1998/19980105/19980105.pdf
     \3\ U.S. Treasury, ``A Financial System That Creates Economic 
Opportunity: Nonbank Financials, FinTech, and Innovation'', (July 2018) 
at 156. Available at https://home.treasury.gov/sites/default/files/
2018-07/A-Financial-System-that-Creates-Economic-Opportunities-Nonbank-
Finance.pdf.
---------------------------------------------------------------------------
    Finally, I found it gratifying after the Federal Reserve started 
the conversation about faster payments in the U.S. and led 4 years of 
stakeholder engagement that culminated in the overwhelming majority of 
400 comments from industry, consumer, and small business expressing 
support for the Federal Reserve's role as a faster payments provider.
    I am confident that by working with all payment system 
stakeholders, we can achieve our public policy objectives for broadly 
accessible, safe and efficient faster payments.
    Thank you. I am happy to respond to your questions.
ADDENDUM
Faster Payments and the U.S. Payment System
    The U.S. payment system faces a critical juncture in its evolution. 
Services to conduct faster payments, which are available via smart 
phones apps or on our computers, have begun to emerge along with the 
growth of digital commerce. Faster payments allow individuals and 
businesses to send and receive payments within seconds, any time of 
day, on any day of the year, such that the receiver can use the funds 
almost instantly. The round-the-clock, real-time nature of faster 
payments offers convenience that is not available with many traditional 
ways of making payments. In addition, faster payments can yield real 
economic benefits for individuals and businesses by providing them with 
more flexibility to manage their money and allowing them to make time-
sensitive payments whenever needed.
    Yet with many of the faster payment services available today, the 
underlying infrastructure is not designed to immediately move money 
between banks, creating notable delays between the initiation of a 
retail payment and its receipt. These shortcomings limit the degree to 
which the potential benefits of faster payment services may be widely 
enjoyed across our economy in a safe manner. Further expansion of the 
interbank infrastructure is needed to serve as the foundation for the 
development of faster payment services that are safe, efficient, and 
broadly accessible to the American public.
    Last month, the Federal Reserve's Board of Governors (Board) 
announced that the Federal Reserve Banks (Reserve Banks) would develop 
a new service called the FedNowSM Service to support widespread 
adoption of faster payments in the United States. The FedNow Service 
will provide the necessary infrastructure, alongside similar services 
provided by the private sector, to connect banks across the country, 
allowing them to offer innovative faster payment services to their 
customers.
    Since its founding, the Federal Reserve has played a key 
operational role in the Nation's payment system by providing interbank 
payment infrastructure that is available to banks across the country, 
regardless of size or location. This critical role, given by Congress, 
stems from the Federal Reserve's unique ability, as the Nation's 
central bank, to provide interbank settlement without introducing 
liquidity or credit risks. In today's payment infrastructure, whether 
in check processing, automated clearinghouse (ACH) services, or funds 
transfers, you will see a Federal Reserve service operating in healthy 
competition with and in support of similar services provided by the 
private sector, all for the benefit of the American public.
    The importance of this role has been recognized broadly, with an 
independent review by the U.S. Government Accountability Office 
concluding that the Federal Reserve's provision of payment services has 
benefited the U.S. payment system and its users. \4\ It is important to 
point out, however, that Congress did not grant plenary regulatory or 
supervisory authority over the U.S. payment system to the Federal 
Reserve, and the Federal Reserve 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. In 
some other countries, central banks have been assigned the 
responsibility for regulating payment systems. In the United States, 
this is not the case. Thus, the Federal Reserve has historically helped 
to promote the accessibility, safety, and efficiency of the Nation's 
payment system and advance innovations through its operational role as 
provider of payment and settlement services.
---------------------------------------------------------------------------
     \4\ See U.S. Government Accountability Office, GAO-16-614, 
``Federal Reserve's Competition With Other Providers Benefits 
Customers, but Additional Reviews Could Increase Assurance of Cost 
Accuracy'' (2016). Available at https://www.gao.gov/products/GAO-16-
614.
---------------------------------------------------------------------------
Path to Present
    Leading up to the recent FedNow Service decision and announcement 
in August, the Federal Reserve took several actions to facilitate the 
advancement of faster payments in the United States. In 2013, the 
Federal Reserve began a collaborative initiative with industry 
stakeholders to foster improvements to the Nation's payment system. As 
part of this initiative, the Federal Reserve convened in 2015 the 
Faster Payments Task Force (FPTF), comprising a wide range of industry 
stakeholders, to identify and evaluate alternative approaches for 
implementing safe and ubiquitous faster payment capabilities in the 
United States.
    The FPTF published in 2017 a set of consensus recommendations 
focused on actions to support improvements to the Nation's payment 
system. \5\ Among the FPTF's recommendations were requests for the 
Federal Reserve (1) to develop a 24x7x365 settlement service to support 
faster payments and (2) to explore and assess the need for other 
Federal Reserve operational role(s) in faster payments. Subsequently, 
the U.S. Department of the Treasury recommended that ``the Federal 
Reserve move quickly to facilitate a faster retail payments system, 
such as through the development of a real-time settlement service, that 
would also allow for more efficient and ubiquitous access to innovative 
payment capabilities.'' \6\
---------------------------------------------------------------------------
     \5\ These recommendations were intended to help achieve the FPTF's 
vision of ubiquitous faster payment capabilities in the United States 
that would allow any end user (that is, an individual or business) to 
safely, efficiently, and seamlessly send a faster payment to any other 
end user, no matter which banks or payment services they use. See 
Faster Payments Task Force, ``Final Report Part Two: A Call to 
Action'', (July 2017). Available at https://fedpaymentsimprovement.org/
wp-content/uploads/faster-payments-task-force-final-report-part-
two.pdf.
     \6\ The U.S. Department of the Treasury also noted that ``[i]n 
particular, smaller financial institutions, like community banks and 
credit unions, should also have the ability to access the most-
innovative technologies and payment services. While Treasury believes 
that a payment system led by the private sector has the potential to be 
at the forefront of innovation and allow for the most advanced payments 
system in the world, back-end Federal Reserve payment services must 
also be appropriately enhanced to enable innovations.'' U.S. Treasury, 
``A Financial System That Creates Economic Opportunity: Nonbank 
Financials, FinTech, and Innovation'', (July 2018) at 156. Available at 
https://home.treasury.gov/sites/default/files/2018-07/A-Financial-
System-that-Creates-Economic-Opportunities-Nonbank-Financi.pdf.
---------------------------------------------------------------------------
    The Federal Reserve also has directly supported the development of 
private-sector real-time gross settlement (RTGS) services for faster 
payments. The Board approved in 2017 final guidelines for evaluating 
requests for joint accounts at the Reserve Banks intended to facilitate 
settlement between and among banks participating in private-sector 
payment systems for faster payments. \7\ The impetus for allowing 
broader use of joint accounts was to support these private-sector 
arrangements.
---------------------------------------------------------------------------
     \7\ Board of Governors of the Federal Reserve System, ``Guidelines 
for Evaluating Joint Account Requests'', (Issued 2017). Available at 
https://www.federalreserve.gov/paymentsystems/joint_requests.htm. In 
2016, Federal Reserve staff received a request from a private-sector 
service provider to open a new joint account for that organization's 
proposed faster payment system. The use of a joint account at a Reserve 
Bank to support settlement mitigates certain risks by reproducing, as 
closely as possible, the risk-free nature of settlement in central bank 
money.
---------------------------------------------------------------------------
    In November 2018, the Board published a Federal Register notice 
(2018 Notice) requesting comment on two potential actions that could be 
taken by the Federal Reserve consistent with the FPTF recommendations: 
(1) a service for 24x7x365 real-time interbank settlement of faster 
payments; and (2) a liquidity management tool that would enable 
transfers between accounts held at Reserve Banks on a 24x7x365 basis to 
support services for real-time interbank settlement of faster payments.
    The Board explained that a Federal Reserve RTGS service for faster 
payments, alongside private-sector RTGS services, would provide the 
infrastructure needed to achieve ubiquitous, safe, and efficient faster 
payments in the United States. Other parties, such as banks, payment 
processors, and providers of payment services, could utilize this 
platform as a basis for innovation to meet the specific needs of the 
businesses and households they serve. The Board further explained that 
a liquidity management tool, in turn, could help alleviate liquidity 
management issues for banks engaged in RTGS-based faster payments, 
notably those utilizing settlement services offered by the private 
sector. In particular, such a tool would enable movement of funds 
between accounts at the Reserve Banks during hours when traditional 
payment and settlement services are currently not open to allow 
liquidity to be moved, when needed, to an account or accounts used to 
support real-time settlement of faster payments. The 2018 Notice 
proposed that the tool could be provided by expanding operating hours 
of current Federal Reserve services or through a new service.
    In the 2018 Notice, the Board requested comment on the 
appropriateness of real-time gross settlement as the strategic 
foundation for faster payments in the United States and the public 
benefits, implications, and challenges of the Federal Reserve taking 
either, both, or neither of the potential actions.
Consideration of Comments and Policy Assessment
    The Board received over 400 comment letters representing over 800 
entities in response to the 2018 Notice. Comments were submitted by a 
wide variety of stakeholders in the U.S. payment system, including 
community banks, individuals, consumer organizations, merchants, 
service providers, private-sector operators, FinTech companies, trade 
organizations, and other interested parties. \8\ Consistent with the 
diversity of the payment industry, commenters represented a broad range 
of viewpoints.
---------------------------------------------------------------------------
     \8\ Overall, banks were the largest group of respondents, with 
community banks (small and midsize banks) comprising approximately 60 
percent of the total comments--the largest specific segment--and 
representing institutions from 34 States.
---------------------------------------------------------------------------
    Almost all commenters addressed the question of whether the Federal 
Reserve should develop a real-time interbank settlement service for 
faster payments. The vast majority of these commenters, representing 
nearly every stakeholder segment, supported the Federal Reserve taking 
this action. In contrast, large banks, some trade organizations, and 
private-sector operators were generally not supportive of the Federal 
Reserve developing such a service. \9\
---------------------------------------------------------------------------
     \9\ Approximately half of the commenters discussed the liquidity 
management tool, with almost all supporting the Federal Reserve 
offering such a tool.
---------------------------------------------------------------------------
    In reaching its decision to offer the FedNow Service, the Board was 
informed by these public comments and the history of the U.S. payment 
system, in which the Federal Reserve has played a role since its 
inception. In addition, any decision by the Board to offer a new 
payment service is subject to the factors set out in longstanding 
Federal Reserve policy, and the pricing of Reserve Bank services is 
subject to the requirements of the Monetary Control Act of 1980. \10\ 
Specifically, in considering new services, the Board assesses three 
criteria: whether the service is one that other providers alone cannot 
be expected to provide with reasonable effectiveness, scope, and 
equity; whether the service will yield a clear public benefit; and 
whether the Federal Reserve will achieve full cost recovery over the 
long run. \11\
---------------------------------------------------------------------------
     \10\ In 1984, the Board established criteria for the consideration 
of new or enhanced Federal Reserve payment services in its policy ``The 
Federal Reserve in the Payment System''. Board of Governors of the 
Federal Reserve System, ``The Federal Reserve in the Payment System'', 
(Issued 1984; revised 1990). Available at https://
www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
     \11\ In addition, the Board performs a competitive impact analysis 
when considering an operational or legal change to a Reserve Bank 
service or price that would have a direct and material adverse effect 
on the ability of other providers of services to compete with the 
Reserve Banks.
---------------------------------------------------------------------------
Other Providers Criterion
    Through this assessment, the Board has concluded that other 
providers alone cannot be expected to provide an RTGS infrastructure 
for faster payments with reasonable effectiveness, scope, and equity. 
So far, only one private-sector RTGS service for faster payments has 
been established in the United States. Due to coordination challenges 
and the high fixed costs necessary to develop a new payment and 
settlement service, this service is expected to remain the sole 
private-sector RTGS service for faster payments in the United States. 
The ability of a sole private-sector provider to extend access to a few 
thousand banks, let alone the more than 10,000 diverse banks necessary 
to achieve true nationwide scope, would be costly and time-consuming 
given that the existing service has limited relationships with and 
connections to these institutions.
    In addition, the Board concluded that the private-sector operator 
alone cannot be expected to provide the service with reasonable 
effectiveness, as viewed through the lenses of safety and efficiency. 
From a safety perspective, a sole provider may serve as a single point 
of failure in the market for RTGS-based faster payments. From an 
efficiency perspective, a market with only a single operator may cause 
challenges related to competition, innovation, and market 
fragmentation. According to established economic theory and experience 
from other markets, a single service provider not facing competition 
can yield undesirable outcomes, such as higher prices or lower service 
quality. Such undesirable outcomes could limit adoption of faster 
payments by end users, which could in turn curtail efficiency benefits 
to the broader economy.
Public Benefits Criterion
    The Board also determined that the FedNow Service will yield a 
clear public benefit. Since its inception, an underlying public policy 
rationale for the Federal Reserve's involvement in the payment system 
has been to provide services in a safe and efficient manner to banks 
nationwide. Because of this long-standing policy commitment, the 
Federal Reserve has historically extended access to banks of all sizes, 
including smaller banks in rural and remote areas of the country. The 
Federal Reserve's relationships with and connections to thousands of 
banks across the country provide a solid foundation for the FedNow 
Service to facilitate those banks gaining access to an RTGS 
infrastructure for faster payments, which would benefit small and 
midsize banks and the communities they serve.
    In a payment system with multiple operators, banks would have a 
choice whether to join a single service or multiple services. An RTGS 
infrastructure could, therefore, achieve nationwide reach in two main 
ways, either through interoperability via direct exchange of payments 
between operators, such as in the U.S. ACH system, or through at least 
one service connecting to virtually all banks, such as in the funds 
transfer system.
    The FedNow Service would promote payment system safety in multiple 
ways. As noted by commenters, the Federal Reserve has historically 
played an important role in promoting the safety of the U.S. payment 
system by providing liquidity and operational continuity in response to 
financial turmoil, terrorist attacks, natural disasters, and other 
crises. As the prominence of faster payments in the United States 
grows, the development of the FedNow Service would allow the Federal 
Reserve to retain its ability to provide stability and support to the 
banking system and the broader economy in times of crisis. In addition, 
as the operator of the service, the Federal Reserve would be in a 
position to promote the development and implementation of industrywide 
fraud-mitigation standards, which commenters highlighted are especially 
important for real-time payments. The development of the service could 
also enhance the safety of the U.S. payment system by promoting 
resiliency through redundancy.
    Finally, the FedNow Service could provide efficiency benefits by 
serving as a platform for innovation and the development of end-user 
services by the private sector. In addition, an RTGS infrastructure 
with nationwide reach would make the development of new faster payment 
services based on real-time settlement more attractive, increasing 
innovation and competition in the market for end-user faster payment 
services. Such competition could yield efficiency benefits by leading 
to lower prices and higher service quality.
Cost Recovery Criterion
    The Board expects that the FedNow Service will achieve full 
recovery of costs over the long run. The MCA requirement to require 
cost recovery ``over the long run'' is not associated with a specific 
timeframe. Beginning in 1995, the Board adopted a convention of 
evaluating long-run cost recovery for existing services using a rolling 
10-year period. At that time, Federal Reserve services were in mature 
states, characterized by widespread adoption by banks of all sizes 
throughout the country, with relatively stable volumes and costs. At 
other times, notably as the ACH service was evolving, the Board 
considered long run over an extended time period in order to encourage 
the adoption of electronic payments for the benefit of the economy. 
\12\
---------------------------------------------------------------------------
     \12\ ACH began as a Federal Reserve service in the 1970s, prior to 
the passage of the MCA. In 1981, when the pricing principles were first 
applied to ACH, the Board recognized that the ACH service was still 
evolving and allowed fees to be set based on mature volume costs rather 
than current costs for a number of years and only at the end of that 
time began marking 10-year cost recovery. The Board concluded that 
doing so would result in a more efficient payment mechanism and was 
consistent with the MCA. See 46 FR 1343 (January 6, 1981).
---------------------------------------------------------------------------
    Given the timeframe necessary to create a broad network of banks 
connecting to the service, the Board determined that a longer timeframe 
for cost recovery is consistent with the intent of the MCA to encourage 
the adoption of new services that have the potential to bring 
widespread economic benefits to the country.
Expanded Hours for Existing Services
    The second proposed action in the 2018 Notice entailed the 
exploration of the expansion of operating hours for the Fedwire Funds 
Service, which is our existing funds transfer service, and National 
Settlement Service (NSS) hours, which is our service that supports 
private-sector net settlement arrangements, potentially up to 24x7x365, 
to facilitate liquidity management, notably for users of private-sector 
RTGS services.
    As described in the 2018 Notice, RTGS-based faster payment services 
require banks to have sufficient liquidity positioned in a specified 
account to perform interbank settlement at any time, on any day. 
Without sufficient liquidity so available to conduct settlement, a 
faster payment cannot be completed in an RTGS-based service where, by 
design, interbank settlement occurs before final funds can be made 
available to the receiver. At present, the Federal Reserve does not 
provide a service that would provide a means to position additional 
liquidity in the specified account outside standard business hours. In 
light of these considerations, in its 2018 Notice the Board proposed 
developing a liquidity management tool that could help address these 
needs by facilitating transfers to and from other accounts held by 
participants at Federal Reserve Banks.
    In response to the 2018 Notice, several large banks and other 
commenters indicated that the proposed tool could help with managing 
liquidity in the recently established private-sector RTGS service for 
faster payments. The private-sector RTGS service is supported by funds 
in a joint account at a Reserve Bank, and the proposed liquidity 
management tool would enable movement of funds between a joint account 
and banks' reserve accounts during hours when existing services are not 
currently open. Commenters suggested that the Federal Reserve should 
provide this tool through expansion of operating hours for the Fedwire 
Funds Service.
    Commenters also noted that expanded Fedwire Funds Service hours, 
and relatedly, NSS hours, could provide benefits for a variety of 
payment activities beyond those related to faster payments. Payment 
activity supported by expanded hours could include additional 
settlement windows for the ACH service and wholesale payment activity 
in global markets. Because of the systemic importance of the Fedwire 
Funds Service, in particular, additional risk, operational, and policy 
analysis is required for this action, and the draft notice indicates 
the Federal Reserve's intention to engage actively with the industry to 
conduct this analysis.
The FedNow Service
    As explained in the August announcement, the FedNow Service would 
conduct real-time, payment-by-payment, settlement of interbank 
obligations through debits and credits to banks' balances in accounts 
at the Reserve Banks. Real-time settlement in accounts at the Reserve 
Banks means that settlement occurs without liquidity or credit risks, 
which enhances the safety of these payments. The FedNow Service would 
incorporate clearing functionality, allowing banks, in the process of 
settling each payment, to exchange information needed to make debits 
and credits to the accounts of their customers. The service's 
functionality would support banks' (or their agents') provision of end-
to-end faster payments to their customers.
    Ultimately, the FedNow Service will provide, alongside similar 
private-sector services, core infrastructure to promote ubiquitous, 
safe, and efficient faster payments in the United States. In fact, for 
all payment systems in our country, no single private-sector provider 
has ever achieved nationwide reach on its own. With the FedNow Service, 
banks will now have a choice in providers or could choose to use both a 
Federal Reserve and private-sector service for back-up purposes, as 
some do today for check, ACH, and wire services.
    The Federal Reserve recognizes that time-to-market is an important 
consideration expressed by many commenters in response to the 2018 
Notice. Our objective is to implement the service as soon as 
practicably possible. However, the achievement of true nationwide reach 
over the long term, as opposed to initial availability of a service, is 
the most important measure of success for faster payments.
    At the same time as the Board published its decision regarding the 
new service, the Board requested public comment on how the FedNow 
Service might be designed to most effectively support the full set of 
payment system stakeholders and the functioning of the broader U.S. 
payment system. In the same notice, the Board also announced its 
intention to explore the expansion of Fedwire Funds Service and NSS 
hours, up to 24x7x365, to facilitate liquidity management in private-
sector real-time gross settlement services for faster payments and to 
support a wide range of payment activities, beyond those related to 
faster payments.
    The Board's important decision to approve a new payment service 
comes over 40 years after the last service, ACH, was approved for 
implementation back in the 1970s. The decision to establish ACH came at 
a pivotal moment when the industry was overwhelmed by the volume of 
paper checks, and the new technology at that time allowed for what is 
essentially an electronic version of paper checks. Remarkable new 
technology enables the Federal Reserve to support the financial sector 
in offering an ever-growing array of options 24x7x365 in a safe and 
efficient manner. Providing such payment services is very much 
consistent with our historical role in the payment system, one that has 
helped banks to meet the needs of business and households in a growing 
economy for over a century.
                                 ______
                                 
                  PREPARED STATEMENT OF ROBERT HUNTER
 Executive Managing Director and Deputy General Counsel, The Clearing 
                         House Payments Company
                           September 25, 2019
    Chairman Crapo, Ranking Member Brown, and distinguished Members of 
the Committee, my name is Rob Hunter, and I serve as the Deputy General 
Counsel of The Clearing House Payments Company, based in our North 
Carolina facilities. I have worked at The Clearing House for more than 
10 years providing senior legal support to all of our payments 
services. Today, we will be focused on the RTP network, which I was 
fortunate to be involved in developing. I am also the past Chairman of 
the Subcommittee on Electronic Payments of the Business Law Section of 
the American Bar Association and have been involved in a host of 
development activities related to payments throughout my career.
    The RTP network is a new and exciting part of our national payment 
infrastructure. It was launched in 2017 by The Clearing House and is 
fully operational today. One of the most distinguishing features of the 
RTP network is that it operates in real time and all the time--there 
are no ``bankers' hours'' for the RTP network--it functions 24x7. But 
that is just one remarkable feature. The RTP network also delivers on 
the vision of faster, more efficient and more secure payments that will 
benefit every American consumer and business.
    This innovation is consistent with The Clearing House's historical 
role in delivering to our country core payments infrastructure that is 
efficient, safe, and reliable. Founded in 1853, for over a century-and-
a-half The Clearing House has served as the leading private-sector 
operator of payments infrastructure in the United States. On an average 
business day, The Clearing House clears and settles nearly $2 trillion 
over its wire, automated clearing house and check-clearing networks.
    The Committee has asked those of us testifying today to focus on 
five main issues: (a) the current state and evolution of the U.S. 
payment system and how the current system works, (b) the Federal 
Reserve Faster Payments Task Force's process, conclusions, and 
recommendations, (c) the Federal Reserve's notice and request for 
comments on its actions to support interbank settlement of faster 
payments through the development of the FedNow system and expanded 
operating hours for the Fedwire Funds Service and National Settlement 
Service, (d) an in-depth overview of the RTP network and any 
similarities to or differences from the proposed FedNow service, and 
(e) whether FedNow and a private-sector real-time payment system, such 
as the RTP network, could achieve interoperability, while ensuring 
efficient, safe and ubiquitous faster payments.
    I will address each topic in accordance with the Committee's 
request, but before responding specifically to those questions, it may 
be helpful to provide a summary of The Clearing House's position. When 
the Federal Reserve competes with the private sector, the Federal 
Reserve must do so in a manner that minimizes the competitive 
advantages that a Government system has, both inherently and as a 
direct byproduct of the Federal Reserve's role as a supervisor, the 
supplier of liquidity to the financial system and the central bank. 
This is not the normal competitive question of impact on profitability 
because The Clearing House does not seek to operate at a profit. 
Rather, it is a question of The Clearing House's ability to provide the 
most effective and efficient real-time payment system to consumers and 
businesses, to the ultimate benefit of this country's overall economy.
Current State and Evolution of the Payment System
    The payments landscape in the United States is complex and highly 
competitive, with tremendous innovation during the last decade spurred 
by banks, money services businesses and FinTechs. This innovation has 
largely been focused on end-user products. What has been lacking, 
however, until the launch of the RTP network, is modernization of what 
we often refer to as the payments rails. This lack of modernization has 
had important consequences. Consumers and businesses have been left to 
choose between payments options that were slower than desired and that 
offered conditional forms of payment, or new payment products that sit 
outside of the traditional banking system, often with less security and 
resiliency. Bank and nonbank financial institutions have been forced to 
accept settlement risk, increasing fraud risk and increased operational 
complexities due to limitations in the underlying payment rails. The 
RTP network, the first new payments rail in over 40 years, is designed 
to eliminate these suboptimal choices and risks, to accelerate the 
availability of payments, and to serve as a platform for innovation for 
all.
    Americans don't spend a lot of time thinking about our country's 
payments system, which is understandable because so much of it is 
hidden from view. But make no mistake--without this infrastructure our 
economy would cease to function. Our payments system enables consumers 
and businesses to make payments safely, securely and with certainty--
whether you are paying your wireless bill or splitting a restaurant tab 
with friends.
    Although the U.S. payments system has and continues to work very 
well (meaning safely and efficiently), prior to the introduction of the 
RTP network, it had become (as noted above) very outdated when compared 
to the payments systems in other industrialized parts of the world. I 
suspect everyone in this room has been frustrated upon hearing that you 
have to wait a day or longer to gain access to funds you have received 
or when you don't actually know when a party to whom you have made a 
payment will actually receive those funds. These frustrations are due 
to the simple fact that our country's payments infrastructure was 
designed and built over 40 years ago--well before the dawn of the 
Internet and mobile phones.
    Launched in November of 2017 and fully operational, the RTP network 
addresses the need to modernize the payments infrastructure in the 
United States and provides a safer, more secure and more efficient way 
to make payments that clear and settle immediately, consistent with the 
way American consumers and businesses operate today.
Federal Reserve Faster Payments Task Force
    To its credit, the Federal Reserve recognized the need for faster 
payments in the United States and leveraged its convening power to urge 
the private sector to act. In 2013, the Federal Reserve proposed 5 
objectives to improve the U.S. payment system that, according to the 
Federal Reserve, would ideally be achieved within 10 years, including 
``[a] ubiquitous, safe, faster electronic solution(s) for making a 
broad variety of business and personal payments supported by a flexible 
and cost-effective means for payment clearing and settlement groups to 
settle their positions rapidly and with finality'' (i.e., a real-time 
payments system). \1\
---------------------------------------------------------------------------
     \1\ ``Payment System Improvement--Public Consultation Paper'' 
(Sept. 10, 2013), available at https://fedpaymentsimprovement.org/wp-
content/uploads/2013/09/Payment-System-Improvement-Public-Consultation-
Paper.pdf.
---------------------------------------------------------------------------
    After receiving substantial stakeholder comment on the various 
objectives, including commentary expressly directed toward the 
development of a real-time payments system, the Federal Reserve 
published in 2015 its Strategies for Improving the U.S. Payment System. 
\2\ In this paper, the Federal Reserve described various strategies for 
improving the payments system in the United States, including 
``[i]dentify[ing] effective approach(es) for implementing a safe, 
ubiquitous, faster payments capability in the United States'', noting 
that ``[p]ayment stakeholders will ultimately determine through their 
individual and collective actions the extent to which these strategies 
are achieved.'' \3\
---------------------------------------------------------------------------
     \2\ Strategies for Improving the U.S. Payments System (Jan. 26, 
2015) available at https://fedpaymentsimprovement.org/wp-content/
uploads/strategies-improving-us-payment-system.pdf.
     \3\ Id. at 3.
---------------------------------------------------------------------------
    In late 2015 and early 2016 and to further the strategies outlined 
in its 2015 paper, the Federal Reserve established its Faster Payments 
Task Force (FPTF), which was charged with ``evaluating options for 
achieving faster payments capabilities with the goal of identifying the 
approach(es) that would best achieve the desired outcomes.'' \4\ As 
part of this assessment process, the FPTF called on the private sector 
to submit proposals for ``a full end-to-end payments solution'' to 
achieve the identified strategies. \5\ These proposals were to be 
judged against the ``effectiveness criteria'' developed by the FPTF to 
determine ``how well solutions can achieve the desired outcomes 
associated with improving the U.S. Payments System.'' \6\
---------------------------------------------------------------------------
     \4\ Id. at 17.
     \5\ ``In Pursuit of a Better Payment System'', Federal Reserve 
Banks (2016) at 5.
     \6\ Id. at 4.
---------------------------------------------------------------------------
    Of the 16 different private-sector proposals that were submitted to 
the FPTF, The Clearing House's RTP network proposal received the very 
highest marks, achieving a rating of ``very effective'' (the highest 
possible rating) with respect to 31 of the 36 criteria and 
``effective'' with respect to the remaining five. \7\ A ``very 
effective'' rating meant that ``the solution fully satisfies the[] 
criteria.'' \8\
---------------------------------------------------------------------------
     \7\ Faster Payments QIAT Assessment (Feb. 21, 2017).
     \8\ Faster Payments Effectiveness Criteria (Jan. 26, 2016) (FPTF 
Effectiveness Criteria) at 6.
---------------------------------------------------------------------------
    Importantly, the RTP network was given the highest rating possible 
with respect to its plan to achieve ubiquity, its approach to 
settlement and resiliency as well as the other categories noted below:
---------------------------------------------------------------------------
     \9\ ``Accessibility'' is defined in the FPTF Effectiveness 
Criteria as meaning that the solution would ``enable any entity . . . 
to initiate and/or receive payments to/from any Entity'' and that the 
solution had a ``credible plan for achieving widespread adoption.'' 
FPTF Effectiveness Criteria at 6.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The Clearing House was well positioned to meet the need identified 
by the Federal Reserve for the development of a real-time payments 
solution and is proud of the ratings its solution received from the 
FPTF.
    That The Clearing House would be well-positioned to deliver on the 
promise of faster payments for all should not come as a surprise. The 
Clearing House, which was created to provide the payment services 
required by the Nation's economy, has been in existence for over 165 
years and, while owned by a relatively small number of banks, it has 
always existed to serve depository institutions of all sizes, and 
continues to do so today. In fact, in The Clearing House's Automated 
Clearing House (ACH) and check-clearing networks approximately 80 
percent of our customers are banks and credit unions with $10 billion 
in total assets or less.
    The Clearing House has been entrusted with operating an integral 
part of the financial system since 1853 because we serve our 
participants effectively and ethically. We do not engage in anti-
competitive behavior because such behavior offends our culture and core 
values. Our focus on the needs of the industry as a whole has led The 
Clearing House to price our services on a ``cost recovery basis''--in 
other words, services are priced at a level sufficient to maintain the 
ongoing safety and soundness of The Clearing House's systems and to 
make necessary investments in research and development. The Clearing 
House doesn't have shareholders seeking to maximize profits: it has 
never paid a dividend in its history, there is no expectation for any 
return on capital and there is no special pricing for owner banks. The 
Clearing House instead annually reassesses fees; this cost recovery 
model has enabled The Clearing House to continually lower prices over 
time. And, if that were not enough, we are subject to antitrust laws 
that provide real guardrails on the way we compete, and to multiple 
different legal protections that prohibit unfair or deceptive acts and 
practices.
    The Clearing House maintains a critical and constant emphasis on 
the safety, security, reliability, and efficiency of its payment 
systems and it has a remarkable 166-year history of resiliency, having 
maintained its operations without interruption through multiple world 
wars, financial crises and natural and man-made disasters, including 9/
11 and the great recession.
The RTP Network
    To meet the needs identified by the Federal Reserve and consistent 
with the criteria articulated by the FPTF, The Clearing House led an 
initiative to modernize the U.S. payments system by developing the RTP 
network. Today, the network represents the culmination of The Clearing 
House and the private sector's collective investment of more than $1 
billion to design, build, launch, and commercialize a real-time 
payments network in this country. Launched in 2017 and fully 
operational since that time, the RTP network is the first significant 
new payments infrastructure introduced in the United States in over 40 
years. The RTP network was designed and built to offer real-time 
payments capabilities to every consumer and business in the country via 
any and all depository institutions nationwide that want to deliver 
this functionality to their customers--what the industry refers to as 
``ubiquity''. This means that whether you bank with JPMorgan Chase, or 
the community Bank of Oak Ridge, North Carolina, where I live, any 
consumer or business can have the benefits of real-time payments 
through their depository institution. Today, the RTP network is already 
connected to over 50 percent of all U.S. transaction accounts, with the 
goal of achieving near-universal reach in the next several years.
    In terms of the network's functionality, RTP delivers the real-time 
capabilities that Americans want and need, so that payment recipients 
receive final, good funds immediately and senders receive confirmation 
that the funds have been received. The benefits to consumers, small 
businesses, and the Nation's economy are transformational. For example:

    Employees who were previously paid by check can be paid 
        through the RTP system and have immediate access to final good 
        funds;

    Day laborers can be paid immediately at the end of their 
        shift;

    Uber drivers can get money into their bank accounts to buy 
        gas for the next day;

    Consumers can stop worrying about how long a payment may 
        take to get to their power company, their mortgage lender or 
        their water company;

    Small businesses, like contractors, can be paid immediately 
        upon completion of a job;

    Restaurants can leverage the RTP network to make payments 
        for ``just-in-time'' inventory instead of relying on credit; 
        and

    Insurance companies can get disaster relief funds 
        immediately into their policyholders' accounts.

    While the immediacy of a payment is an important component of the 
RTP network, RTP offers so much more, including the rich data features 
of the system, which allow small businesses to easily transmit invoices 
and instantly receive payments--streamlining cashflow for businesses 
that are the backbone of our economy. In addition to the examples 
above, the appended Fact Sheet provides more details on the design of 
the RTP network.
    In addition to the features of the RTP network that will provide 
all Americans with a range of new benefits relating to speed, 
convenience, and safety of the payments they make and receive, there 
are also societal benefits that will accrue from real-time payments. 
Some analysts, for instance, believe that real-time payments are one of 
the most immediate ways to benefit Americans who today live paycheck-
to-paycheck but tomorrow can receive immediate, final payment through 
the RTP system and therefore have earlier access to funds.
    Let me briefly talk about achieving near-universal reach for the 
RTP network. The RTP network was designed and built so that the network 
has the capacity to reach every depository institution in the country, 
either directly or through third-party service providers, so that every 
American consumer and business can have the benefit of real-time 
payments. To achieve this, The Clearing House not only built out the 
technical capabilities to reach the country's 11,000 financial 
institutions, but also ensured that the pricing to participate on the 
network was the same for all banks and credit unions regardless of 
size. In sum, whether you are the country's largest commercial bank or 
the smallest, you pay the same, per-transaction fee, to bring these 
capabilities to your customers.
    But the decision by a bank to join a faster payments network like 
the RTP network or, in 4 years, FedNow, is not simply a matter of 
having a preexisting connection or paying the per-transaction fee. \10\ 
Each bank joining a faster payments network needs the right connection, 
one that is highly resilient (persistent) and right sized for the 
nature of real-time payments, needs a back office with the capacity and 
technology to accomplish real-time accounting and availability and 
needs employee resources available for 24/7 payments support. This is a 
heavy lift for all banks and for most requires the assistance of third 
party service providers. The Clearing House has been working with all 
types of service providers to help ensure that true access to the RTP 
network is within reach.
---------------------------------------------------------------------------
     \10\ The Federal Reserve makes a similar observation in its 
Federal Register notice where it notes that FedNow participants ``would 
need to deploy and test enhanced or upgraded FedLine components'' and 
``maintain adequate telecommunications services to support the expected 
end-to-end speed of payments.'' Federal Reserve Actions To Support 
Interbank Settlement of Faster Payments, 84 FR 39297, 39320 (Aug. 9, 
2019).
---------------------------------------------------------------------------
    The RTP network is also a fundamentally safer and more secure way 
to pay. RTP payments are limited to ``credit push'' only, which means 
that consumers are always in control of the money that moves from their 
accounts. Unlike ``debit pull'' systems, where a payee can pull money 
from an account, consumers and businesses using the RTP network must 
authenticate into their bank's platform and affirmatively send or 
``push'' money to a recipient--no one can ``pull'' money out. This 
feature also lays the foundation for securing the message between the 
bank and its customer, responding to the need for greater fraud 
resistance and better cybersecurity.
Federal Reserve Notice and Request for Comment on Actions To Support 
        Interbank Settlement
    The Committee has explicitly requested our views about the Federal 
Reserve's decision to enter the real-time payments playing field. Less 
than a year after the RTP network went live, the Federal Reserve issued 
a proposal that contemplated entering the market with its own competing 
real-time gross settlement (RTGS) system. \11\ (The RTP network is also 
a real-time gross settlement system.) In this proposal, the Federal 
Reserve cited, as a major justification for potential entry, a 
generalized concern that its real-time payment service would be needed 
to achieve the ubiquity that could not be achieved by the private 
sector. \12\ There was no analysis of The Clearing House's then-
operational RTP network's efforts to achieve ubiquity or the FPTF 
findings related to the RTP network.
---------------------------------------------------------------------------
     \11\ Potential Federal Reserve Actions to Support Interbank 
Settlement of Faster Payments, Request for Comments, 83 FR 57351 (Nov. 
15, 2018).
     \12\ Id. at 57361.
---------------------------------------------------------------------------
    The 2018 proposal had two other important components. First, the 
Federal Reserve noted that accessibility would be greatly enhanced ``if 
existing and potential future private-sector RTGS services were able to 
interoperate with a Reserve Bank service such that end-user customers 
of any bank could send faster payments to end-user customers of any 
other bank regardless of the faster-payments services used by the 
banks.'' \13\ Second, the Federal Reserve suggested that it might 
modernize its own existing Fedwire and National Settlement Service 
(NSS) infrastructures, upon which the private sector relies to manage 
liquidity, by extending the hours of those services to meet the demands 
of a 24x7 economy. The comment process revealed near unanimity of 
support for extending Fedwire and NSS hours. \14\
---------------------------------------------------------------------------
     \13\ Id.
     \14\ 84 FR 39297, 39302 (approximately 225 of 230 commenters 
supported the Federal Reserve's liquidity management proposal).
---------------------------------------------------------------------------
    While The Clearing House was disappointed in the Federal Reserve's 
action suggesting it might enter the market with its own solution, and 
concerned over the chilling impact that might have on The Clearing 
House's plans to bring the benefits of real-time payments to every 
American, The Clearing House was also encouraged by statements that the 
Federal Reserve might modernize its own existing Fedwire and NSS 
infrastructures. If the Federal Reserve took these enhancing actions, 
private-sector systems would find it easier to offer 24x7 payments 
services, which currently operate during times when the Federal Reserve 
is not open or operational to provide liquidity.
    In August of 2019, the Federal Reserve issued a Federal Register 
notice stating that it would enter the market with its own competing 
RTGS system, FedNow. The Federal Reserve acknowledged that FedNow would 
not be ready to launch until 2023 or 2024 at the earliest and that 
nationwide reach would take more time to establish. \15\ In spite of 
near unanimity of support for extending Fedwire and NSS hours, the 
notice states only that the Federal Reserve will continue to ``explore 
the expansion'' of Fedwire and NSS hours. \16\
---------------------------------------------------------------------------
     \15\ Id. at 39301.
     \16\ Id. at 39316.
---------------------------------------------------------------------------
    The announcement stated that the Federal Reserve's FedNow service 
will provide a ``clear public benefit'' based on accessibility, safety, 
and efficiency. Notwithstanding the FPTF ratings for the RTP network, 
the announcement also concluded that the RTGS service is not one that 
other providers alone can provide with ``reasonable scope, 
effectiveness, and equity.'' \17\ In reaching its decision, the Federal 
Reserve stated that the criteria ``require[] a forward-looking 
evaluation of the probable or likely future state of the payment system 
over the long run, with or without Federal Reserve action'' and that 
the Federal Reserve ``focuses on expected, long-term outcomes and does 
not require a determination that each of the criteria is satisfied at 
present or will be with certainty in the future.'' \18\
---------------------------------------------------------------------------
     \17\ Id. at 39306-39309, 39310-39312.
     \18\ Id. at 39303.
---------------------------------------------------------------------------
    The future state described by the Federal Reserve in its Federal 
Register notice was one in which The Clearing House would act in ways 
that are entirely inconsistent with its 166 year history (i.e., that we 
would abandon cost-recovery pricing and instead pursue a profit motive) 
and that in some cases would be anticompetitive despite The Clearing 
House being subject to antitrust laws. While unintended, the 
assumptions that the Federal Reserve made in support of its decision to 
enter the market have contributed to misinformation about The Clearing 
House and the RTP network and run the risk of impeding The Clearing 
House's ability to bring the benefits of real-time payments to every 
American.
    The FedNow announcement further noted that the Federal Reserve 
believes it needs to enter the market with its own competing system 
because it lacks ``plenary regulatory or supervisory authority'' over 
payments systems and instead has ``traditionally influenced retail 
payment markets through its role as an operator.'' \19\ Its authority 
over The Clearing House under the Bank Service Company Act, \20\ 
however, is extremely broad, with The Clearing House being subject to 
regulation and examination to the same extent as if the services being 
provided were being performed by the depository institution that is 
subject to Federal Reserve supervision itself. \21\ In addition, the 
Act gives the Federal Reserve broad authority to issue ``such 
regulations and orders as may be necessary to enable [it] to administer 
and to carry out the purposes of this [Act].'' \22\ Nevertheless, the 
Federal Reserve concludes in the Federal Register notice that this 
authority is not sufficient to protect against potential future bad 
behavior by The Clearing House although this conclusion is made without 
reference to antitrust and unfair and deceptive practices laws to which 
The Clearing House is subject.
---------------------------------------------------------------------------
     \19\ Id. at 39300.
     \20\ The Clearing House is also a designated financial market 
utility under Title VIII of Dodd-Frank, subjecting The Clearing House 
to the highest levels of supervision and regulation by the Federal 
Reserve. While The Clearing House's regulation and supervision under 
Title VIII relate specifically to its role as the operator of CHIPS, 
The Clearing House operates as a single entity in the operation of its 
payments systems.
     \21\ See, e.g., 12 U.S.C. 1867(c) (``[W]henever a depository 
institution that is regularly examined by an appropriate Federal 
banking agency, or any subsidiary or affiliate of such a depository 
institution that is subject to examination by that agency, causes to be 
performed for itself, by contract or otherwise, any services authorized 
under this chapter, whether on or off its premises . . . such 
performance shall be subject to regulation and examination by such 
agency to the same extent as if such services were being performed by 
the depository institution itself on its own premises . . . .'').
     \22\ 12 U.S.C. 1867(d) (``The Board and the appropriate Federal 
banking agencies are authorized to issue such regulations and orders as 
may be necessary to enable them to administer and to carry out the 
purposes of this chapter . . . .'').
---------------------------------------------------------------------------
    Despite concerns that the Federal Reserve's announcement may hinder 
The Clearing House in achieving the full potential of the RTP network 
(see discussion below on the impact of two noninteroperable systems), 
The Clearing House is resolute in its goal of bringing real-time 
payments to the United States and believes strongly in the value and 
integrity of the RTP network, as fully confirmed by the strong ratings 
it received from the Federal Reserve's own Faster Payments Task Force. 
We are committed to working closely with every financial institution 
that is interested in pursuing participation in the RTP network so that 
each institution's customers can obtain the benefits of real-time 
payments.
Comparison of the RTP Network to FedNow
    The Committee has asked for a comparison of the RTP network to 
FedNow, which is not easy because one payment system exists and the 
other is an aspirational future system. The information that we have 
about the design of FedNow is strictly based on the Federal Register 
notice, which does not provide many significant details and suggests 
that much of the design of the system is still in the planning stage. 
While President George is best positioned to speak to the design of 
FedNow, we believe that the proposed design will be similar to the RTP 
network in the following ways.

    Both the RTP network and FedNow are real-time gross 
        settlement systems

    Both are credit push systems that operate 24x7

    The RTP network has a current value limit of $25,000 and 
        the Federal Reserve has indicated FedNow will have a value 
        limit of $25,000

    Both systems will leverage ISO 20022 message standards

    Of course the biggest difference between the two systems is that 
the RTP network is operational and available in the market today while 
FedNow will not be available for at least 4 years. While much has been 
made about differences in settlement, the RTP network uses a settlement 
model that has been used for decades to settle payments over The 
Clearing House's wire payments system, known as CHIPS, a systemically 
important payment system designated as such under Dodd-Frank and 
supervised and regulated by the Federal Reserve. RTP settlement is 
fully supported by a balance in an account at the Federal Reserve Bank 
of New York. Funding (or lack of funding) by any one RTP participant 
does not affect the ability of other participants to send or receive 
funds over the RTP network. Importantly, the RTP network is designed so 
that neither The Clearing House nor its participants experience credit 
risk. In contrast it appears that the FedNow service will provide 
unlimited credit (no real-time monitoring of credit positions) even on 
weekends and holidays when the Federal Reserve's discount window is 
closed.
    The general design of FedNow raises several significant competitive 
issues for the private sector that may hamper the private sector's 
ability to bring the full benefits of real-time payments to consumers 
and businesses in this country. The good news is that the Federal 
Reserve could take steps to address these concerns.
    First, the Federal Reserve, as the Nation's central bank, has the 
ability to clear and settle payments directly through financial 
institutions' master accounts, which means the balances being held in 
accounts used for FedNow payments will count towards a financial 
institution's reserve requirements and bear interest. The Federal 
Reserve has the legal authority and operational capacity to accord the 
same treatment to financial institution positions in the RTP account 
that is held at the Federal Reserve Bank of New York and that is used 
to facilitate RTP settlement, but so far has been unwilling to do so.
    Second, given the near unanimity of support in response to its 
October 2018 Request for Comment that the Federal Reserve should move 
forward with making Fedwire and NSS available on a 24x7 basis, the 
Federal Reserve should act quickly to implement expanded hours. Because 
the private sector is dependent on Fedwire or NSS to manage liquidity 
in private-sector systems, this is the single most important action the 
Federal Reserve could take to encourage private-sector competition in 
real-time payments. This is especially important from a competitive 
perspective given that the Federal Reserve appears to have announced 
that it will provide unlimited access to liquidity in the FedNow system 
even when the discount window is closed.
    These two issues must be expeditiously addressed by the Federal 
Reserve in order to ensure that the private sector is not impeded in 
its ability to bring the benefits of real-time payments to American 
consumers and businesses.
    Finally, while the Federal Reserve's analysis of its pricing 
flexibility under the Monetary Control Act (MCA) comports with our 
understanding of the MCA, the Federal Reserve's choices on pricing will 
obviously significantly impact competition with the private sector. For 
example, the Federal Reserve has indicated that it may be 15+ years 
before FedNow achieves cost recovery and that initial fees will be 
based on ``mature volumes'' with the Federal Reserve anticipating that 
FedNow will become the sole RTGS system with ``nationwide reach'' \23\ 
To ensure fair competition, The Clearing House would urge that the 
Federal Reserve reassess what is meant by ``in the long run'' to take 
into account the length of time that a private-sector entity would be 
able to wait to recover its operating costs, and calculate ``mature 
volumes'' in a manner that does not unrealistically assume volume 
moving away from the RTP network and to FedNow.
---------------------------------------------------------------------------
     \23\ 84 FR 39297, 39313-39314, and 39320.
---------------------------------------------------------------------------
Interoperability
    The Clearing House does not believe that interoperability between 
two RTGS systems is achievable. The Federal Reserve's original proposal 
in November of 2018 assumed that the Federal Reserve's RTGS system 
would be interoperable with private-sector systems. It appears from the 
Federal Reserve's notice, however, that the Federal Reserve has 
realized that interoperability is unlikely.
    The result in the United States may be a completely bifurcated 
market, where, unless each bank in the country joins two systems (a 
highly expensive and inefficient proposition, particularly for smaller 
banks), the banks and their customers that are transmitting payments on 
one system will not be able to reach the banks and their customers that 
are on the other. In the place of ubiquity, we will have balkanization. 
In our view, that is a highly damaging result for the future of real-
time payments in the United States.
    When considering the issue of interoperability, it is important to 
understand the differences between real-time payments and other payment 
methods, such as the ACH system or wire systems like CHIPS and Fedwire. 
With regard to ACH, ACH is interoperable with respect to the exchange 
of payment messages (known as ``clearing''), allowing a participant on 
one system to send a message to a participant on another system. It is 
not, however, interoperable with respect to settlement. Clearing 
interoperability is achievable in the ACH network because clearing and 
settlement in the ACH are distinct actions that happen at different 
times. With real-time clearing and settlement systems like the RTP 
network, clearing and settlement happen instantaneously--they cannot be 
split without significantly compromising the integrity and 
functionality of the system--and unlike the ACH network funds are 
immediately available to the recipient and are final and irrevocable.
    Similarly, real-time payments cannot function like wire payments, 
which rely on a system of intermediary banks to be able to reach all 
endpoints. In contrast to systems like Fedwire and CHIPS (The Clearing 
House's wire system), an overarching design principle of real-time 
payment systems like the RTP network is to ensure that when a payer 
(the sender of a payment) instructs payment to a payee (the recipient 
of a payment), that payment will be completed instantaneously. To 
achieve this goal, payment systems like the RTP network must be 
designed so that payment processing will always be completed (meaning 
get to the recipient's bank) and will be completed within milliseconds. 
While The Clearing House has yet to see how the Federal Reserve will 
design FedNow to meet this important objective of real-time payments, 
the RTP network accomplishes this by supporting a very simple payment 
model. In an RTP payment there is a payer, the payer's bank, the payee 
and the payee's bank (no intermediary banks). This design eliminates 
the very real possibilities that exist today in wire transfer systems 
that a payment will be delayed or stopped at an intermediary bank. This 
also means that the RTP network can only be used to make a payment if 
the financial institutions holding the payer's and payee's accounts are 
both participants on the RTP network. This is in stark contrast to wire 
transfer systems like CHIPS which can be used to support payments sent 
by anyone to anyone regardless of whether such persons have accounts 
with CHIPS participants. This important distinction between wire and 
real-time systems like the RTP network means that CHIPS can compete 
with Fedwire for each and every dollar wire payment--either system 
could be used to help make such payments even though neither CHIPS nor 
Fedwire \24\ is ubiquitous. The RTP network (and the FedNow service) 
will not enjoy that same opportunity and instead will be strictly 
limited to the accounts held at banks that have signed up to use the 
service. It is The Clearing House's view that in that type of payments 
environment, given the commodity nature of payments, it will be very 
hard for two systems to both succeed.
---------------------------------------------------------------------------
     \24\ The CHIPS system has 44 financial institution participants. 
The Fedwire Funds Service has approximately 5,300 participants. (cite 
Fed PFMI https://frbservices.org/assets/financial-services/wires/funds-
service-disclosure.pdf p. 8 says over 5,300 and our public website 
https://www.theclearinghouse.org/-/media/new/tch/documents/payment-
systems/chips-participants-revised-05-15-2019.pdf.) Yet both systems 
can facilitate payments involving all 11,000 U.S. financial 
institutions.
---------------------------------------------------------------------------
Conclusion
    The Clearing House is extremely proud of its record of providing 
essential payments infrastructure for the U.S. financial system for 
well over a century-and-a-half. While we are proud of our long service 
to the Nation, we are also excited about our country now having the 
most advanced payment system in the world. We are working hard to bring 
the benefits of the RTP network to all of the banks in this country so 
that your constituents, consumers and businesses across America, can 
all realize the benefits of faster, more efficient and more secure 
real-time payments.
    The Clearing House appreciates your interest in this topic and I 
look forward to answering your questions.
The RTP Network
    The Clearing House launched the RTP network in November 2017 to 
bring real-time payments to the United States. Today the RTP network 
reaches over 50 percent of U.S. transaction accounts, with a path to 
achieving universal adoption over the coming years. The RTP network was 
built for financial institutions of all sizes and serves as a platform 
for innovation enabling the delivery of new products and services to 
their customers. Real-time payments over the RTP network provide 
consumers and businesses with the ability to conveniently send payments 
directly from their accounts 24/7 and to receive and access funds sent 
to them over the RTP network immediately.
RTP Facts and Frequently Asked Questions:

    Ubiquity--All federally insured U.S. depository 
        institutions can participate on the RTP network.

    Access to the RTP network--Federally insured U.S. 
        depository institutions have the option to directly connect to 
        the RTP network or use an electronic connection provided by a 
        third-party service provider such as a core processor, a hosted 
        gateway, a bankers' bank or a corporate credit union.

    Pricing--The RTP network has a single price for all 
        participants regardless of size, with no volume discounts, no 
        volume commitments and no monthly minimums. Pricing for the RTP 
        network is available on The Clearing House's website 
        (www.theclearinghouse.org/).

    24/7--The RTP network operates 24/7, which allows financial 
        institutions to send or receive payments at any time.

    All Types of Payments--The RTP network supports all types 
        of payments (B2B, B2C, C2B, P2P, G2C). The RTP system may not 
        be used to make a payment for a foreign account.

    Flexible Messaging Functionality--Rich, flexible messaging 
        functionality (nonpayment messages) is included to support 
        communications between participants and value-added products. 
        For example, the RTP system provides messaging capability 
        enabling a request for payment of a bill or invoice directly 
        via the RTP network.

    Immediate Availability--Recipients receive the payment 
        within seconds of the sending financial institution initiating 
        the transaction; the receiving financial institution is 
        required to make funds available immediately, except where 
        necessary for risk management or legal compliance purposes.

    Payment Certainty--Sending financial institutions are not 
        permitted to revoke or recall a payment once it has been 
        submitted to the RTP network. However, there is a process to 
        facilitate communication between financial institutions around 
        return of funds sent in error or if there is suspected fraud.

    Transaction limits--The RTP network is strictly a credit 
        push system. The credit transfer limit is currently $25,000.

    Prefunding--RTP participants that intend to send payments 
        over the RTP network are currently required to contribute 
        funding to a special deposit account at the Federal Reserve 
        Bank of New York (an account that may be used by all RTP 
        participants regardless of the Federal Reserve district in 
        which they are located). A participant may use a liquidity 
        provider such as a bankers' bank or corporate credit union to 
        provide its funding. An RTP participant that only receives 
        payments over the RTP network does not have to contribute 
        funding.

    Rules Governing the RTP Network--The RTP Participation and 
        Operating Rules apply to all network messages and are available 
        on The Clearing House's website (www.theclearinghouse.org).
                                 ______
                                 
                 PREPARED STATEMENT OF ROBERT A. STEEN
 Chairman and CEO, Bridge Community Bank, on behalf of the Independent 
                      Community Bankers of America
                           September 25, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
I am Bob Steen, Chairman and CEO of Bridge Community Bank in Mount 
Vernon, Iowa.
    I testify today on behalf of the Independent Community Bankers of 
America and community banks nationwide, with more than 52,000 
locations. I have played an active role in ICBA over the years 
including serving on the Bank Operations and Payments Committee. Thank 
you for the opportunity to testify at today's hearing titled 
``Facilitating Faster Payments in the U.S.'' I believe that it is 
imperative that the U.S. develop a robust real-time payments system to 
meet consumer demand and stay competitive with the rest of the world. 
This system must create access for all institutions, regardless of size 
or charter type, and must be situated in a competitive environment with 
end-user choice.
    How we achieve this goal is critical. A real-time payments system 
is too important to be entrusted to a private monopoly. The two dozen 
largest banks simply cannot own and operate the U.S. payments system. 
ICBA strongly supports the Federal Reserve's decision to build FedNow, 
a real-time payments system that will give direct access to all 
financial institutions and their customers. I am pleased to provide the 
perspective of thousands of community banks such as ours that strive to 
remain independent and competitive by offering state-of-the-art payment 
products to our customers.
What Faster Payments Mean to My Bank and Community Banks
    Bridge Community Bank is a $96 million asset community bank founded 
in 1903 and owned by our 20 employees. We have three full-service 
locations serving rural communities in growth markets in and around 
Cedar Rapids and Iowa City. Bridge Community Bank meets the needs of 
our communities through small business, agricultural, and consumer 
banking. The rural communities we serve are beyond the appetite of most 
of the largest national banks because we do not have the population 
density to suit their transaction-based business model. What works for 
Bridge Community Bank is a personal relationship model in which we 
serve the totality of a family's business and personal banking needs, 
both deposits and lending--often two to three generations, and 
sometimes four and even five. The transaction account is the key to the 
broader customer relationship and at the heart of community banking. We 
have long recognized that payments innovation is critical to the long-
term prosperity and independence of Bridge Community Bank and the 
community banking industry.
    In recent years, we have seen numerous nonbanks move into the 
payments arena. The players include Square, PayPal, also doing business 
as Venmo, and many others. We are losing our place as an industry, and 
we must be part of the solution. Many of these nonbank providers are 
willing and able to absorb long-term and extraordinary losses for the 
single purpose of growing market share. Their losses do not translate 
to our gains. My industry cannot and should not do what they do. Still, 
if we lose the payments side of the customer relationship, our 
franchise will have no value. This is why I have invested so much of my 
time and energy over the years into payments innovation. We have 
incubated multiple payments projects in our bank. Of note, the ExcheQ 
mobile application, on which we partnered with a community bank in the 
development and testing, allows any account holder to pay any other 
person as easily as sending a text or email. Using the ubiquitous ACH 
same day settlement system, ExcheQ is able to send money to anyone in 
the U.S. that has an account at any financial institution without a 
payment application on the receiver's mobile device. This type of 
innovation is critical to keeping our bank and other community banks 
relevant to both our customers and our community, especially but not 
exclusively for the younger generation. FedNow, a neutral, real-time 
settlement network, will be critical to our ability to continue to 
innovate on behalf of our customers. Once FedNow is fully operational 
and ubiquitous, our customers will be able to send money in real-time 
using ExcheQ without being dependent on our core banking system. That, 
by itself, is magic.
U.S. Rapidly Being Marginalized in the Payments Services That Underlie 
        Our Economy
    It is an unfortunate reality that the U.S. lags much of the rest of 
the world in faster payments. Globally, 40 real-time payments systems 
are live. Europe, Mexico, and Australia have already implemented real-
time systems. For example, one of our own bank payment solutions can 
achieve a real-time transaction for our customers utilizing a Mexican 
prefunded account connecting through the Central Bank of Mexico SPEI 
network. These systems are realizing significant growth. In China, for 
example, there are now more than 25 million faster payments made every 
day, more than double the daily average from just a year ago.
    America's economic vitality depends on a modern, continually 
innovating, and globally competitive payments system. As more and more 
transactions move online, delays in settlement will extend cross-party 
risk and ultimately hobble the evolution of American commerce. 
Transactions have become instantaneous, but the underlying payments 
that support them continue to lag. A dynamic economy needs to be 
supported by a modern payments system. I believe that FedNow will 
promote U.S. competitiveness in payments and is a natural extension of 
the Federal Reserve's historical role in ensuring access and secure 
payments for all financial institutions.
Customers Need a Payment System That Matches Their Expectations
    Customers expect an electronic payment, especially a payment 
initiated on a mobile device, to arrive as soon as it is sent. However, 
most payments today take one-to-three days to clear and settle, 
delaying customer access to funds. A customer might need a paycheck or 
other incoming payment to clear before making a mortgage or car payment 
and avoid late penalties. These delays come at a real cost. A single 
delay can result in unnecessary returns, late charges, credit history 
impact, and even affect the consumer spending that sustains our 
economy. Funds availability delays make it more difficult for a small 
business to manage money between and among accounts to meet payroll, 
service debts, pay a supplier, or other immediate and critical 
expenses.
    Real-time payments will facilitate commerce by ensuring immediate 
access to funds, without holds or delays. As our economy evolves, 
immediate access to funds will become increasingly important. The 
emergence of task-based employers such as Uber and Lyft and other 
``sharing economy'' peer-to-peer arrangements must be supported by a 
real-time payments system that allows for the true instantaneous 
exchange of funds. Payments innovation must keep pace with broader 
technological innovation.
    As Federal Reserve Governor Brainard has noted, the unmet demand 
for real-time payments is fueling the development of solutions that 
bypass banks and even sovereign currencies. Dislodging banks and 
sovereign currencies from their historic role in the exchange of 
payments will likely have a profound, unintentional impact on the 
global economy.
The Clearing House Solution Fails Critical Tests
    In November 2017, the largest banks, through The Clearing House, 
launched a real-time payments network. The Clearing House effort has 
failed on the critical parameters of creating access for all financial 
institutions and ubiquity. A system that lacks these is of little true 
value to American consumers and businesses. It is my understanding that 
only 15 financial institutions--out of nearly 11,000 nationwide--are 
actively engaged on the network. The Clearing House system will not 
have the reach, on its own, to be the effective real-time payments 
solution our economy needs. In fact, a private sector payments provider 
has never achieved nationwide reach on its own in checks, ACH, cards, 
or wire transfers. Unlike the Federal Reserve, The Clearing House has 
neither the mission nor the capability to achieve this critical goal. 
It cannot be the only option.
    Most critically, The Clearing House system is a private system 
owned by the largest banks. As a matter of principle, ICBA is against 
any monopoly or other concentration of economic power. This is one of 
our core and foundational values. Monopolies harm consumers and 
ultimately escalate costs, erode service quality, and limit choice. 
What's more, monopolies create financial and systemic risk. Real-time 
payments are too important to our economic prosperity to leave in the 
hands of two dozen of the largest banks, especially an organization 
that does not have a proven track record of reaching smaller financial 
institutions in clearing checks, ACH, and wire transfers.
    Two years ago, The Clearing House obtained approval from the U.S. 
Justice Department to build a private real-time payments network based 
on a pledge that they would offer the same entry and transactional 
pricing to all financial institutions. The Clearing House asked for 
Justice's assurance that the agency would not bring an antitrust 
lawsuit against their payments network. Recently, the Clearing House 
added a caveat to its pledge not to offer volume discounts--that it 
must not have a competitor. That sounds a lot like: ``Trust us. We 
won't behave like a monopoly as long as we can be a monopoly.'' While 
the caveat has since disappeared from their website, this posture 
should only strengthen our collective demand to ensure access and 
create competition and choice.
    In addition to questions of monopoly power and its abuse, there's 
the question of systemic risk. If the U.S. is limited to a single real-
time payments system, we will be vulnerable to a critical disruption of 
the system which would have serious and lasting economic repercussions. 
It makes no sense for us to acquiesce to that level of risk. Having 
more than one settlement provider creates a critical safety net for the 
U.S. payment system. The Federal Reserve has a long and proven record 
of managing resilient systems in times of crisis.
The Federal Reserve Must Be Involved in Faster Payments
    Bridge Community Bank and ICBA strongly support the recent 
announcement by the Federal Reserve to build and operate a real-time 
payments settlement system. In this role the Federal Reserve can 
guarantee competition, provide choice for consumers, businesses, and 
banks, create true universal access and payment ubiquity, and keep pace 
with the rest of the world. This system should ultimately interoperate 
with other systems such as The Clearing House system, much as it has 
with ACH and paper checks.
Competition
    The remedy for monopoly is competition. Competition is the defining 
feature of our economic system and the foundation of our national 
prosperity. It creates choice for consumers as well as businesses and 
promotes innovation in the development of new products to meet consumer 
preferences and needs. Competition promotes efficiency and helps 
contain costs.
    What is broadly true in our economic system is also true in 
payments. The Federal Reserve's development and operation of a real-
time gross settlement system would guarantee needed competition. This 
point bears repeating: FedNow will not displace The Clearing House 
system. It will create an alternative to operate alongside any private 
sector system, ensuring equitable access to banks and communities of 
all sizes nationwide. This is the Federal Reserve's historic role in 
check clearing, ACH, and wire services. It's is their duty to play the 
same role in faster payments.
    FedNow is true to the historic legacy of the Federal Reserve. One 
of the initial responsibilities of the Federal Reserve was to serve as 
a clearinghouse of checks, ensuring that a customer's good check is 
honored, regardless of whether their bank is a Wall Street bank or 
located on Main Street in Mount Vernon, Iowa. The Federal Reserve, 
leveraging its regional bank structure, demanded reasonable 
availability of funds thereby limiting intentional float and delays at 
the expense of the public. During the past century, every eligible 
financial institution, regardless of size, has had equal access to the 
Nation's payments and settlement systems at par through their local 
district Federal Reserve Bank if they have so desired.
Reach
    Most importantly, the U.S. does not need another closed-loop real-
time payment system in which some financial institutions participate, 
and others are excluded. All financial institutions, regardless of size 
or charter type, and all customers, whether they live in small or rural 
communities that are exclusively served by community banks, or in 
suburban or urban communities, must have access to a real-time payments 
network. To create an inclusive financial system, every single 
financial institution should have the opportunity to participate. I 
firmly believe that simply cannot happen without the Federal Reserve's 
role in real-time settlement.
    The Fed is uniquely positioned to provide access to all 11,000 
financial institutions because all of these institutions have access to 
a settlement account and a service connection with the Fed. The Federal 
Reserve operates a check, ACH, and wire transfer service. The Clearing 
House simply cannot match this capability. In short, industrywide 
ubiquity may never be achieved without the Fed developing and operating 
a real-time gross settlement system and interoperating with the private 
sector. If we want to maximize access to real-time payments for 
financial institutions and consumers nationwide, the Federal Reserve, 
as the U.S. central bank, must be involved.
Affordability
    If history is any guide, the Fed will maintain affordable as well 
as universal access to faster payments. The Federal Reserve offers a 
fair and affordable pricing structure, even to the smallest of the 
small financial institutions like our bank. For example, as the first 
bank to forward an electronic check file to the Federal Reserve shortly 
after the effective date of the Check21 Act, our bank saw an immediate 
60 percent savings for check services. Universal access, as critical as 
it is, has little value if not offered on affordable terms. That is 
exactly what the Fed has done over my long career.
Direct Access for Community Banks
    The Fed is trusted among community banks. Each community bank has a 
relationship manager and the opportunity for direct access to the Fed. 
I know our representative's name and I know his cell number. He answers 
the phone. As a community bank, I know that I have direct and easy 
access to Federal Reserve support services even after our banking 
hours. I place a high value on this access. I would not have this 
access with the largest banks or their proxy which historically have 
served as a settlement provider for only a few of the Nation's 11,000 
financial institutions.
A Platform for Innovation
    Ubiquitous access for all payments system end users to faster, more 
efficient and more secure payments--irrespective of their financial 
institution's size or charter type--will also provide a foundation for 
a payments system that will lead to more innovation. Once ubiquity is 
achieved, new use cases will emerge that we have not thought of. Real-
time payroll, immediate bill payment, person-to-person payments, and 
business-to-business payments that are actually real-time will become 
the norm.
A Natural Extension of the Federal Reserve's Current Role
    The Federal Reserve's entry into real-time payments is part of a 
natural evolution from its involvement in check clearing, ACH payments, 
and wire transfers. By playing a settlement role in these services, the 
Fed has strengthened the payments system by providing safety, 
integrity, choice and equitable access to all financial institutions. 
The Federal Reserve will bring the same critical benefits to real-time 
payments.
A Deterrent to Further Consolidation
    As I stated at the outset, payments innovation, offering customers 
what they want when they want it, is critical to the prosperity, 
sustainability, and continued independence of community banks. A 
monopoly in the payments space and especially in real-time payments, 
operated by the largest banks, would surely marginalize our bank and 
our industry, weaken our customer relationships, and ultimately speed 
the pace of consolidation that is changing the American financial 
services landscape. The Federal Reserve's involvement, together with 
tiered regulation based on size and complexity, which--thanks to 
Chairman Crapo and this Committee--has been enacted and is now directly 
benefiting community banks, will help to preserve and strengthen the 
community banking industry, which is so vital to the U.S. economy.
Conclusion
    Thank you again for convening this hearing and raising the profile 
of a critical issue for the future of American commerce and consumer 
finance.
    The demand for faster payments is already here, and it's only going 
to increase. By playing a settlement role in real-time payments as it 
already does for checks, ACH payments and wire transfers, the Fed will 
provide safety, integrity, choice and equitable access to all financial 
institutions. The Fed has not only the authority, but the duty, to 
build and operate our real-time settlement system.
                                 ______
                                 
                  PREPARED STATEMENT OF GEORGE SELGIN
     Senior Fellow and Director, Center for Monetary and Financial 
                      Alternatives, Cato Institute
                           September 25, 2019
Introduction
    Chairman Crapo, Ranking Member Brown, and distinguished Members of 
the Committee on Banking, Housing, and Urban Affairs, my name is George 
Selgin, and I am the Director of the Cato Institute's Center for 
Monetary and Financial Alternatives. I am also an adjunct professor of 
economics at George Mason University, and Professor Emeritus of 
Economics at the University of Georgia.
    I'm grateful to you for allowing me to take part in this hearing on 
``Facilitating Faster Payments in the U.S.'' The slow speed of many 
payments in this country is a cause of serious inconvenience and 
substantial losses to American businesses and consumers, and one that 
places an especially great burden on people living paycheck-to-
paycheck, who can least afford to wait, sometimes for days, for checks 
or employer direct deposits to clear. \1\ For that reason it is 
essential that Congress do everything in its power to facilitate the 
speeding up of payments in this country.
---------------------------------------------------------------------------
     \1\ For some figures see Aaron Klein, ``How the Fed Can Help 
Families Living Paycheck to Paycheck'', Brookings Series on Financial 
Markets and Regulations, November 22, 2017, and idem., ``The Fastest 
Way To Address Income Inequality? Implement a Real-Time Payment 
System'', Brookings Series on Financial Markets and Regulations, 
January 2, 2019. Available at https://www.brookings.edu/research/how-
the-fed-can-help-families-living-paycheck-to-paycheck/ and https://
www.brookings.edu/research/the-fastest-way-to-address-income-
inequality-implement-a-real-time-payment-system/, respectively.
---------------------------------------------------------------------------
    To assist Congress in that endeavor, I wish to draw your 
Committee's attention to some dangers posed by the Federal Reserve 
decision to proceed with FedNow--a real-time retail payments service 
that will compete directly with private-sector retail payments 
services. Specifically, I wish to discuss four ways in which the Fed's 
plan might hinder rather than facilitate the achievement of an 
equitable, efficient, and safe U.S. fast payments system, and to 
suggest steps Congress should take to guard against this outcome.
The Federal Reserve as a Payment Service Competitor
    As a rule, competition is an effective--if not the most effective--
means for encouraging providers of services to price those services 
equitably, to produce them efficiently, and to improve their quality 
over time. However, these outcomes depend on the presence of a level 
playing field on which all providers compete--that is, they depend on 
the various providers having roughly equal legal privileges and 
obligations. In the absence of a level playing field, the presence of 
multiple providers alone does not guarantee good outcomes. Instead, 
special care must be taken to guard against bad ones.
    The Federal Reserve banks enjoy many legal advantages over private 
suppliers of payment services. They command a monopoly of bank reserves 
that serve as means of final payment; they are empowered to regulate 
commercial banks and some other private-sector payment service 
providers; and they are exempt from antitrust laws. Finally, although 
the 1980 Monetary Control Act requires that the Fed charge prices for 
its services that recover those services' capital and operating 
expenses, it only needs to do so over a ``long run'' of unspecified 
length, and then only according to accounting methods of its own 
choosing that are not subject to external review.
    These and other Fed privileges mean that, when it enters into 
direct competition with private-sector payment service providers, it 
does so on a playing field that it can easily slant in its favor. It is 
owing to this that the Fed itself has established strict criteria it 
must meet before offering any new payment service, including the 
requirement that the service in question ``be one that other providers 
alone cannot be expected to provide with reasonable effectiveness, 
scope, and equity.'' \2\
---------------------------------------------------------------------------
     \2\ See Board of Governors of the Federal Reserve System, 
``Policies: The Federal Reserve in the Payments System'', available at 
https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
---------------------------------------------------------------------------
    In responding to the Fed's request for comment regarding 
``Potential Federal Reserve Actions To Support Interbank Settlement of 
Faster Payments'', I argued against the Fed's then-proposed retail RTGS 
(Real Time Gross Settlement) payment service partly on the grounds that 
it did not meet the Fed's own criteria for providing new payments 
services. \3\ I also argued that the new service would delay progress 
toward a ubiquitous U.S. fast payments system. I continue to hold these 
views.
---------------------------------------------------------------------------
     \3\ Available at https://www.cato.org/publications/public-
comments/re-potential-federal-reserve-actions-support-interbank-
settlement.
---------------------------------------------------------------------------
    I also fear that, instead of preventing private-sector payment 
service providers from engaging in anticompetitive behavior, the Fed 
will itself engage in such behavior. In my testimony today, I wish to 
draw attention to four particular anticompetitive dangers that the 
Fed's entry into the fast payments business poses, and to recommend 
steps Congress should take to guard against each.
Postponed Fed Settlement System Reform
    The first danger is that the Fed will treat FedNow as a substitute 
for a 24x7x365 expansion of the operating hours of Fedwire, its 
wholesale RTGS service, and NSS (the National Settlement Service), a 
separate multilateral settlement service that is also owned and 
operated by the Federal Reserve banks. \4\ The availability of 24x7x365 
Fed settlements is essential to achieving faster (though not 
necessarily real-time) payments on other payment services. But instead 
of hastening to offer that service, the Fed may delay doing so to limit 
private payment services' ability to compete with it.
---------------------------------------------------------------------------
     \4\ The NSS serves ``depository institutions with Federal Reserve 
master accounts that settle for participants in clearinghouses, 
financial exchanges and other clearing and settlement arrangements.'' 
For further details see FRBServices.org, ``National Settlement 
Service'', available at https://www.frbservices.org/financial-services/
national-settlement-service/index.html.
---------------------------------------------------------------------------
    The danger here stems from the Fed's monopoly of final means of 
payment, including bank reserves. Because of that monopoly, most 
private noncash payments, including most check, card, and ACH 
(Automated Clearing House) payments, can only be completed with the 
help of either Fedwire or the NSS or both. Only once settlement takes 
place can recipient banks credit funds to a payee's account without 
assuming some credit risk. Because Fedwire and the NSS operate only on 
weekdays, excluding holidays, and then with limited hours, retail 
payment services that rely on them are correspondingly limited in their 
ability to process payments quickly at all times.
    Although it would also enhance the efficiency of private real-time 
payments services, the main benefit of 24x7x365 Fed settlement services 
would consist of a substantial reduction in delays on ``legacy'' 
payment networks. \5\ For example, today's Fedwire and NSS operating 
hours currently stand in the way of National Automated Clearing House 
Association's (NACHA) long-standing effort to enhance ACH's same day 
payment services by providing for a third ACH ``processing window.'' 
Although NACHA had hoped to make this third window available by 
September 2020, and the change required only a minor extension of 
Fedwire and NSS operating hours, the Fed failed to prepare for the 
change on time, forcing NACHA to postpone its planned reform until 
March 2021. \6\
---------------------------------------------------------------------------
     \5\ Because RTP settlements occur on the books of a special Fed 
account jointly owned by RTP participants, it can operate 24x7x365. 
However, its participants depend on Fedwire or the NSS to occasionally 
replenish their individual RTP account balances. The settlement 
services' limited operating hours raise participants' costs of using 
RTP by obliging them to maintain larger non- interest earning RTP 
account balances than they otherwise might, especially going into 
weekends. Concerning the non- interest-bearing status of RTP account 
balances, see below.
     \6\ Jim Daly, ``Fed Delay Causes NACHA To Postpone a Third 
Processing Window for ACH Transactions for Six Months''. Digital 
Transactions, September 30, 2019. Available at https://
www.digitaltransactions.net/fed-delay-causes-nacha-to-postpone-a-third-
processing-window-for-ach-transactions-for-six-months/.
---------------------------------------------------------------------------
    When the Fed requested public comment on whether it should 
establish its own fast payments network, it also asked whether it 
should either arrange to have Fedwire and the NSS operate 24x7x365 or 
establish a new ``Liquidity Management Tool'' for the purpose of 
allowing 24x7x365 transfers among commercial banks' Federal Reserve 
accounts. Almost every response to this question favored having the Fed 
pursue one of these proposed reforms (most respondents did not care 
which), making the proposal much less controversial than the Fed's plan 
to establish its own retail RTGS service. Yet despite this, and the 
relative easiness and great potential benefits of the asked-for reform, 
the Fed ultimately chose to do no more than continue to ``explore'' the 
possibility of offering 24x7x365 settlement services, and to perhaps 
seek comment upon the proposal yet again! \7\
---------------------------------------------------------------------------
     \7\ 84 FR 39301. Available at https://www.govinfo.gov/content/pkg/
FR-2019-08-09/pdf/2019-17027.pdf.
---------------------------------------------------------------------------
    Why is the Fed dragging its feet on an almost universally favored 
reform that could alone suffice to eliminate most of the more notorious 
payment delays in this country? \8\ The Fed's actions seem at odds with 
its overarching public mission. But they are what one would expect from 
a firm endeavoring to compete successfully with rival payment service 
providers. For example, when NACHA was first endeavoring to make same-
day ACH payments possible, its efforts were opposed by several large 
banks. It was widely suspected, according to a contemporary report, 
that this opposition stemmed from those banks' intent ``to build their 
own proprietary electronic payment systems, which could give them a leg 
up on smaller banks.'' \9\ The Fed's hesitation to make 24x7x365 Fed 
settlements available to private payment service providers may likewise 
reflect its own desire to give FedNow ``a leg up'' on other payment 
networks. \10\
---------------------------------------------------------------------------
     \8\ Because the most costly payment delays at present are those 
that keep workers waiting not hours but days for payments to clear, 
``The Fastest Way To Address Income Inequality'' stemming from such 
delays is, with all due respect to Aaron Klein (op. cit.), not to have 
the Fed implement FedNow, which will not be ready for several years, 
but to have it offer 24x7x365 settlement services, which should take 
much less time.
     \9\ Kevin Wack, ``How Big Banks Killed a Plan To Speed Up Money 
Transfers''. American Banker, November 13, 2013. Available at https://
www.americanbanker.com/news/how-big-banks-killed-a-plan-to-speed-up-
money-transfers. Although Wack here refers to TCH as NACHA's ``most 
visible foe,'' it only appears that some of TCH's owner banks opposed 
NACHA's plan. In a comment letter TCH itself submitted, in its capacity 
as an ACH operator, to NACHA in February 2015, it expressed its overall 
approval of NACHA's proposal. TCH's comment letter is available at 
https://www.theclearinghouse.org/-/media/files/association-documents-2/
20150206-comment-letter-to-nacha-supporting-same-day-settlement.pdf.
     \10\ NACHA itself seems to have anticipated this outcome. In its 
own comment letter concerning the Fed's various proposals, it 
complained that the Fed already appeared to be retreating from what 
once seemed to be a commitment to further expand Fedwire and NSS 
operating hours, while expressing its fear that it was doing so in 
order to favor the establishment of its own real-time retail payments 
systems, over measures that could further expedite payments on legacy 
systems. See Jim Daly, ``NACHA Wants the Fed To Take a Broader View of 
Faster Payments'', Digital Transactions, December 5, 2018. Available at 
https://www.digitaltransactions.net/nacha-wants-the-fed-to-take-a-
broader-view-of-faster-payments/.
---------------------------------------------------------------------------
    Whatever the Fed's motives, Congress should not allow it to delay a 
badly needed enhancement of its settlement services any longer. 
Instead, it should give the Fed 2 years within which to either place 
its Fedwire and NSS services on a 24x7x365 operating basis, or 
establish an alternative 24x7x365 Liquidity Management Tool. If 
Congress does not do this, I fear that Congress will overlook the most 
important of all steps it might take to dramatically and rapidly 
enhance the speed of U.S. retail payments.
Volume-Based Pricing Favoring Large Banks
    A second danger the Fed's entry into the fast payments business 
poses is that, by resorting to volume-based pricing, the Fed will 
ultimately put small banks that wish to offer fast payment services to 
their customers at a disadvantage.
    Because many are counting on the Fed to guard against rather than 
introduce volume-based fast payment fees, some background is required 
to understand why that expectation exists, and why just the opposite 
might happen.
    The only potentially ubiquitous real-time payments service that 
exists at present, the RTP system established by TCH (The Clearing 
House) in 2017, presently operates on a contractually binding flat-rate 
basis, with no minimum volume requirements. \11\ But TCH's flat-fee 
commitment isn't absolute: instead, it allows RTP to alter its pricing 
policy in the event that the Fed enters into competition with it. 
Noting this, Fed officials and others have argued that RTP cannot be 
trusted to make certain that small banks continue to receive equitable 
treatment, instead of finding themselves placed at a disadvantage 
relative to their large competitors. That TCH is itself owned by 25 of 
the Nation's largest banks makes the risk to smaller banks seem all the 
more obvious. Consequently, the Fed and others argue, having FedNow 
directly compete with RTP is the surest way to keep RTP from reneging 
on its flat-fee commitment.
---------------------------------------------------------------------------
     \11\ For RTP's pricing policies see https://
www.theclearinghouse.org/payment-systems/rtp/-/media/
00a1f095c9a049fea6c3e2e5fbc2c6ad.ashx.
---------------------------------------------------------------------------
    But closer consideration of TCH's general pricing practices, along 
with some history, suggest that the Fed's entry is more likely to have 
just the opposite consequence. Regarding TCH's practices, in seeking a 
statement from the Justice Department's Antitrust Division ``of its 
present intention not to seek any enforcement action against'' the RTP 
system it was then developing, TCH explained that it:

        operates on a ``utility'' model, charging fees only to cover 
        the costs incurred in operating its CHIPS, EPN, and check 
        imaging systems and to support future innovation, and does not 
        pay dividends to its owner banks. \12\ Accordingly . . . TCH 
        owner banks . . . will benefit by participating in the RTP 
        system and enhancing their abilities to compete more 
        effectively among themselves and with non-TCH owner banks and 
        nonbank payment service providers. \13\
---------------------------------------------------------------------------
     \12\ CHIPS (for Clearing House Interbank Payment System) is TCH's 
large-value interbank payment service, while EPN (for Electronic 
Payments Network) is its ACH (Automated Clearing House) operations 
service. [This writer's note.]
     \13\ Richart Taffet, ``The Clearing House Payment Company LLC's 
Request for Business Review Letter'', October 11, 2016. Available at 
https://www.justice.gov/atr/page/file/998216/download.

    The veracity of TCH's claims is attested to both by the known 
pricing practices of its established payment systems and by the Justice 
Department's conclusion that RTP did not in fact pose ``significant 
anticompetitive threats.'' \14\
---------------------------------------------------------------------------
     \14\ Andrew C. Finch, ``The Clearing House Payments Company LLC 
Business Review Request'', September 21, 2017. Available at https://
www.justice.gov/atr/page/file/998201/download.
---------------------------------------------------------------------------
    FedNow, in contrast, does pose such a threat, as is clear from what 
happened in the case of ACH payments. The Fed competes with TCH, and in 
the past competed with other private-sector providers, in providing ACH 
payment services. TCH initially charged flat ACH fees. But during the 
1990s, the Fed, in an effort to compete more aggressively in an 
increasingly national ACH market, resorted to volume-based ACH fees. 
\15\ The Fed's move compelled TCH to follow suit to avoid losing the 
business of its larger ACH customers. Yet TCH's ACH prices are still 
more favorable to small banks than those charged by the Fed, which 
charges many smaller banks five times the per-transaction fee it 
charges its largest customers. \16\
---------------------------------------------------------------------------
     \15\ Some years earlier, when the Fed first sought comment on its 
plans to establish nationwide EFT (Electric Funds Transfer) services, 
the Justice Department's Antitrust Division commented in favor of the 
Fed's adoption of a nondiscriminatory pricing system, noting that a 
discriminatory pricing system could prove to be ``as substantial a bar 
to competition as exclusionary rules.'' Anatoli Kuprianov, ``The 
Monetary Control Act and the Role of the Federal Reserve in the 
Interbank Clearing Market'', Federal Reserve Bank of Richmond Economic 
Review, July/August 1985, p. 31. Available at https://
www.richmondfed.org/-/media/richmondfedorg/publications/research/
economic_review/1985/pdf/er710403.pdf.
    As Mark Weinberg has observed, whereas uniform average-cost pricing 
generally ``maximizes net social benefits subject to the constraint 
that total revenues from the sale of the product just equal total 
costs,'' volume-based pricing, a form of price discrimination, does 
not. Consequently the Fed's resort to the latter ``raises some 
important questions,'' including whether ``the Reserve Banks' `business 
interests' [are] in conflict with their public policy 
responsibilities.'' ``An efficiency perspective,'' he continues, 
``dictates that a loss of market share by the Federal Reserve is 
neither good nor bad per se. What matters is the overall cost 
efficiency of the market. If the Federal Reserve is replaced by 
providers with lower costs, then such a change should be accommodated. 
The goal of pricing policy, however, should be that only efficiency-
enhancing losses are experienced.'' John A. Weinberg, ``Selling Federal 
Reserve Payment Services: One Price Fits All?'' Federal Reserve Bank of 
Richmond Economic Quarterly, Fall 1994, pp. 3 and 8. Available at 
https://www.richmondfed.org/-/media/richmondfedorg/publications/
research/economic_quarterly/1994/fall/pdf/weinberg.pdf.
     \16\ Thomas Wade, ``How the Federal Reserve's Automated Clearing 
House Informs the Fed's Proposed Real-Time Payments Entry'', American 
Action Forum, July 11, 2019. Available at https://
www.americanactionforum.org/insight/the-federal-reserves-automated-
clearing-house/.
---------------------------------------------------------------------------
    It was to protect itself from such potential Fed competition, and 
not (as Fed officials have suggested) to be able to ultimately resort 
to discriminatory pricing, that TCH made its flat-rate commitment 
contingent on the Fed's not entering into competition with it. Were TCH 
not to do this, it would risk having FedNow bid away its large 
participants.
    To avoid having volume-based pricing undermine the goal of 
equitable real-time payments, Congress must do more than merely trust 
the Fed not to engage in such pricing. At very least, it should insist 
that the Federal Reserve Board follow TCH's example by making a public 
commitment to refrain from offering volume-based discounts on FedNow 
or, at very least, by publicizing a specific, anticipated FedNow 
pricing policy, such as it presumably employed in assessing the new 
service's feasibility and desirability. As then Richmond Fed economist 
John Weinberg observed some years ago, ``When the Fed is one of several 
competitors, it can contribute to the efficiency of the market by 
adopting a clear pricing policy to which other sellers can react.'' 
\17\
---------------------------------------------------------------------------
     \17\ Weinberg, op. cit., p. 20.
---------------------------------------------------------------------------
Prejudicial Treatment of Balances in Jointly Held Fed Accounts
    The third danger stems from the Fed's ability to refuse to classify 
bank balances held in jointly owned Fed accounts as reserves, and to do 
so even when the accounts in question are ``intended to facilitate 
settlement between and among depository institutions participating in 
private-sector payment systems.'' \18\
---------------------------------------------------------------------------
     \18\ For the Fed's rules for establishing such joint accounts see 
82 FR 41951, available at https://www.govinfo.gov/content/pkg/FR-2017-
09-05/pdf/2017-18705.pdf.
---------------------------------------------------------------------------
    Fed balances classified as ``reserves'' earn interest, while those 
not so classified do not. Consequently, by refusing to classify the 
jointly held Fed balances held by banks participating in a private 
payments network as reserves, the Fed adds to the cost of participating 
in that network, and hence to the relative attractiveness of other 
networks, including those it itself operates, that aren't subject to 
the same ``reserve tax.'' The Fed's status as bank regulator can thus 
allow it to compete unfairly by ``raising [its] rivals' costs.'' \19\
---------------------------------------------------------------------------
     \19\ The seminal paper here is Steven C. Salop and David T. 
Scheffman, ``Raising Rival's Costs'', American Economic Review, May 
1983, pp. 267-271. Available at https://www.jstor.org/stable/
1816853?seq=1#metadata_info_tab_contents.
---------------------------------------------------------------------------
    Although the Fed allows ``only an institution eligible to have a 
Federal Reserve account under the applicable Federal statute and 
Federal Reserve rules, policies, and procedures'' to be a joint account 
holder, it reserves the right to determine whether balances in joint 
accounts count as reserves on a balance-by-balance basis. \20\ Today, 
the Fed administers three joint accounts serving to facilitate 
settlements among participants in TCH's CHIPs, RTP, and EPN networks. 
\21\ So far as I'm aware, it has not yet chosen to treat balances in 
any of these accounts as reserves. Consequently those balances neither 
bear interest nor qualify as ``High Quality Liquid Assets'' that can 
satisfy Basel's LCR (Liquidity Coverage Ratio) requirements.
---------------------------------------------------------------------------
     \20\ 82 FR 41956.
     \21\ Although most EPN ACH payments are settled using Fedwire, TCH 
relies on a joint Fed account to assist in the settlement of items sent 
by Fed ACH participants to EPN participants that choose to be 
identified by UPIC (Universal Payment Indication Code) numbers only, so 
as to avoid divulging confidential banking information.
---------------------------------------------------------------------------
    I can think of no economic reason why the Fed should not classify 
all Federal Reserve bank balances held in joint accounts used in 
settling payments as reserves, and to accord such balances the same 
privileges as other reserve balances. RTP account balances, for 
example, are no less liquid than banks' regular Fed account balances, 
and serve the same purpose of supplying their owners with means for 
settling payments. That banks choose to fund their RTP accounts rather 
than their individual Fed accounts, so as to allow them to make real-
time payments instead of relying on slower ones, should not subject 
them to any avoidable penalties.
    Moreover, by refusing to treat RTP balances as reserves the Fed may 
complicate its monetary policy operations unnecessarily by creating a 
new ``autonomous'' determinant of the total stock of bank reserves. As 
the Fed itself explains:

        if joint account balances are not treated as reserves, they are 
        a factor affecting the supply of reserve balances, meaning, all 
        else equal, movements in joint account balances have similarly 
        sized but opposite effects on the supply of reserve balances, 
        which the Federal Reserve will need to offset to provide the 
        appropriate level of reserves in a scarce reserve regime. \22\
---------------------------------------------------------------------------
     \22\ See Federal Reserve System, ``Final Guidelines for Evaluating 
Joint Account Requests'', at https://www.govinfo.gov/content/pkg/FR-
2017-09-05/pdf/2017-18705.pdf. Although the Fed presently operates an 
abundant reserve regime, recent experience has illustrated, rather 
dramatically, that under certain conditions the Fed may still have to 
intervene to offset autonomous reserve losses. See Nick Timiraos and 
Daniel Kruger, ``Fed Intervenes To Curb Soaring Short-Term Borrowing 
Costs'', Wall Street Journal, September 17, 2019. Available at https://
www.wsj.com/articles/fed-to-conduct-first-overnight-repo-transactions-
in-several-years-11568729757.

    In short, the Fed's ability to refuse to classify balances held in 
joint accounts ``intended to facilitate settlement'' on private 
payments system with which it competes represents a clear conflict of 
interests. To resolve this conflict, and thereby assure that the Fed 
competes fairly with rival payment service providers, Congress should 
compel the Fed to classify all balances held in joint Federal Reserve 
bank accounts as reserves, provided only that the accounts in question 
are designed to facilitate settlements on private payments networks. 
Congress should also have the Government Accountability Office (GAO) 
occasionally review the Fed's handling of applications for such joint 
accounts, to ensure that it continues to abide by its current 
guidelines for granting them.
Abuse of Monetary Control Act Loopholes
    Finally, I wish to point to the risk that the Fed will take 
advantage of loopholes in the 1980 Monetary Control Act (MCA) to charge 
prices for its FedNow services that fail to cover their full costs, as 
that act requires. Thanks to its monopoly of paper currency, the Fed 
earns substantial ``seigniorage'' revenue it can use to cross-subsidize 
its other payment services to the extent that MCA loopholes allow it.
    Although the MCA is supposed to rule out such cross-subsidies, 
there are at least two defects in its provisions that can prevent it 
from doing so. One concerns the Act's requirement that the Fed's 
service fees cover its costs ``over the long run.'' Because it fails to 
define ``the long run,'' the Act as written allows the Fed to interpret 
the phrase as it pleases. In contrast, private-sector payment service 
providers must generally be able to recover the cost of new services 
rapidly enough to achieve a positive present value for those services.
    Fed officials claim that they generally endeavor to recover the 
Fed's expenditures for established services within a 10-year period, 
but that they expect FedNow's ``first instance of long-run cost 
recovery to occur outside'' that 10-year cost recovery period. \23\ 
However, they do not say how far outside, and the Fed incurs no 
penalties for failing to recover its costs within any specific length 
of time. \24\ It follows that the Fed's investment in FedNow needn't 
have a positive present value, so that it can set FedNow fees below 
what a private-sector provider of an equally costly service could 
afford.
---------------------------------------------------------------------------
     \23\ 84 FR 39314.
     \24\ GAO, ``Federal Reserve's Competition With Other Providers 
Benefits Customers, but Additional Reviews Could Increase Assurance of 
Cost Accuracy'', GAO-16-614, August 2016. Available at https://
www.gao.gov/assets/680/679388.pdf.
---------------------------------------------------------------------------
    A second MCA loophole leaves to the Fed itself the choice of an 
internal cost accounting system by which the Fed allocates its 
expenditures among its various activities, while failing to provide for 
periodic and systematic external reviews of that accounting system to 
assure its adequacy. In consequence the last external review of the 
Fed's cost accounting system took place in 1984! External assessments 
of the Fed's success in complying with the MCA's cost recovery 
provisions, such as that undertaken by the GAO in 2016, \25\ are 
therefore only as accurate as the Fed's own internal audits--a highly 
unsatisfactory circumstance.
---------------------------------------------------------------------------
     \25\ Ibid.
---------------------------------------------------------------------------
    By closing these MCA loopholes, Congress can prevent the Fed from 
underpricing its payments services, including FedNow. To do so, it 
should insist that the Fed offer compelling proof that it will be able 
to recover the costs of FedNow rapidly enough to give that project a 
positive present value using an equitable and competitive fee 
structure. Congress should also follow the GAO's 2016 recommendation 
that it provide for periodic independent reviews of the Fed's cost-
accounting practices. \26\ Together these changes should go far in 
assuring that the Fed competes fairly with private payment service 
providers.
---------------------------------------------------------------------------
     \26\ Ibid., p. 64: ``Having [the Fed's] cost accounting practices 
periodically subject to independent testing would provide greater 
assurance that the Federal Reserve is complying with the Monetary 
Control Act.''
---------------------------------------------------------------------------
Conclusion
    I conclude my testimony by observing that none of the steps I have 
recommended to Congress would prevent the Fed from doing all that it 
can possibly do to facilitate faster payments in the United States. My 
recommendations will only serve to make sure that in competing with 
private-sector payment service providers, the Fed plays by the rules, 
as it must if it is to contribute to rather than hinder the speeding-up 
of U.S. payments. A well-intentioned Fed should therefore have no 
objection to them, while an ill-intentioned one will make them 
indispensable.
                                 ______
                                 
                  PREPARED STATEMENT OF SHEILA C. BAIR
          Former Chair, Federal Deposit Insurance Corporation
                           September 25, 2019
    Chairman Crapo, Ranking Member Brown, Members of the Committee. 
Thank you for the opportunity to testify today to present my personal 
views on the need to facilitate faster payments in the United States. I 
applaud the Federal Reserve Board's recently announced plans to build 
``FedNow''--an interbank settlement system to support real-time 
payments. This initiative by the Fed will provide the foundation upon 
which to build the next generation of instantaneous payment services, 
in partnership with the private sector. At the same time, the Fed's 
operational involvement will ensure that the payments system of the 
future is resilient, safe, and broadly accessible on fair and equitable 
terms.
    Payments are the lifeblood of an economy. Any major disruption in 
the ability of households and businesses to transfer funds in payment 
of goods and services would have catastrophic results. As such, our 
payments system is an essential public utility and like other public 
utilities, cannot be left solely in the hands of private enterprise. 
This is why the Federal Reserve has long played a core role in payment 
services, typically operating alongside and in support of private 
sector systems.
    The current payments system is fraught with frictions and 
inefficiencies. When we send money, the withdrawals from our bank 
accounts are usually immediate. However, it can take days for the money 
to go from our banks to recipients' banks where the funds can be 
accessed. The wait creates costs and hardships, particularly for 
households and small businesses on tight budgets--for the house keeper 
waiting for her clients' check to clear before she can pay her rent, or 
the small business waiting for a customer's check to clear before it 
can pay its workers. These delays in payments can lead to a cascade of 
negative consequences, including forcing households and businesses to 
rely on expensive forms of credit to tide them over, such as overdraft 
protection or payday loans.
    A handful of financial technology startups have tried to provide 
real-time payment services, but they are limited networks, typically 
working only if both the sender and recipient are subscribers and/or 
have accounts at participating banks. Moreover, they still rely on 
legacy systems to settle funds between banks. This results in a buildup 
of obligations between sending and receiving banks, as the actual 
transfer of payments between banks can take several days. If allowed to 
grow, this complex of IOUs among banks is a potential source of 
fragility in our payments infrastructure that could present significant 
risks in times of stress.
    In 2017, a group of large banks under the auspices of The Clearing 
House or TCH launched a real-time payments platform called the RTP 
Network. This network aspires to achieve the ubiquity lacking with 
FinTech initiatives. It requires participating banks to prefund a joint 
account that stands behind payment transfers. Debits and credits are 
tracked in a centralized ledger maintained by TCH. As yet, RTP has 
failed to gain significant traction, with relatively low volumes and 
few banks participating beyond mostly the big ones which own TCH. 
Importantly, its safety and resilience is heavily reliant on the larges 
banks which built and back it.
    What's needed--but what the private sector has yet to deliver--is a 
trusted and universally available infrastructure that would allow banks 
and credit unions of all sizes to send and receive money in ``real 
time''. After years of study and public outreach, the Fed has now 
decided to develop and launch such a system: FedNow. The Fed is already 
connected to virtually every depository institution in the country and 
thus is well-positioned to provide the basic infrastructure to move 
money quickly between banks.
    Not surprisingly, the Fed's decision has been widely applauded by 
smaller institutions and FinTechs, but roundly criticized by TCH and 
its advocates, who argue that FedNow will unnecessarily compete with 
the RTP Network and stifle innovation.
    History has shown the folly of exclusively relying on big Wall 
Street banks for financial infrastructure. Indeed, one political 
catalyst for Congress creating the Federal Reserve System in 1913 was 
the inability of midwestern farmers to access funds during planting 
season. The large New York institutions rural banks then relied upon to 
keep their reserve deposits had a bad habit of lending those funds to 
securities speculators, instead of keeping them safe and readily 
accessible. Currently, nearly all major payments systems--including 
those for processing checks, facilitating direct deposits, and wire 
transfers--depend on both private and Fed systems.
    Smaller depository institutions and FinTechs are understandably 
wary of a system controlled by big bank competitors. For now the TCH 
has promised its system will be accessible to all on fair and equitable 
terms, but will those promises hold in the future if they achieve 
market dominance? Until recently, the TCH website acknowledged its 
pricing could change if it has to ``react competitively''. The Federal 
Reserve lacks regulatory authority to require TCH to make its system 
accessible to everyone or regulate its fees to prevent anti-competitive 
pricing.
    FedNow will promote competition, not stifle it, by protecting 
against potential anticompetitive behavior by TCH or any other dominant 
private actor of the future. The Fed wants private sector innovation. 
Indeed, it worked closely with TCH to set up the joint account which 
underpins the RTP Network. And it is exploring making its current wire 
and net settlement services available on a 24x7x365 basis to support 
private initiatives to provide faster payments around the clock. But 
the Fed wants multiple players in this space, competing on fair terms. 
With FedNow, it will give all depository institutions and their FinTech 
partners a ubiquitous infrastructure upon which they can build their 
own platforms and services.
    Some critics have scoffed at the notion that ``Government 
bureaucrats'' at the Fed could come up with an innovative new system, 
and point to the fact that FedNow is not expected to launch until 2023 
or 2024. Given the Fed's long history in payments, the expertise of the 
Fed's staff is unparalleled, while private sector innovation in this 
space has been sluggish. Work on the TCH system started in 2014. It did 
not go live until 3 years later, and TCH acknowledges that it will not 
be easily available to all depository institutions until the end of 
2020. The widely used ACH system, which facilitates direct deposits, 
took 6 years to develop during the late 1960s and early 1970s, and even 
longer after it was developed to mature in its current widely used 
form. Four to five years does not seem like an inordinate amount of 
time to build FedNow, particularly given the Fed's commitment to work 
with all industry stakeholders and fully explore use of new 
technologies to construct the system.
    Perhaps most importantly, FedNow will promote financial system 
resiliency. As we discovered in 2008, big banks can fail. The Fed 
cannot. The TCH has tried to construct a system that comes close to 
replicating central bank settlement, but it is not the Federal Reserve. 
We hope that postcrisis reforms will prevent the failure of large, 
systemic institutions in the future, but we cannot be sure. Only the 
Fed has the institutional capability and proven track record to operate 
under the most highly stressed conditions. Without a backup system, a 
failure to fund RTP's joint account by a major bank could impact 
continuity in payment services for millions of Americans. This could 
leave taxpayers with a conundrum similar to the one they faced in 2008: 
bail the banks out or expose households and businesses to disruptions 
in essential payment services. If the big banks were truly interested 
in the resiliency of the financial system--and rebuilding trust with 
the public--they would be applauding FedNow as a parallel system that 
could serve as a backup to their own. FedNow would also serve as an 
important backstop to potential operational breakdowns in the RTP 
system, including compromise of its centralized ledger.
    Finally, while I strongly support the Fed's decision to build 
``FedNow'' let me also express the hope that the Fed fully explores the 
use of digital currency, including a cryptocurrency based on 
distributed ledger technology (DLT), in effectuating real-time 
settlement between banks. As I have written in the past, the Fed should 
consider development of a Central Bank Digital Currency (CBDC) that 
could eventually be used by members of the public to transfer money 
directly between each other without the need for bank intermediation 
and its attendant costly fees. If based on DLT, such a system promises 
to be more secure, efficient and less costly than intermediated systems 
that rely on centralized ledgers and master accounts. Given the 
permanence and immutability of DLT, it could also provide important law 
enforcement benefits. In moving toward such a system, using DLT to 
support settlement between banks might be a good place to start.
    Importantly, major private sector proposals, such as Facebook's 
recent proposal to create a new global cryptocurrency called ``Libra'' 
rely on DLT. Libra faces many roadblocks. However, even if the Facebook 
initiative fails, it certainly won't be the last private sector attempt 
to leverage DLT to dominate global payments. If the Fed does not stay 
ahead of this rapidly maturing technology, I fear private sector 
efforts to eclipse fiat monetary systems will get ahead of them, with 
potential disruptions to our banking system and in a worst case 
scenario, loss of control of our own currency. Since leaving the FDIC, 
I have become involved as a board member or advisor to a number of 
financial technology startups developing use cases for DLT ranging from 
securities to mortgages to gold to a stable coin tied to the dollar. 
While the promise of such technology is great, I am convinced that when 
it comes to payments, the Federal Reserve is in the best position to 
utilize it in a way that maximizes the public good.
    Whether the threat comes from big banks or big tech, private 
interests should not dominate payments services so crucial to the 
financial well-being of the public. They should have the right to 
compete, but not monopolize, how we move our money. Only the Fed has 
the resources, expertise, and public mandate to build a payments system 
infrastructure that can capture the benefits of private innovation 
while ensuring a competitive playing field and most importantly, a 
stable system that will serve the public during good times and bad.
    For the Committee's information, I have attached some of my 
previous writings on Facebook's Libra and the need for a CBDC.
    I would be happy to answer the Committee's questions.
    Attachments: 
https://finance.yahoo.com/news/fed-libra-sheila-bair-160930832.html;
https://finance.yahoo.com/news/former-fdic-chair-fed-needs-get-serious-
digital-currency-131756819.html

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM ESTHER GEORGE

Q.1. How is the Federal Reserve's decision to implement real-
time payments consistent with its historic role in the payment 
system?

A.1. A new Federal Reserve service to support faster payments, 
operating alongside private-sector real-time gross settlement 
(RTGS) services for faster payments, aligns with the current 
model for most other payment systems in the United States. 
Since its inception, as intended by Congress, the Federal 
Reserve has played a key operational role in the Nation's 
payment system by providing payment and settlement services 
between banks. Over the last 100 years, this operational role 
has allowed the Federal Reserve to advance key policy goals 
that support the Federal Reserve's broader mission, such as the 
accessibility, safety, and efficiency of the U.S. payment 
system. The payment and settlement services offered by the 
Reserve Banks, such as services for funds transfers, checks, 
and automated clearinghouse (ACH) payments, have traditionally 
operated alongside and in support of similar private-sector 
services. Through the decision to develop the FedNowSM Service, 
the Federal Reserve will continue to serve its traditional role 
of providing payment and settlement services to banks and will 
help establish a safe and efficient nationwide infrastructure 
for faster payments in the United States.

Q.2. During the hearing, Mr. Hunter testified that the 
regulatory authority the Federal Reserve has over a bank that 
they supervise is the same regulatory authority that they have 
over The Clearing House. Is this characterization accurate?
    Please explain the distinction between the Federal 
Reserve's authority over State-chartered member banks and its 
authority over payments system operators like TCH.

A.2. The Federal Reserve Board (Board) has examination and 
enforcement authority over State member banks under section 9 
of the Federal Reserve Act and section 8 of the Federal Deposit 
Insurance Act (FDIA), and can examine all aspects of their 
operations. Its enforcement tools for these banks include cease 
and desist orders, written agreements, prompt corrective action 
directives, removal, and prohibition orders, and orders 
assessing civil money penalties.
    The Board does not have plenary regulatory or supervisory 
authority over the U.S. payment system. Some payments system 
operators, such as The Clearing House (TCH), are examined by 
the Board, Federal Deposit Insurance Corporation, and Office of 
the Comptroller of the Currency (the agencies) under the Bank 
Service Company Act (BSCA). The BSCA provides the agencies with 
the authority to examine and regulate (but not take enforcement 
actions against) a firm that provides certain services to 
supervised institutions. This authority is limited to any 
services authorized by the BSCA that the firm provides to a 
depository institution, or any subsidiary or affiliate of such 
depository institution.
    In addition, the Board is the supervisory authority for TCH 
in its role as the operator of the Clearing House Interbank 
Payments System, as a designated financial market utility under 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010. Pursuant to this authority, the Board 
can, among other things, examine TCH, prescribe risk management 
standards, and receive and review advance notice of proposed 
changes to the operations of TCH. This authority, however, does 
not apply with respect to TCH's role as the operator of other 
payment systems, such as its system for faster payments.

Q.3. How will the liquidity management tool and expanded hours 
for Fedwire Funds Service and the National Settlement Service 
benefit banks and private-sector payment operators, including 
TCH?
    What actions has the Federal Reserve already taken to 
support private sector developments and the existing private-
sector RTP system?

A.3. Over the past 6 years, the Federal Reserve and industry 
stakeholders have collaborated on a number of initiatives to 
improve the speed, safety, and efficiency of the Nation's 
payment system. In 2015, the Federal Reserve convened the 
Faster Payments Task Force, a 320-member group comprised of a 
broad range of industry stakeholders, to identify and assess 
alternative approaches for implementing safe and ubiquitous 
faster payment capabilities in the United States. The Federal 
Reserve also has directly supported the development of private-
sector services for faster payments by providing joint accounts 
to facilitate settlement in faster payment services. For 
example, the faster payment service offered by TCH settles 
payments in real time on its private ledger, supported by a 
joint account at a Reserve Bank that is prefunded by banks 
participating in the service.
    Expanded Fedwire Funds Service and National Settlement 
Service (NSS) hours would support a wide range of payment 
activities, including private-sector RTGS services for faster 
payments. In particular, the Reserve Banks do not currently 
offer a service that provides the functionality to manage 
liquidity on a 24x7x365 basis for RTGS services that rely on a 
joint account. The ability to transfer funds from master 
accounts at the Reserve Banks to a joint account on a 24x7x365 
basis would allow participants in such services to manage 
liquidity more effectively, avoiding the need for additional 
funding of a joint account ahead of times when liquidity 
transfers are not currently possible, such as weekends and 
holidays. By expanding Fedwire Funds Service and NSS hours, the 
Federal Reserve would provide further support to private-sector 
RTGS services for faster payments based on joint accounts. 
Expanded hours for the Fedwire Funds Service and NSS could also 
benefit other retail or wholesale payment activities, for 
example, by enabling additional settlement windows for ACH 
payments.

Q.4. How will faster payments benefit lower income workers and 
small businesses?

A.4. Beyond speed and convenience, faster payments can yield 
real economic benefits for individuals and businesses, 
including lower-income workers and small businesses, by 
allowing them to make time-sensitive payments whenever needed 
and providing them with more flexibility to manage their money. 
This flexibility is especially important for individuals and 
households on tight budgets, for whom receiving a payment in 
real time could help avoid the need to use expensive check 
cashing services, engage in high-cost borrowing, or incur 
overdraft or late fees, which may represent a significant 
financial burden. Similarly, immediate access to funds and the 
ability to make bill and invoice payments instantly can benefit 
small businesses that may otherwise need to seek costly short-
term financing. Widely available faster payments would be the 
foundation for the next generation of payment services, 
catalyzing innovations that generate new economic activity.

Q.5. The Federal Reserve anticipates the FedNow Service to be 
available in 2023 or 2024. What is your process for developing 
and building this new system?
    To what extent is industry and public feedback factored 
into this timeline?

A.5. The Federal Reserve recognizes that establishing the 
FedNow Service will need to be carried out as soon as 
practicably possible and that time-to-market is an important 
consideration for many industry participants. As part of the 
process for developing the FedNow Service, the Board requested 
public comment on the service's desired features and 
functionality. \1\ The Federal Reserve has engaged with 
industry participants through one-on-one meetings, industry 
forums, and presentations to facilitate and encourage those 
comments. The public comment period ended on November 7, 2019. 
All comments will be carefully and thoroughly reviewed. 
Following this, the Board will publish a final service 
description in an upcoming Federal Register Notice. In 
addition, the Federal Reserve will continue to engage with 
industry stakeholders, the public and Congress, throughout the 
development process for the FedNow Service in order to 
understand and address, on an ongoing basis, the needs of 
depository institutions, other industry stakeholders, and the 
public.
---------------------------------------------------------------------------
     \1\ The Federal Register Notice is available at https://
www.federalreserve.gov/newsevents/pressreleases/files/
other20190805a1.pdf.

Q.6. I have been concerned about private entities like Facebook 
introducing digital currencies as an alternative to the U.S. 
dollar or other fiat currencies. What are the risks to the 
financial system if there are private digital currencies 
competing with the U.S. dollar?
    Please provide historical examples.

A.6. History provides many experiences to draw on for assessing 
proposals for private money, from the period in our history 
when the colonial States each issued their own currencies to 
the many decades when the circulation of private commercial 
banknotes stood in for a national currency. The Federal Reserve 
was created in part to respond to the inability of many of 
these banks to honor their obligations for the banknotes they 
issued and the panics and runs that ensued. Those experiences 
inform how we think about current innovations in payments and 
potential new forms of private money.
    The existing financial system combines central bank money, 
commercial bank money, and certain nonbank private money based 
on the U.S. dollar as the unit of account. Central bank money 
is composed of paper currency and money held in deposits at the 
Federal Reserve Banks. Commercial bank money refers to money 
held in deposits at commercial banks. Commercial bank money is 
widely used in part because people are confident that they can 
convert it on demand to the liability of another commercial 
bank or of the central bank, such as physical cash. This 
confidence comes in no small part because bank deposits are 
insured, and commercial banks are subject to supervision and 
regulation. Consumers and businesses also use this money in 
transactions because of its convenience and availability.
    Nonbank private money based on the U.S. dollar as the unit 
of account exists in smaller scale for a variety of consumer 
uses, including payments (e.g., Paypal) and general purpose 
stored value cards. The current diverse set of retail payment 
options available to consumers is provided by a variety of 
partnerships between nonbank private payment companies and 
commercial banks (e.g., card networks). Various Federal and 
State laws regulate private nonbank money and establish 
consumer protections for their users. Nonetheless, the 
corporate issuers of nonbank private money are not regulated to 
the same extent as are banks, the value stored in these systems 
is generally not FDIC insured, and consumers may be at risk 
that the company issuing such money will not be able to honor 
these liabilities.
    Facebook's Libra initiative stands out from the above types 
of money in a variety of ways, including potential scale, 
cross-border ambitions, and its intention to create its own 
denomination. The Libra initiative belongs to a diverse class 
of products called stablecoins. Many stablecoins aspire to 
serve as a new technological iteration of either commercial 
bank or nonbank private U.S. dollars, while others, like Libra, 
aspire to establish a separate unit of account. Facebook has 
stated that its use of a separate denomination is not meant to 
rival existing fiat currencies but to reduce cross-border 
payments frictions through the use of a single unit of account. 
Regardless of their potential use cases, it is important that 
Libra and similar projects address a core set of legal and 
regulatory issues before processing payments. Compliance with 
customer due diligence over anti- money-laundering rules and 
regulations will be essential to ensure Libra is not used for 
illegal activities and illicit finance. Facebook and/or the 
Libra Association should clearly demonstrate how consumer 
protections would be assured.
    Consumers should be educated on how their rights differ 
with respect to digital wallets compared to bank accounts. 
Additionally, Facebook and/or the Libra Association should 
provide clarity on what legal entity can be held responsible 
for the security of personally identifiable information and 
transaction data, and clarity on how and by whom personal data 
will be stored, accessed, and used.
    More broadly, Libra or similar large-scale initiatives 
raise questions regarding the ways they will link to the 
banking system or other financial institutions, which specific 
financial activities will be conducted by the envisioned 
payment network and broader services ecosystem, and what 
potential broader impacts these initiatives might have on the 
implementation of monetary policy and the preservation of 
financial stability. If not managed effectively, liquidity, 
credit, market, or operational risks--alone or in combination--
could trigger a loss of confidence and a classic run out of 
Libra. A global network raises complicated issues associated 
with many legally independent but interdependent operations, 
and the lack of clarity about the management of reserves and 
the rights and responsibilities of various market participants 
in the network.
    Guided by public and private cooperation, the U.S. payment 
system has evolved greatly to better serve all participants in 
the economy. Innovations and reforms have ushered in greater 
convenience in many ways, not least of which in the way 
individuals and institutions conduct transactions between and 
among themselves. As we continue to evaluate innovations in 
payments, including those that potentially include issuance of 
private, nondollar, digital currencies, we will continue to 
press for responsible innovation that contributes to the safety 
and efficiency of the payment system. Technology and innovation 
hold potential to improve the financial system and reduce 
frictions and delays, while also preserving consumer 
protections, data privacy and security, financial stability, 
and monetary policy transmission and guarding against illicit 
activity and cyber risks.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                       FROM ESTHER GEORGE

Q.1. During the hearing, you confirmed that the Fed had not 
identified a specific pricing structure for FedNow. Why hasn't 
the Fed committed to a flat pricing structure such that 
institutions of all sizes are charged the same fees regardless 
of transaction volume? Please describe how a variable pricing 
structure could benefit depository institutions, especially 
small community banks and credit unions.

A.1. The Federal Reserve will announce the fee structure and 
schedule for the FedNowSM Service before the service is 
launched. To be responsive to the evolving needs of 
participants in the faster payment market, the Federal Reserve 
will perform an assessment of market practices at the time of 
service's implementation, and that assessment will inform the 
ultimate fee structure and schedule. Additionally, the Federal 
Reserve reviews its fees on an annual basis and revises them if 
necessary. As part of that annual process, the Federal Reserve 
publishes fee schedules in a Federal Register Notice.
    For existing services, the Federal Reserve has used a 
variety of pricing structures, including volume-based pricing. 
The provision of payment services often involves large fixed 
costs. In such a situation, volume-based pricing structures can 
yield lower prices for service participants. Volume-based 
pricing can help encourage use of the service. If a payment 
service has high volumes, the fixed costs of providing the 
service can be spread among those many transactions, resulting 
in lower fees for all. Without such a pricing structure to 
encourage use, fixed costs would be distributed among lower 
volumes, increasing fees for all users of the service. The 
Federal Reserve therefore has used multiple pricing approaches 
to enable it to offer lower fees for all service users, 
including community banks and credit unions.

Q.2. If the Federal Reserve launches a real-time payments 
network that is not interoperable with those already in 
existence, the United States will face a fragmented real-time 
payments system. The requirement for banks to incur additional 
costs to connect account holders to multiple networks will 
likely introduce costly inefficiencies that will be borne by 
financial institutions, businesses, consumers, and taxpayers. 
Should the Federal Reserve avoid fracturing our country's real-
time payments system infrastructure by ensuring that its FedNow 
network is interoperable with all other real-time payments 
networks before launch?

A.2. The U.S. payment system must reach over 10,000 depository 
institutions across the Nation, an outcome that the Federal 
Reserve views as a key objective for the real-time gross 
settlement (RTGS) infrastructure for faster payments. Achieving 
such nationwide reach has been a recurring challenge, and, to 
date, no single private-sector payment service provider of 
traditional payment services, such as check, automated 
clearinghouse (ACH), funds transfer, or payment card services, 
has done so alone. By helping the RTGS infrastructure achieve 
nationwide reach through interoperability or other approaches, 
the FedNow Service can improve efficiency by increasing 
innovation and competition in the market for end-user faster 
payment services. In addition, the presence of multiple RTGS 
services for faster payments--the FedNow Service and private-
sector RTGS services--can yield additional efficiency benefits 
by leading to lower prices and higher service quality, which 
would benefit the U.S. payment system and its users.
    Through its engagement with the industry, the public, and 
Congress, the Federal Reserve is exploring interoperability and 
other paths to achieving the ultimate goal of nationwide reach 
for faster payments. Interoperability will continue to be a 
focus of the Federal Reserve's efforts.

Q.3. Do you believe the Federal Reserve has competitive 
advantages over private payment system operators?
    If so, please describe them. If not, please explain why you 
believe there is a level playing field between the Federal 
Reserve and other payment system operators.

A.3. The Federal Reserve Board (Board) has recently published a 
Federal Register Notice that includes an initial competitive 
impact analysis, a typical practice when the Reserve Banks are 
considering an operational or legal change to a new or existing 
service, such as the planned FedNow Service.
    In conducting its initial competitive impact analysis, the 
Board identified relevant private sector providers of similar 
services, and the Board then compared those providers' services 
with the FedNow Service to identify differences. The Board 
identified various differences between the FedNow Service and 
the private-sector RTGS that may construe relative advantages 
and disadvantages that benefit one service or the other. The 
Board requested public comment on its initial competitive 
impact analysis from August 5 to November 7, 2019. The Board 
will carefully review and consider all comments before issuing 
a final Federal Register Notice.

Q.4. In its January 2015 report titled ``Strategies for 
Improving the U.S. Payment System'', the Federal Reserve Board 
said it looked forward to exploring ``the technology, 
infrastructure and operational and resource changes required to 
support weekend and/or 24x7 operating hours'' for its National 
Settlement Service, which could allow all check and ACH 
payments to settle within a day. Why has the Federal Reserve 
chosen to focus its efforts on launching FedNow, which will 
take several years to implement, when it could much more 
quickly advance faster payments by expanding the hours of its 
existing National Settlement Service?

A.4. In January 2015, the Federal Reserve expanded National 
Settlement Service (NSS) operating hours to accommodate new 
rules for the posting and settlement of check and automated 
clearinghouse (ACH) payments. \1\ More recently, in a May 2019 
Federal Register Notice, the Federal Reserve Board sought 
public comment on potentially expanding further the operating 
hours of NSS and the Fed wire Funds Service to allow for a 
third same-day ACH processing and settlement window, which 
could result in increased adoption and use of same-day ACH 
payments. \2\
---------------------------------------------------------------------------
     \1\ The notice is available at https://www.govinfo.gov/content/
pkg/FR-2014-12-05/pdf/2014-28664.pdf.
     \2\ The notice is available at https://www.federalregister.gov/
documents/2019/05/16/2019-09949/potential-modifications-to-the-federal-
reserve-banks-national-settlement-service-and-fedwire-funds.
---------------------------------------------------------------------------
    Both the FedNow Service and potential modifications to 
further support the ACH system through upgrades to existing 
services are part of the Federal Reserve's continued efforts to 
improve the U.S. payment system. In these efforts, the Federal 
Reserve will continue to evolve its existing services. In 
particular, the Federal Reserve is exploring the expansion of 
Fedwire Funds Service and NSS hours, up to 24x7x365, to 
facilitate liquidity management in private sector RTGS services 
for faster payments and to support a wide range of payment 
activities, beyond those related to faster payments.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                       FROM ESTHER GEORGE

Q.1. What are the implementation challenges associated with 
FedNow? How does the Federal Reserve (the Fed) plan to resolve 
these challenges?

A.1. The United States has a highly complex banking system with 
more than 10,000 diverse depository institutions, including 
commercial banks, savings banks, savings and loan associations, 
and credit unions. This diversity inherently creates challenges 
with achieving nationwide reach, an outcome that the Federal 
Reserve views as a key objective for the real-time gross 
settlement (RTGS) infrastructure for faster payments. Achieving 
such nationwide reach has been a recurring challenge, and, to 
date, no single private-sector payment service provider of 
traditional payment services, such as check, automated 
clearinghouse (ACH), funds transfer, or payment card services, 
has done so alone. The Federal Reserve plans to leverage its 
existing nationwide infrastructure to provide a key channel to 
reach institutions across the country that might otherwise not 
have access to an RTGS infrastructure for faster payments. In 
advance of the service's launch, the Federal Reserve will be 
working closely with depository institutions and their 
technology partners to prepare for expeditious onboarding. 
Nevertheless, achieving nationwide reach of an RTGS 
infrastructure for faster payments will take time, as the 
industry takes steps to adopt the FedNowSM Service and private-
sector RTGS services. The Federal Reserve intends to work with 
the industry to resolve implementation challenges and to 
connect with the majority of institutions in the country, in 
furtherance of the ultimate objective of nationwide reach.

Q.2. In your testimony, you stated that the FedNow service 
would allow the Fed to ``promote the development and 
implementation of industrywide fraud mitigation standards.'' 
Can you provide more detail regarding the steps being taken to 
prevent consumer harm from fraud on FedNow?

A.2. The Federal Reserve is actively engaging with industry 
stakeholders to better assess potential features of the FedNow 
Service that could help mitigate fraud risk and advance the 
safety of faster payments in the United States. For example, 
the FedNow Service could offer tools to help banks detect 
fraudulent payments. Following analysis of comments received 
from the public comment period that ended on November 7, 2019, 
the Board will elaborate on these features in a final service 
description, which will be provided in an upcoming Federal 
Register Notice.

Q.3. How will the Fed ensure that its system is fully 
interoperable with existing RTP systems and future ones that 
may develop?

A.3. The Federal Reserve views nationwide reach as a key 
objective for the RTGS infrastructure for faster payments and 
has considered the possible relationships between the FedNow 
Service and private-sector RTGS services. As mentioned 
previously, achieving nationwide reach has been a recurring 
challenge, and, to date, no single private-sector provider of 
traditional payment services, such as check, automated 
clearinghouse (ACH), funds transfer, or payment card services, 
has done so alone. Through its engagement with the industry, 
the Federal Reserve is exploring interoperability and other 
paths to achieving the ultimate goal of nationwide reach for 
faster payments. Interoperability will continue to be a focus 
of the Federal Reserve's efforts.

Q.4. In the Federal Register notice for the proposed FedNow 
Service, the Fed also announced plans to explore expanding the 
hours for the Fedwire Funds Service and the National Settlement 
Service. \1\
---------------------------------------------------------------------------
     \1\ Federal Reserve System, Federal Register Notice, ``Federal 
Reserve Actions To Support Interbank Settlement of Faster Payments'', 
August 9, 2019, https://www.federalreserve.gov/newsevents/
pressreleases/files/other20190805aI.pdf.
---------------------------------------------------------------------------
    Does the Federal Reserve have a timeline for implementing 
this proposed expansion?

A.4. Because of the Federal Reserve Board's (Board) risk 
management expectations for the Fedwire Funds Service, 
additional analysis is needed to evaluate fully the relevant 
operational, risk, and policy considerations for both the 
Reserve Banks and a large number of service participants, with 
a range of needs and objectives. The Federal Reserve plans to 
engage with the industry on issues related to expanded Fedwire 
Funds Service and National Settlement Service (NSS) operating 
hours, as well as potential approaches for expanding those 
hours. Subject to the outcome of this engagement, as well as 
additional analysis of relevant operational, risk, and policy 
considerations, the Board will seek public comment on plans to 
expand hours for the Fedwire Funds Service and NSS.

Q.5. Please describe the ways in which this expansion will 
further support private sector initiatives to provide faster 
payments and more quickly settle transactions.

A.5. Expanded Fedwire Funds Service and NSS hours would support 
a wide range of payment activities, including private-sector 
RTGS services for faster payments. In particular, the Reserve 
Banks do not currently offer a service that provides the 
functionality to manage liquidity on a 24x7x365 basis for RTGS 
services that rely on a joint account at a Reserve Bank. The 
ability to transfer funds from master accounts at the Reserve 
Banks to a joint account on a 24x7x365 basis would allow 
participants in such services to manage liquidity more 
effectively, avoiding the need for additional funding of a 
joint account ahead of times when liquidity transfers are not 
currently possible, such as weekends and holidays. By expanding 
Fedwire Funds Service and NSS hours, the Federal Reserve would 
provide further support to private-sector RTGS services for 
faster payments based on joint accounts. Expanded hours for the 
Fedwire Funds Service and NSS could also benefit other retail 
or wholesale payment activities, for example, by enabling 
additional settlement windows for ACH payments.

Q.6. The Fed has stated that the ultimate pricing structure for 
FedNow ``would be informed by the Board's assessment of market 
practices at the time of implementation.'' \2\ Could you 
provide further detail as to what factors the Fed will be 
considering as it develops a fee structure and schedule, 
particularly with respect to whether the Fed will offer volume 
discounts to the largest banks?
---------------------------------------------------------------------------
     \2\ Ibid.

A.6. The Federal Reserve will announce the fee structure and 
schedule for the FedNow Service before the service is launched. 
To be responsive to the evolving needs of participants in the 
faster payment market, the Federal Reserve will perform an 
assessment of market practices at the time of service's 
implementation, and that assessment will inform the ultimate 
fee structure and schedule. Additionally, the Federal Reserve 
reviews its fees on an annual basis and revises them if 
necessary. As part of that annual process, the Federal Reserve 
publishes fee schedules in a Federal Register Notice.
    For existing services, the Federal Reserve has used a 
variety of pricing structures, including volume-based pricing. 
The provision of payment services often involves large fixed 
costs. In such a situation, volume-based pricing structures can 
yield lower prices for service participants. Volume-based 
pricing can help encourage use of the service. If a payment 
service has high volumes, the fixed costs of providing the 
service can be spread among those many transactions, resulting 
in lower fees for all. Without such a pricing structure to 
encourage use, fixed costs would be distributed among lower 
volumes, increasing fees for all users of the service. The 
Federal Reserve therefore has used multiple pricing approaches 
to enable it to offer lower fees for all service users, 
including community banks and credit unions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                       FROM ESTHER GEORGE

Q.1. According to the Federal Reserve (Fed), FedNow will be 
able to leverage the Fed's existing network and infrastructure 
to achieving nationwide reach. However, joining FedNow will not 
only depend on existing infrastructure but the cost of 
connecting to the system. Can you provide any insight into 
pricing and how the Fed will ensure a level playing field for 
smaller financial institutions, such as community banks?

A.1. Historically, driven by its longstanding policy commitment 
to promote nationwide access to payment services, the Federal 
Reserve has provided services to banks of all sizes on fair and 
equitable terms, including smaller banks in rural and remote 
areas of the country. The FedNowSM Service will facilitate 
access to a real-time gross settlement (RTGS) infrastructure 
for faster payments for these banks and, most importantly, the 
communities they serve.
    In assessing fees for new and existing services, the 
Federal Reserve evaluates customer needs, while recognizing 
longstanding principles for the pricing of Federal Reserve 
services and the requirement of the Monetary Control Act of 
1980 that, over the long run, fees shall be established on the 
basis of all direct and indirect costs incurred in providing 
the services. \1\ In order to make payment services available 
to banks in a fair and transparent manner, the Federal Reserve 
reviews fees on an annual basis and revises them if necessary, 
in addition to making all fee schedules available publicly to 
customers and competitors alike. \2\
---------------------------------------------------------------------------
     \1\ The pricing principles are available at https://
www.federalreserve.gov/paymentsystems/pfs_principles.htm.
     \2\ The 2019 fee schedule is available at https://
www.federalregister.gov/documents/2019/02/01/2019-00624/federal-
reserve-bank-services.
---------------------------------------------------------------------------
    Before the FedNow Service is launched, the Federal Reserve 
will assess market practices to inform the service's fee 
structure and schedule and will provide the fee schedule to the 
public. Following the launch of the service, the Federal 
Reserve will continue to assess evolving conditions in the 
market and will respond accordingly as part of its annual 
review of priced services.

Q.2. According to the Fed, interoperability may not be an 
initial element of FedNow. However, there are growing concerns 
that a lack of interoperability at the onset will lead to a 
fragmented payments system, where smaller institutions will be 
unable to join FedNow because they have already dedicated 
resources to connecting to another real-time system. What steps 
is the Fed taking to mitigate a fragmented system?

A.2. The U.S. payment system must reach over 10,000 depository 
institutions across the Nation, an outcome that the Federal 
Reserve views as a key objective for the RTGS infrastructure 
for faster payments. Achieving such nationwide reach has been a 
recurring challenge, and, to date, no single private-sector 
provider of traditional payment services, such as check, 
automated clearinghouse (ACH), funds transfer, or payment card 
services, has done so alone. By helping the RTGS infrastructure 
achieve nationwide reach through interoperability or other 
approaches, the FedNow Service can improve efficiency by 
increasing innovation and competition in the market for end-
user faster payment services. In addition, the presence of 
multiple RTGS services for faster payments--the FedNow Service 
and private-sector RTGS services--can yield additional 
efficiency benefits by leading to lower prices and higher 
service quality, which would benefit the U.S. payment system 
and its users.
    Through its engagement with the industry, the Federal 
Reserve is exploring interoperability and other paths to 
achieving the ultimate goal of nationwide reach for faster 
payments. Interoperability will continue to be a focus of the 
Federal Reserve's efforts.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM ROBERT HUNTER

Q.1. One third of The Clearing House's owners are foreign 
banks, and the RTP system is based on technology developed and 
owned by a U.K. payments company. What data security protocols 
does TCH use to protect the RTP system from a data breach or 
infiltration by a foreign actor? What cloud services, if any, 
does TCH use?

A.1. The Clearing House (TCH) takes data security extremely 
seriously and maintains a critical and constant emphasis on the 
safety, security, reliability, and efficiency of our payment 
systems. This commitment is evident in TCH's remarkable 166-
year history of reliability and resiliency, having maintained 
our operations without interruption through multiple world 
wars, financial crises, natural and man-made disasters, 
including 9/11 and the great recession, and a host of 
cybersecurity threats.
    Importantly, TCH is supervised and regulated to the highest 
standards of information security protection by the Federal 
Reserve, the Federal Deposit Insurance Corporation and the 
Office of the Comptroller of the Currency under the Bank 
Service Company Act and through the Significant Service 
Provider (SSP) program. \1\ Through the Bank Service Company 
Act, the SSP program, and other authorities, TCH is subject to 
voluminous standards and guidance relating to information 
security promulgated by the Federal Financial Institutions 
Examination Council. In addition to regulation and supervision 
under the SSP program, TCH has also been designated as a 
systemically important financial market infrastructure and is 
regulated and supervised by the Federal Reserve pursuant to 
Title VIII of the Dodd-Frank Act. \2\
---------------------------------------------------------------------------
     \1\ The agencies' authority under the Bank Service Company Act is 
quite broad. See, e.g., 12 U.S.C. 1867 (c) (``whenever a depository 
institution that is regularly examined by an appropriate Federal 
banking agency or any subsidiary of or affiliate of such depository 
institution that is subject to examination by that agency causes to be 
performed for itself, by contract or otherwise, any services authorized 
under this chapter, whether on or off its premises such performance 
shall be subject to regulation and examination by such agency to the 
same extent as if such services were being performed by the depositary 
institution itself on its own premises''); 12 U.S.C. 1867 (d) (``The 
Board and the appropriate Federal banking agencies are authorized to 
issue such regulations and orders as may be necessary to enable them to 
administer and to carry out the purposes of this chapter'').
     \2\ While The Clearing House's regulation and supervision under 
Title VIII relates specifically to its role as the operator of CHIPS, 
the exam team frequently takes the view that their supervisory 
authority encompasses all aspects of TCH's operations given the shared 
infrastructure of the company.
---------------------------------------------------------------------------
    In order to protect the security and integrity of the 
RTP' network, TCH employs a state-of-the-art, 
multitier, multisite application architecture with robust 
security controls and industrial-strength resiliency to protect 
the confidentiality, integrity, and availability of real-time 
payments, messages, and associated data. TCH systems and 
protocols are compliant with the highest Government, financial, 
and technology industry standards (NIST, FFIEC, ISO). All 
payments and related data are transmitted over private network 
communications lines only, data is encrypted both in transit 
and at rest and TCH does not employ any cloud services in the 
RTP' network architecture. Systems are continuously 
and regularly monitored for vulnerabilities, with real-time 
alerting and reporting features. TCH is also in regular contact 
with the Federal Bureau of Investigation, the Internet Crime 
Complaint Center, the National Cyber Investigative Joint Task 
Force, FS-ISAC, and FSARC to help facilitate coordination and 
communication relating to information security events.
    We also note that the technology provider for the RTP 
network, Vocalink, while headquartered in the United Kingdom, 
is owned by MasterCard, a U.S. company. Vocalink does not run 
the RTP network and does not receive any transactional data. 
All code provided by Vocalink is scanned by TCH for potential 
viruses and anomalies and PEN tested before being placed in 
production. Production code for the RTP network runs on TCH 
servers located in the United States.
    Finally, we note that while banks that are chartered 
outside of the United States may become members of TCH, they 
must have powers in their home jurisdiction similar to those of 
the domestic commercial banks or trust companies that are 
otherwise eligible for membership in TCH and must have a branch 
or agency located within the United States licensed by the 
Comptroller of the Currency or a State of the United States and 
therefore subject to domestic regulation and supervision in the 
United States. Participation in the RTP network is limited to 
U.S. licensed banks and the U.S. licensed branches of foreign 
banks and, therefore, all participants are U.S. regulated and 
supervised institutions. TCH owner banks do not have access to 
RTP network code or transactional data flowing through the 
network (other their own transactional data if they are a 
network participant). RTP network participants only have access 
to their own transactional data.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                       FROM ROBERT HUNTER

Q.1. In 2013, The Clearing House released a report that 
acknowledged ``A monopoly, however, eliminates competition, and 
competition is necessary to drive customer value and 
innovation. With interoperability among payment systems, 
operators can compete vigorously to provide value for their 
participants and enjoy the value created by a ubiquitous 
network.'' \1\ More recently, TCH has pushed back against 
efforts to create a competitive real-time payments marketplace 
and has even suggested it could change its pricing model in a 
way that negatively affects smaller institutions as a result of 
the Federal Reserve's proposed FedNow. \2\
---------------------------------------------------------------------------
     \1\ The Clearing House, ``U.S. Payment System: Recommendations for 
Safe Evolution and Future Improvements'', December 3, 2013, https://
fedpaymentsimprovement.org/wp-content/uploads/2013/12/Response-The-
Clearing-House-120313.pdf.
     \2\ American Banker, ``Community Bankers Alarmed After Big Banks 
Backtrack on Faster-Payments Pricing'', Kevin Wack, April 10, 2019, 
https://www.americanbanker.com/news/community-bankers-alarmed-after-
bie-banks-backtrack-on-faster-payments-pricing.
---------------------------------------------------------------------------
    Why has TCH changed its view regarding the need for 
competition in the marketplace in the past 6 years?

A.1. TCH has not changed its view regarding the need for 
competition in the marketplace and, indeed, there is robust 
competition in the marketplace for faster payments, including 
competition from Visa, MasterCard, numerous FinTech companies, 
same-day ACH, and others. The Federal Reserve's Faster Payments 
Task Force alone received 16 different private sector proposals 
that were responsive to its call to the private sector to 
address the need for faster payments in the United States. 
While TCH welcomes competition from the private sector, 
competition from Government, and specifically the Federal 
Reserve, which also regulates and supervises TCH, is not 
competition that is based on a level playing field.
    When the Federal Reserve competes with the private sector, 
it should do so in a manner that minimizes the competitive 
advantages that a Government system would have, both inherently 
and as a direct byproduct of the Fed's role as a supervisor, 
the supplier of liquidity to the financial system and the 
Central Bank. For TCH, this is not the usual competitive 
question of impact on profitability because TCH does not seek 
to operate at a profit. Rather, it is a question of TCH's 
ability to provide the most effective and efficient real-time 
payment system to consumers and businesses, to the ultimate 
benefit of this country's overall economy.
    As noted in my prepared testimony, to help TCH achieve this 
objective, we believe there are several actions the Fed should 
take now, before launching its FedNow service, that would help 
to create competitive equality between the private sector and 
the Government.
    First, payments on FedNow will settle directly through 
financial institutions' master accounts at the Fed, which means 
the balances held in the accounts used for FedNow payments will 
count towards reserve requirements and bear interest. The Fed 
should accord the same treatment to financial institution 
positions in the RTP account that is held at the Federal 
Reserve Bank of New York, which facilitates RTP settlement.
    Second, it appears that the Fed will provide unlimited 
access to liquidity (no real-time monitoring) even on nights 
and weekends when the discount window is closed. In contrast, 
consistent with the Federal Reserve policy for using its joint 
account, the RTP network does not extend credit to and does not 
permit credit exposures to arise among its participants. 
Instead, like other private sector systems, the RTP network is 
dependent on Fedwire or NSS to manage liquidity. The Federal 
Reserve should therefore move forward with making them 
available 24x7 to provide comparable liquidity and enable 
private sector competition.
    Finally, we note that the report cited predates the 
development of systems architecture for The Clearing House's 
RTP' network and contains certain assumptions about 
the potential for interoperability between real-time gross 
settlement systems that, unfortunately, are not consistent with 
the reality of how those systems work either here or abroad. 
Based on our knowledge of how such systems work today, we are 
not optimistic about the potential for interoperability and 
understand, based on our reading of the Federal Reserve's 
FedNow proposal, that the Federal Reserve is not optimistic 
about the potential for such interoperability either.

Q.2. To justify a potential change in the pricing model of the 
RTP Network in response to FedNow, you have cited the Federal 
Reserve's use of volume discounts. However, the Fed has not yet 
determined its pricing model. Given your acknowledgement during 
the hearing that TCH does not seek to make a profit, if the Fed 
does not implement volume discounts, will TCH commit to 
maintaining its flat fee pricing structure?

A.2. TCH built the RTP system to benefit financial institutions 
of all sizes and has already publicly committed that TCH will 
operate the RTP' network ``as a utility for the 
benefit of the industry'' and that RTP fees will ``be flat for 
all participants regardless of size and shall not include 
volume discounts or minimum volume requirements.'' TCH would 
consider a change to this approach only if another provider's 
different approach to pricing were to threaten the viability of 
the RTP network and require TCH to react competitively to 
maintain the integrity and availability of the RTP network to 
all financial institutions. This is exactly what happened in 
the ACH market in the mid-1990s when the Federal Reserve 
introduced volume discounts into its ACH pricing. At the time, 
TCH was committed to a level pricing structure for financial 
institutions regardless of size. Ultimately, however, the 
Federal Reserve's introduction of volume discounts into the ACH 
has led to small banks paying 4-5 times the per transaction 
fees of large financial institutions and there is significant 
concern that the Federal Reserve may follow similar pricing 
practices with regard to the pricing of its FedNow product. 
Specifically, TCH notes that while TCH has made its commitment 
to level pricing abundantly clear, the Federal Reserve has 
repeatedly refused to make that same commitment.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
                      FROM ROBERT A. STEEN

Q.1. The question I want to address is the one of digital 
currencies. Are we moving, technologically to a whole different 
world that central banks and financial institutions need to be 
more focused on? How transformative will this be?

A.1. The current limited regulation and oversight of the 
virtual currency marketplace exposes consumers and investors to 
significant risks. Appropriate regulation is vital for ensuring 
public trust and consumer protection and mitigating prudential 
risks for virtual currency stakeholders.
    A reasonable legal and regulatory regime is necessary to 
manage the consumer and prudential risks related to the 
purchase, holding, and use of virtual currency.
    Virtual currency companies and activities should adhere to 
comparable levels of regulation applicable to traditional, 
functionally similar payments products and services offered by 
closely regulated banks which includes requirements covering:

    capital adequacy and reserves;

    activity restrictions;

    information security;

    business resiliency;

    ownership and control;

    anti- money laundering and anti-terrorist 
        financing;

    reporting and maintenance of books and records;

    consumer protection;

    ongoing examination.

    An appropriate regulatory framework should not contain 
overly broad definitions for ``virtual currency'' and ``virtual 
currency business activities'' but should be broad enough to 
ensure that the activities that create the greatest consumer 
and prudential risk are subject to regulation.
    A legal and regulatory regime should not apply to regulated 
banks which are already subject to extensive regulation. And 
finally, without well defined and legitimate use cases for 
crypto currency, there is an equally questionable purpose or 
business case for developing such a regulatory regime.
    None of this, however, should preclude innovation around 
digitizing the U.S. dollar as part of the real-time settlement 
process within the FedNow design.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM ROBERT A. STEEN

Q.1. For a community bank, what are the costs associated with 
joining a private-sector payments system like TCH compared to a 
Fed-operated network?

A.1. While the FedNow service has not yet disclosed their 
pricing schedule, it is the start-up costs, particularly from 
my core processor, that are of greatest concern to my bank. My 
core processor generally charges tens of thousands of dollars 
to connect to a provider such as TCH. My bank already has a 
connection to the Fed, so those costs will be substantially 
mitigated. As a settlement provider for the ACH, the Fed 
employs volume-based pricing, but my bank, despite being small 
and paying fees adjusted for low volume, still find it is very 
reasonable. Having two providers will also provide competition 
to ensure fair and reasonable pricing.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM ROBERT A. STEEN

Q.1. Your written testimony acknowledges the important role of 
community banks in the small business lending market.
    Describe how the lack of a ubiquitous real-time payments 
structure has impacted the ability of community banks to serve 
small businesses.

A.1. Small businesses and independent contractors rely on short 
term cashflow to stay competitive. The quicker the funds are in 
the account, the less the need for temporary credit. A 
ubiquitous real-time payments settlement rail will compliment 
and address this need.

Q.2. Do you believe that community banks have lost small 
business customers as they are forced to resort to high-cost 
alternative lenders to meet their cash needs in a timely 
fashion?

A.2. The lack of a ubiquitous real-time settlement has not 
materially impacted our bank's small business lending. However, 
the addition of ubiquitous real-time settlement would assure 
that funds are posted upon payment and would improve a small 
businesses' cashflow.

Q.3. Community banks are also unique in their ability to serve 
and maintain relationships with individual consumers.
    Describe how the lack of a ubiquitous real-time payments 
structure has impacted the ability of community banks to serve 
the needs of individual customers.

A.3. The payment system, especially the ACH, has served our 
customers well. It provides a low-cost settlement to ensure 
that the customer has access to the funds early on payday or 
even hours before payday. However, the additional of a 
ubiquitous real-time settlement rail could disrupt the way we 
think about payroll, especially for contractor pay and task-
based services, ensuring the employee or contractor has 
immediate access to funds.

Q.4. Has the emergence of nonbank lenders that individuals can 
use to instantly transfer funds impacted the customer base of 
community banks?

A.4. Nonbank lenders, while not having the ability to instantly 
transfer funds to consumer, can trap our customer in a cycle of 
debt, with extremely high interest rates and unreasonable 
payments terms.

Q.5. Do you believe that community banks have lost individual 
customers as they are forced to resort to high-cost alternative 
lenders to meet their cash needs in a timely fashion?

A.5. Bridge Community Bank does not believe we have lost 
consumer customers due to the lack of a ubiquitous real-time 
settlement, However, the addition of a ubiquitous real-time 
settlement rail would assure that funds are posted immediately 
and would provide immediate funds to consumers that may in many 
cases avoid the need for short term borrowings.

Q.6. Supporters of the payments system operated by TCH have 
pointed to the use of third-party service providers (TSPs) as a 
mechanism for that system to achieve ubiquity. Yet many others 
disagree, and have argued that the smaller and medium-sized 
banks, particularly those situated in less populated areas, do 
not have established relationships with reliable TSPs.
    Do community banks and smaller financial institutions 
generally have relationships with the service providers they 
would need to implement a private sector real-time payments 
system?

A.6. Virtually all community banks have relationships with 
third-party core processors, who either write the in-house data 
systems for community banks or house the bank's customer data. 
This relationship is essential to all community banks and the 
core processor relationship serves as one of the most important 
vendor relationships for a community bank. It is, however, a 
complex and costly relationship, requiring community bank 
ongoing oversight. Many times, it is time consuming and 
extraordinarily costly for our core processor to link to 
services such as Zelle and RTP. All of those costs are passed 
down to our bank. Our core processor is already interfaced to 
our Federal Reserve connection, which gives us direct access 
and a material head start.

Q.7. Do community banks have concerns regarding the 
cybersecurity risks associated with third-party service 
providers?

A.7. Protecting our customers' data is our primary concern and 
we regard our core processor as an ally in this. Like any bank, 
we remain vigilant that any technology partner, especially the 
core processor protects our customers data and we are steadfast 
in overseeing this relationship protects our bank and its 
customers. We fully understand that our bank could not 
withstand a significant breach of our customers' personal 
information such as the recent 107 million customer identity 
loss from one of the large banks.

Q.8. Currently the Federal Reserve does not provide a service 
that would allow banks to move liquidity to support the real-
time settlements of faster payments.
    How would the expansion of the hours for the Fedwire Funds 
Service and National Settlement up to 24x7x365 support faster 
payments?

A.8. The Federal Reserve should begin the process of improving 
liquidity tools for the existing services and would then be 
better prepared for those tools being available for FedNow. 
Beyond that, we see the expansion of hours for Fedwire and the 
National Settlement Service as an extremely important step 
toward payments efficiency. Not only will it benefit real-time 
settlement systems such as FedNow and RTP, but it can improve 
the service of existing services such as ACH and wire transfer. 
However, community banks will have to modify our procedures and 
forge partnership to ensure their liquidity during off hours.

Q.9. What benefits would this additional service provide to 
consumers and small businesses?

A.9. These changes, while significant, will provide an overall 
benefit to all our customers and will accelerate the delivery 
of funds to our customers. End users do not need immediately 
available funds until they do. Those instances, along with use 
cases we have yet to see, make this worthwhile.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM SHEILA C. BAIR

Q.1. I have been concerned about private entities like Facebook 
introducing digital currencies as an alternative to the U.S. 
dollar or other fiat currencies. In your testimony, you 
expressed your support for the Federal Reserve to explore the 
use of digital currency, including cryptocurrency based on 
distributed ledger technology (DLT). What disruptions to the 
financial system could occur if we allow private digital 
currencies to compete with the U.S. dollar? Why is the Fed in 
the best position to use DLT for payments?

A.1. You are right to be concerned about the potential for 
financial disruptions from a privately sponsored digital 
currency such as Libra. These risks include the possibility of 
bank runs, credit disruptions, and consumer losses from foreign 
currency risk or financial mismanagement of the Libra reserve. 
What we've learned from Bitcoin is that digital currencies not 
tethered to fiat currency will be too volatile to function as a 
medium of exchange. Thus, privately offered digital currencies 
will need to be tied to fiat currencies to maintain stable 
value. Libra's sponsors propose to do that by tying their 
currency to a basket of stable fiat currencies. But there is no 
apparent regulatory authority to make sure that the managers of 
the Libra reserve will responsibly invest the money it receives 
from its customers in exchange for Libra.
    Libra's sponsors have promised to invest it only in high 
quality Government debt and bank deposits but since they will 
make their profits from the returns on those funds, their 
incentives will be to look for yield. And if they invest in 
risky assets which suffer losses, this could prompt a run on 
Libra similar to the runs on money funds we experienced during 
the financial crisis. Even if the reserves are responsibly 
invested, Libra purchasers will still be subject to foreign 
currency risk when they exchange their Libra back into their 
own fiat currency. This may not be well understood by public.
    Payments systems are, by nature, natural monopolies. The 
more users who join the same payments network, the more 
efficient and convenient it becomes. Thus, if a privately 
sponsored digital currency such as Libra did gain critical 
mass, it could prompt a quick and destabilizing exodus of money 
out of traditional banking systems. People could quickly 
withdraw money from their banking accounts to purchase Libra if 
they saw it as a cheaper, faster way of making payments than 
that offered by their banks. This could destabilize banks, but 
could also lead to a credit contraction as it would shrink the 
amount of deposits available for lending. If most of Libra's 
reserves are invested in Government debt, this could result in 
an inefficient reallocation of capital from deposits, which 
fund private lending, to Government balance sheets. Libra's 
sponsors say that at least some of the Libra Reserve would be 
redeposited in banks of their choosing. This money would remain 
in the banking system but would likely be reallocated to large 
institutions selected by Libra's sponsors, increasing 
concentration in the banking sector and likely damaging smaller 
community banks. Moreover, unlike the bank deposit accounts 
used by retail Libra users--which would be protected up to 
FDIC-insured deposit limits--Libra reserve deposits would 
likely far exceed those limits, exposing the Libra reserve to 
credit losses if any of the big banks holding those reserves 
fail.
    These kinds of problems could be preempted and solved 
through a central bank digital currency (CBDC). The Fed or 
other central bank could issue a limited amount of CBDC for the 
purpose of making payments. This could be done through accounts 
kept at traditional banks. CBDC would capture the efficiencies 
of modern technology to provide for efficient, secure, and low-
cost real-time payments, while maintaining control over the 
amount in circulation. Short of CBDC, there are other ways the 
Fed could use distributed ledger technology (DLT) to achieve 
greater efficiencies in payments and preempt private efforts to 
replace fiat systems. A first step might be to construct a 
distributed ledger that could be accessed only by regulated, 
insured depository institutions. Such a ledger would enable 
each institution, regardless of size or resources, the ability 
to directly transfer funds to one another on the ledger in 
``real time,'' without the need for an intermediary. I hope 
that the Fed will explore this use of DLT in constructing 
FedNow.

Q.2. Wall Street has been very successful recently in beating 
back many of the reforms we put in place to prevent another big 
bank bailout, including, for example, the Volcker Rule and the 
swap-margin rule. Why were these rules put in place and how do 
the recent changes exacerbate the risks to our financial 
system?

A.2. The Volcker Rule was put in place to prevent banking 
organizations benefiting from low-cost FDIC-insured bank 
deposits, from engaging in reckless speculation of the kind we 
saw during the financial crisis. Unfortunately, what started as 
a good faith effort to simplify the regulations implementing 
the Volcker Rule turned into a ``ploy to weaken core elements 
of the reform.'' as Paul Volcker wrote to Jerome Powell in an 
Aug. 20 letter. Making the weakening of the Volcker Rule more 
problematic is the previous effective repeal of Dodd-Frank 
(DFA) protections against the use of FDIC-insured banks to 
support deal-making in high risk derivatives. Originally, DFA 
prohibited insured banks from holding uncleared swap positions. 
(Uncleared swaps can be among the riskiest. When a 
clearinghouse refuses to be the central counterparty to a 
derivative instrument, it is because it does not understand the 
risk of the instrument and how to manage it.) In 2014, in 
response to industry lobbying, Congress gutted this swaps 
``push-out'' rule. The 2014 change allowed broker-dealer 
affiliates of big banking organizations to transfer the risks 
of their uncleared derivative transactions to FDIC-insured 
subsidiaries. This increased risk to the FDIC deposit insurance 
fund, but fattened banks' derivatives profits. (Derivatives 
customers agree to more favorable terms when FDIC-insured banks 
act as their counterparties because the insured banks are safer 
than noninsured broker-dealers which generally have lower 
credit ratings, weaker capital requirements and less stable 
funding.) These increased risks to the FDIC are now exacerbated 
by the changes to the Volcker Rule and swap-margin rule. The 
Volcker Rule still had an overarching prohibition against the 
use of swaps and other instruments for speculative proprietary 
trading. And the original swap-margin rule at least required 
affiliates to post initial ``margin'' or collateral against the 
swap exposure when it was transferred to the insured bank. 
Those safeguards no longer apply.
    This is a good example of how a series of stand-alone 
changes represented to be ``minor tweaks'' to the existing 
framework work in combination to substantially weaken 
postcrisis reforms.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM SHEILA C. BAIR

Q.1. In your written testimony and previous writings, you have 
described the impact of the Federal Reserve developing a real-
time payments (RTP) system on the resiliency of the financial 
sector. \1\ The largest financial institutions, via The 
Clearing House (TCH), currently have an effective monopoly over 
the real-time payments in the United States via the for-profit 
settlement service RTP network.
---------------------------------------------------------------------------
     \1\ Yahoo Finance, ``Why the Fed Is Right To Step in and Finally 
Make Real-Time Payments Happen'', Sheila Bair, September 4, 2019, 
https://finance.yahoo.com/news/fednow-real-time-payments-sheila-bair-
175320549.html.
---------------------------------------------------------------------------
    Does this current market structure create additional 
systemic risk in the financial sector?
    Do you believe that the protections against credit risk 
included in the design of the RTP network are sufficient to 
eliminate the systemic risk associated with a single point of 
failure in the RTP market?

A.1. The credit risk protections are untested in a crisis. We 
don't know how well they will work. In addition, they are 
designed to protect the other banks funding the joint account 
from exposure to the default of a participating bank, not the 
defaulting bank's customers who would lose access to RTP. Most 
importantly, they do not provide protection from operational 
disruptions which could be caused, for instance, by management 
error or a security breach. FedNow would provide a second 
system to ensure continuity of real-time payments if RTP was 
compromised or failed for whatever reason. Moreover, given the 
Fed's broader role of providing liquidity support in times of 
financial stress, it would be in a better position to support 
payments in times of crisis.

Q.2. If not, why not, and how would the creation of FedNow 
address these systemic risk concerns?

A.2. The Fed has a strong proven track record in managing 
through crises and by its nature, it cannot fail. Its FedNow 
system would not need to depend on the financial backing of 
large banks to provide liquidity. Though the Fed has not 
decided on the basic architecture, presumably real-time 
interbank payments will occur with the Fed acting as the 
central intermediary or possibly through a distributed ledger 
where payments can be transmitted directly from the sender's 
bank account to the recipient's bank account. (The Fed has said 
it is researching DLT as one approach.) In either case, there 
is no need for intermediation by TCH or the large banks that 
own its system. If interoperability is achieved, then this 
transition to FedNow in the case of an RTP disruption should be 
seamless. Absent interoperability, presumably all major banks 
would belong to both systems. Critics of FedNow have argued 
that the need to participate in two real-time payments systems 
imposes unnecessary costs on the payments system. I would argue 
that having this redundancy for something as essential payments 
is well worth any incremental cost and is common in other 
payments system such as ACH.

Q.3. In your written testimony, you also stated that a 
potential future failure of the largest banks would result in a 
``conundrum similar to the one [taxpayers] faced in 2008: bail 
the banks out or expose households and businesses to 
disruptions in essential payment services.''
    Does the current market structure create additional moral 
hazard with respect to the incentives for policymakers to enact 
another bailout in the event of a failure of one of the largest 
institutions?

A.3. Yes. The economy cannot function without a well-
functioning payments system. If we were solely reliant on TCH's 
RTP system and it failed because of the failure of one or more 
of its major members, the Fed's operational flexibility would 
be limited. It could well find itself forced into a bailout to 
keep the banks and RTP functioning. With FedNow, the Fed would 
have independent operational capability to maintain continuity 
of payments outside the RTP system. Denying the Fed an 
operational role in real-time payments--as TCH has advocated--
would leave it on the sidelines and then force it to prop up 
RTP if there was a problem. Contrast this to the kind 
operational capabilities the Fed had during 9/11 when it was 
able to seamlessly step in and provide broad support for the 
market.

Q.4. If so, please describe how FedNow would help address those 
concerns.

A.4. As mentioned above, FedNow would be a parallel system that 
optimally would be interoperable with RTP though during the 
hearing, TCH's witness was inconsistent on the question of 
whether TCH would discuss with the Fed steps necessary to 
achieve interoperability. Absent interoperability, presumably 
all major banks would be members of both systems or have the 
ability to fall back on it if RTP failed.

Q.5. How would a real-time payments network dominated 
exclusively by the private sector impact the ability of the 
Federal Reserve to stabilize the financial system in the event 
of a future crisis?

A.5. See above.
              Additional Material Supplied for the Record
                   REVISED STATEMENT OF GEORGE SELGIN
     Senior Fellow and Director, Center for Monetary and Financial 
                      Alternatives, Cato Institute
                           September 25, 2019
Introduction
    Chairman Crapo, Ranking Member Brown, and distinguished Members of 
the Committee on Banking, Housing, and Urban Affairs, my name is George 
Selgin, and I am the Director of the Cato Institute's Center for 
Monetary and Financial Alternatives. I am also an adjunct professor of 
economics at George Mason University, and Professor Emeritus of 
Economics at the University of Georgia.
    I'm grateful to you for allowing me to take part in this hearing on 
``Facilitating Faster Payments in the U.S.'' The slow speed of many 
payments in this country is a cause of serious inconvenience and 
substantial losses to American businesses and consumers, and one that 
places an especially great burden on people living paycheck-to-
paycheck, who can least afford to wait, sometimes for days, for checks 
or employer direct deposits to clear. \1\ For that reason it is 
essential that Congress do everything in its power to facilitate the 
speeding up of payments in this country.
---------------------------------------------------------------------------
     \1\ For some figures see Aaron Klein, ``How the Fed Can Help 
Families Living Paycheck to Paycheck'', Brookings Series on Financial 
Markets and Regulations, November 22, 2017, and idem., ``The Fastest 
Way To Address Income Inequality? Implement a Real-Time Payment 
System'', Brookings Series on Financial Markets and Regulations, 
January 2, 2019. Available at https://www.brookings.edu/research/how-
the-fed-can-help-families-living-paycheck-to-paycheck/ and https://
www.brookings.edu/research/the-fastest-way-to-address-income-
inequality-implement-a-real-time-payment-system/, respectively.
---------------------------------------------------------------------------
    To assist Congress in that endeavor, I wish to draw your 
Committee's attention to some dangers posed by the Federal Reserve 
decision to proceed with FedNow--a real-time retail payments service 
that will compete directly with private-sector retail payments 
services. Specifically, I wish to discuss four ways in which the Fed's 
plan might hinder rather than facilitate the achievement of an 
equitable, efficient, and safe U.S. fast payments system, and to 
suggest steps Congress should take to guard against this outcome.
The Federal Reserve as a Payment Service Competitor
    As a rule, competition is an effective--if not the most effective--
means for encouraging providers of services to price those services 
equitably, to produce them efficiently, and to improve their quality 
over time. However, these outcomes depend on the presence of a level 
playing field on which all providers compete--that is, they depend on 
the various providers having roughly equal legal privileges and 
obligations. In the absence of a level playing field, the presence of 
multiple providers alone does not guarantee good outcomes. Instead, 
special care must be taken to guard against bad ones.
    The Federal Reserve banks enjoy many legal advantages over private 
suppliers of payment services. They command a monopoly of bank reserves 
that serve as means of final payment; they are empowered to regulate 
commercial banks and some other private-sector payment service 
providers; and they are exempt from antitrust laws. Finally, although 
the 1980 Monetary Control Act requires that the Fed charge prices for 
its services that recover those services' capital and operating 
expenses, it only needs to do so over a ``long run'' of unspecified 
length, and then only according to accounting methods of its own 
choosing that are not subject to external review.
    These and other Fed privileges mean that, when it enters into 
direct competition with private-sector payment service providers, it 
does so on a playing field that it can easily slant in its favor. It is 
owing to this that the Fed itself has established strict criteria it 
must meet before offering any new payment service, including the 
requirement that the service in question ``be one that other providers 
alone cannot be expected to provide with reasonable effectiveness, 
scope, and equity.'' \2\
---------------------------------------------------------------------------
     \2\ See Board of Governors of the Federal Reserve System, 
``Policies: The Federal Reserve in the Payments System'', available at 
https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
---------------------------------------------------------------------------
    In responding to the Fed's request for comment regarding 
``Potential Federal Reserve Actions To Support Interbank Settlement of 
Faster Payments'', I argued against the Fed's then-proposed retail RTGS 
(Real Time Gross Settlement) payment service partly on the grounds that 
it did not meet the Fed's own criteria for providing new payments 
services. \3\ I also argued that the new service would delay progress 
toward a ubiquitous U.S. fast payments system. I continue to hold these 
views.
---------------------------------------------------------------------------
     \3\ Available at https://www.cato.org/publications/public-
comments/re-potential-federal-reserve-actions-support-interbank-
settlement.
---------------------------------------------------------------------------
    I also fear that, instead of preventing private-sector payment 
service providers from engaging in anticompetitive behavior, the Fed 
will itself engage in such behavior. In my testimony today, I wish to 
draw attention to four particular anticompetitive dangers that the 
Fed's entry into the fast payments business poses, and to recommend 
steps Congress should take to guard against each.
Postponed Fed Settlement System Reform
    The first danger is that the Fed will treat FedNow as a substitute 
for a 24x7x365 expansion of the operating hours of Fedwire, its 
wholesale RTGS service, and NSS (the National Settlement Service), a 
separate multilateral settlement service that is also owned and 
operated by the Federal Reserve banks. \4\ The availability of 24x7x365 
Fed settlements is essential to achieving faster (though not 
necessarily real-time) and safer payments on other payment services. 
But instead of hastening to offer that service, the Fed may delay doing 
so to limit private payment services' ability to compete with it.
---------------------------------------------------------------------------
     \4\ The NSS serves ``depository institutions with Federal Reserve 
master accounts that settle for participants in clearinghouses, 
financial exchanges and other clearing and settlement arrangements.'' 
For further details see FRBServices.org, ``National Settlement 
Service'', available at https://www.frbservices.org/financial-services/
national-settlement-service/index.html.
---------------------------------------------------------------------------
    The danger here stems from the Fed's monopoly of final means of 
payment, including bank reserves. Because of that monopoly, most 
private noncash payments, including most check, card, and ACH 
(Automated Clearing House) payments, can only be completed with the 
help of either Fedwire or the NSS or both. Only once settlement takes 
place can recipient banks credit funds to a payee's account without 
assuming some credit risk. Because Fedwire and the NSS operate only on 
weekdays, excluding holidays, and then with limited hours, retail 
payment services that rely on them are correspondingly limited in their 
ability to complete payments both quickly and safely at all times. \5\
---------------------------------------------------------------------------
     \5\ The Fed has long recognized this potential benefit of making 
its settlement services available 24x7x365. See Board of Governors of 
the Federal Reserve System, ``Strategies for Improving the U.S. Payment 
System'', January 26, 2015, p. 50. Available at https://
www.betterthancash.org/tools-research/resources/federal-reserve-
strategies-for-improving-the-us-payment-system.
---------------------------------------------------------------------------
    Although it would also enhance the efficiency of private real-time 
payments services, the main benefit of 24x7x365 Fed settlement services 
would consist of a substantial reduction in delays on ``legacy'' 
payment networks. \6\ For example, today's Fedwire and NSS operating 
hours currently stand in the way of National Automated Clearing House 
Association's (NACHA) long-standing effort to enhance ACH's same day 
payment services by providing for a third ACH ``processing window.'' 
Although NACHA had hoped to make this third window available by 
September 2020, and the change required only a minor extension of 
Fedwire and NSS operating hours, the Fed failed to prepare for the 
change on time, forcing NACHA to postpone its planned reform until 
March 2021. \7\
---------------------------------------------------------------------------
     \6\ Because RTP settlements occur on the books of a special Fed 
account jointly owned by RTP participants, it can operate 24x7x365. 
However, its participants depend on Fedwire or the NSS to occasionally 
replenish their individual RTP account balances. The settlement 
services' limited operating hours raise participants' costs of using 
RTP by obliging them to maintain larger non- interest earning RTP 
account balances than they otherwise might, especially going into 
weekends. Concerning the non- interest-bearing status of RTP account 
balances, see below.
     \7\ Jim Daly, ``Fed Delay Causes NACHA To Postpone a Third 
Processing Window for ACH Transactions for Six Months''. Digital 
Transactions, September 30, 2019. Available at https://
www.digitaltransactions.net/fed-delay-causes-nacha-to-postpone-a-third-
processing-window-for-ach-transactions-for-six-months/.
---------------------------------------------------------------------------
    When the Fed requested public comment on whether it should 
establish its own fast payments network, it also asked whether it 
should either arrange to have Fedwire and the NSS operate 24x7x365 or 
establish a new ``Liquidity Management Tool'' for the purpose of 
allowing 24x7x365 transfers among commercial banks' Federal Reserve 
accounts. Almost every response to this question favored having the Fed 
pursue one of these proposed reforms (most respondents did not care 
which), making the proposal much less controversial than the Fed's plan 
to establish its own retail RTGS service. Yet despite this, and the 
relative easiness and great potential benefits of the asked-for reform, 
the Fed ultimately chose to do no more than continue to ``explore'' the 
possibility of offering 24x7x365 settlement services, and to perhaps 
seek comment upon the proposal yet again! \8\
---------------------------------------------------------------------------
     \8\ 84 FR 39301. Available at https://www.govinfo.gov/content/pkg/
FR-2019-08-09/pdf/2019-17027.pdf. In early 2015 the Fed had said it 
would begin exploring ``the technology, infrastructure and operational 
and resource changes required to support weekend and/or 24x7 operating 
hours'' of its settlement services during or soon after 2016. See Board 
of Governors, ``Strategies for Improving'', pp. 21 and 51.
---------------------------------------------------------------------------
    Why is the Fed dragging its feet on an almost universally favored 
reform that could alone suffice to eliminate most of the more notorious 
payment delays in this country? \9\ The Fed's actions seem at odds with 
its overarching public mission. But they are what one would expect from 
a firm endeavoring to compete successfully with rival payment service 
providers. For example, when NACHA was first endeavoring to make same-
day ACH payments possible, its efforts were opposed by several large 
banks. It was widely suspected, according to a contemporary report, 
that this opposition stemmed from those banks' intent ``to build their 
own proprietary electronic payment systems, which could give them a leg 
up on smaller banks.'' \10\ The Fed's hesitation to make 24x7x365 Fed 
settlements available to private payment service providers may likewise 
reflect its own desire to give FedNow ``a leg up'' on other payment 
networks. \11\
---------------------------------------------------------------------------
     \9\ Because the most costly payment delays at present are those 
that keep workers waiting not hours but days for payments to clear, 
``The Fastest Way To Address Income Inequality'' stemming from such 
delays is, with all due respect to Aaron Klein (op. cit.), not to have 
the Fed implement FedNow, which will not be ready for several years, 
but to have it offer 24x7x365 settlement services, which should take 
much less time.
     \10\ Kevin Wack, ``How Big Banks Killed a Plan To Speed Up Money 
Transfers''. American Banker, November 13, 2013. Available at https://
www.americanbanker.com/news/how-big-banks-killed-a-plan-to-speed-up-
money-transfers. Although Wack here refers to TCH as NACHA's ``most 
visible foe,'' it only appears that some of TCH's owner banks opposed 
NACHA's plan. In a comment letter TCH itself submitted, in its capacity 
as an ACH operator, to NACHA in February 2015, it expressed its overall 
approval of NACHA's proposal. TCH's comment letter is available at 
https://www.theclearinghouse.org/-/media/files/association-documents-2/
20150206-comment-letter-to-nacha-supporting-same-day-settlement.pdf.
     \11\ NACHA itself seems to have anticipated this outcome. In its 
own comment letter concerning the Fed's various proposals, it 
complained that the Fed already appeared to be retreating from what 
once seemed to be a commitment to further expand Fedwire and NSS 
operating hours, while expressing its fear that it was doing so in 
order to favor the establishment of its own real-time retail payments 
systems, over measures that could further expedite payments on legacy 
systems. See Jim Daly, ``NACHA Wants the Fed To Take a Broader View of 
Faster Payments'', Digital Transactions, December 5, 2018. Available at 
https://www.digitaltransactions.net/nacha-wants-the-fed-to-take-a-
broader-view-of-faster-payments/.
---------------------------------------------------------------------------
    Whatever the Fed's motives, Congress should not allow it to delay a 
badly needed enhancement of its settlement services any longer. 
Instead, it should give the Fed 2 years within which to either place 
its Fedwire and NSS services on a 24x7x365 operating basis, or 
establish an alternative 24x7x365 Liquidity Management Tool. If 
Congress does not do this, I fear that Congress will overlook the most 
important of all steps it might take to dramatically and rapidly 
enhance the speed of U.S. retail payments.
Volume-Based Pricing Favoring Large Banks
    A second danger the Fed's entry into the fast payments business 
poses is that, by resorting to volume-based pricing, the Fed will 
ultimately put small banks that wish to offer fast payment services to 
their customers at a disadvantage.
    Because many are counting on the Fed to guard against rather than 
introduce volume-based fast payment fees, some background is required 
to understand why that expectation exists, and why just the opposite 
might happen.
    The only potentially ubiquitous real-time payments service that 
exists at present, the RTP system established by TCH (The Clearing 
House) in 2017, presently operates on a contractually binding flat-rate 
basis, with no minimum volume requirements. \12\ But TCH's flat-fee 
commitment isn't absolute: instead, it allows RTP to alter its pricing 
policy in the event that the Fed enters into competition with it. 
Noting this, Fed officials and others have argued that RTP cannot be 
trusted to make certain that small banks continue to receive equitable 
treatment, instead of finding themselves placed at a disadvantage 
relative to their large competitors. That TCH is itself owned by 25 of 
the Nation's largest banks makes the risk to smaller banks seem all the 
more obvious. Consequently, the Fed and others argue, having FedNow 
directly compete with RTP is the surest way to keep RTP from reneging 
on its flat-fee commitment.
---------------------------------------------------------------------------
     \12\ For RTP's pricing policies see https://
www.theclearinghouse.org/payment-systems/rtp/-/media/
00a1f095c9a049fea6c3e2e5fbc2c6ad.ashx.
---------------------------------------------------------------------------
    But closer consideration of TCH's general pricing practices, along 
with some history, suggest that the Fed's entry is more likely to have 
just the opposite consequence. Regarding TCH's practices, in seeking a 
statement from the Justice Department's Antitrust Division ``of its 
present intention not to seek any enforcement action against'' the RTP 
system it was then developing, TCH explained that it:

        operates on a ``utility'' model, charging fees only to cover 
        the costs incurred in operating its CHIPS, EPN, and check 
        imaging systems and to support future innovation, and does not 
        pay dividends to its owner banks. \13\ Accordingly . . . TCH 
        owner banks . . . will benefit by participating in the RTP 
        system and enhancing their abilities to compete more 
        effectively among themselves and with non-TCH owner banks and 
        nonbank payment service providers. \14\
---------------------------------------------------------------------------
     \13\ CHIPS (for Clearing House Interbank Payment System) is TCH's 
large-value interbank payment service, while EPN (for Electronic 
Payments Network) is its ACH (Automated Clearing House) operations 
service. [This writer's note.]
     \14\ Richart Taffet, ``The Clearing House Payment Company LLC's 
Request for Business Review Letter'', October 11, 2016. Available at 
https://www.justice.gov/atr/page/file/998216/download.

    The veracity of TCH's claims is attested to both by the known 
pricing practices of its established payment systems and by the Justice 
Department's conclusion that RTP did not in fact pose ``significant 
anticompetitive threats.'' \15\
---------------------------------------------------------------------------
     \15\ Andrew C. Finch, ``The Clearing House Payments Company LLC 
Business Review Request'', September 21, 2017. Available at https://
www.justice.gov/atr/page/file/998201/download.
---------------------------------------------------------------------------
    FedNow, in contrast, does pose such a threat, as is clear from what 
happened in the case of ACH payments. The Fed competes with TCH, and in 
the past competed with other private-sector providers, in providing ACH 
payment services. TCH initially charged flat ACH fees. But during the 
1990s, the Fed, in an effort to compete more aggressively in an 
increasingly national ACH market, resorted to volume-based ACH fees. 
\16\ The Fed's move compelled TCH to follow suit to avoid losing the 
business of its larger ACH customers. Yet TCH's ACH prices are still 
more favorable to small banks than those charged by the Fed, which 
charges many smaller banks five times the per-transaction fee it 
charges its largest customers. \17\
---------------------------------------------------------------------------
     \16\ Some years earlier, when the Fed first sought comment on its 
plans to establish nationwide EFT (Electric Funds Transfer) services, 
the Justice Department's Antitrust Division commented in favor of the 
Fed's adoption of a nondiscriminatory pricing system, noting that a 
discriminatory pricing system could prove to be ``as substantial a bar 
to competition as exclusionary rules.'' Anatoli Kuprianov, ``The 
Monetary Control Act and the Role of the Federal Reserve in the 
Interbank Clearing Market'', Federal Reserve Bank of Richmond Economic 
Review, July/August 1985, p. 31. Available at https://
www.richmondfed.org/-/media/richmondfedorg/publications/research/
economic_review/1985/pdf/er710403.pdf.
    As Mark Weinberg has observed, whereas uniform average-cost pricing 
generally ``maximizes net social benefits subject to the constraint 
that total revenues from the sale of the product just equal total 
costs,'' volume-based pricing, a form of price discrimination, does 
not. Consequently the Fed's resort to the latter ``raises some 
important questions,'' including whether ``the Reserve Banks' `business 
interests' [are] in conflict with their public policy 
responsibilities.'' ``An efficiency perspective,'' he continues, 
``dictates that a loss of market share by the Federal Reserve is 
neither good nor bad per se. What matters is the overall cost 
efficiency of the market. If the Federal Reserve is replaced by 
providers with lower costs, then such a change should be accommodated. 
The goal of pricing policy, however, should be that only efficiency-
enhancing losses are experienced.'' John A. Weinberg, ``Selling Federal 
Reserve Payment Services: One Price Fits All?'' Federal Reserve Bank of 
Richmond Economic Quarterly, Fall 1994, pp. 3 and 8. Available at 
https://www.richmondfed.org/-/media/richmondfedorg/publications/
research/economic_quarterly/1994/fall/pdf/weinberg.pdf.
     \17\ Thomas Wade, ``How the Federal Reserve's Automated Clearing 
House Informs the Fed's Proposed Real-Time Payments Entry'', American 
Action Forum, July 11, 2019. Available at https://
www.americanactionforum.org/insight/the-federal-reserves-automated-
clearing-house/.
---------------------------------------------------------------------------
    It was to protect itself from such potential Fed competition, and 
not (as Fed officials have suggested) to be able to ultimately resort 
to discriminatory pricing, that TCH made its flat-rate commitment 
contingent on the Fed's not entering into competition with it. Were TCH 
not to do this, it would risk having FedNow bid away its large 
participants.
    To avoid having volume-based pricing undermine the goal of 
equitable real-time payments, Congress must do more than merely trust 
the Fed not to engage in such pricing. At very least, it should insist 
that the Federal Reserve Board follow TCH's example by making a public 
commitment to refrain from offering volume-based discounts on FedNow 
or, at very least, by publicizing a specific, anticipated FedNow 
pricing policy, such as it presumably employed in assessing the new 
service's feasibility and desirability. As then Richmond Fed economist 
John Weinberg observed some years ago, ``When the Fed is one of several 
competitors, it can contribute to the efficiency of the market by 
adopting a clear pricing policy to which other sellers can react.'' 
\18\
---------------------------------------------------------------------------
     \18\ Weinberg, op. cit., p. 20.
---------------------------------------------------------------------------
Prejudicial Treatment of Balances in Jointly Held Fed Accounts
    The third danger stems from the Fed's ability to refuse to classify 
bank balances held in jointly owned Fed accounts as reserves, and to do 
so even when the accounts in question are ``intended to facilitate 
settlement between and among depository institutions participating in 
private-sector payment systems.'' \19\
---------------------------------------------------------------------------
     \19\ For the Fed's rules for establishing such joint accounts see 
82 FR 41951, available at https://www.govinfo.gov/content/pkg/FR-2017-
09-05/pdf/2017-18705.pdf.
---------------------------------------------------------------------------
    Fed balances classified as ``reserves'' earn interest, while those 
not so classified do not. Consequently, by refusing to classify the 
jointly held Fed balances held by banks participating in a private 
payments network as reserves, the Fed adds to the cost of participating 
in that network, and hence to the relative attractiveness of other 
networks, including those it itself operates, that aren't subject to 
the same ``reserve tax.'' The Fed's status as bank regulator can thus 
allow it to compete unfairly by ``raising [its] rivals' costs.'' \20\
---------------------------------------------------------------------------
     \20\ The seminal work here is Steven C. Salop and David T. 
Scheffman, ``Raising Rival's Costs'', American Economic Review, May 
1983, pp. 267-271. Available at https://www.jstor.org/stable/
1816853?seq=1#metadata_info_tab_contents.
---------------------------------------------------------------------------
    Although the Fed allows ``only an institution eligible to have a 
Federal Reserve account under the applicable Federal statute and 
Federal Reserve rules, policies, and procedures'' to be a joint account 
holder, it reserves the right to determine whether balances in joint 
accounts count as reserves on a balance-by-balance basis. \21\ Today, 
the Fed administers three joint accounts serving to facilitate 
settlements among participants in TCH's CHIPs, RTP, and EPN networks. 
\22\ So far as I'm aware, it has not yet chosen to treat balances in 
any of these accounts as reserves. Consequently those balances neither 
bear interest nor qualify as ``High Quality Liquid Assets'' that can 
satisfy Basel's LCR (Liquidity Coverage Ratio) requirements.
---------------------------------------------------------------------------
     \21\ 82 FR 41956.
     \22\ Although most EPN ACH payments are settled using Fedwire, TCH 
relies on a joint Fed account to assist in the settlement of items sent 
by Fed ACH participants to EPN participants that choose to be 
identified by UPIC (Universal Payment Indication Code) numbers only, so 
as to avoid divulging confidential banking information.
---------------------------------------------------------------------------
    I can think of no economic reason why the Fed should not classify 
all Federal Reserve bank balances held in joint accounts used in 
settling payments as reserves, and to accord such balances the same 
privileges as other reserve balances. RTP account balances, for 
example, are no less liquid than banks' regular Fed account balances, 
and serve the same purpose of supplying their owners with means for 
settling payments. That banks choose to fund their RTP accounts rather 
than their individual Fed accounts, so as to allow them to make real-
time payments instead of relying on slower ones, should not subject 
them to any avoidable penalties.
    Moreover, by refusing to treat RTP balances as reserves the Fed may 
complicate its monetary policy operations unnecessarily by creating a 
new ``autonomous'' determinant of the total stock of bank reserves. As 
the Fed itself explains:

        if joint account balances are not treated as reserves, they are 
        a factor affecting the supply of reserve balances, meaning, all 
        else equal, movements in joint account balances have similarly 
        sized but opposite effects on the supply of reserve balances, 
        which the Federal Reserve will need to offset to provide the 
        appropriate level of reserves in a scarce reserve regime. \23\
---------------------------------------------------------------------------
     \23\ See Federal Reserve System, ``Final Guidelines for Evaluating 
Joint Account Requests'', at https://www.govinfo.gov/content/pkg/FR-
2017-09-05/pdf/2017-18705.pdf. Although the Fed presently operates an 
abundant reserve regime, recent experience has illustrated, rather 
dramatically, that under certain conditions the Fed may still have to 
intervene to offset autonomous reserve losses. See Nick Timiraos and 
Daniel Kruger, ``Fed Intervenes To Curb Soaring Short-Term Borrowing 
Costs'', Wall Street Journal, September 17, 2019. Available at https://
www.wsj.com/articles/fed-to-conduct-first-overnight-repo-transactions-
in-several-years-11568729757.

    In short, the Fed's ability to refuse to classify balances held in 
joint accounts ``intended to facilitate settlement'' on private 
payments system with which it competes represents a clear conflict of 
interests. To resolve this conflict, and thereby assure that the Fed 
competes fairly with rival payment service providers, Congress should 
compel the Fed to classify all balances held in joint Federal Reserve 
bank accounts as reserves, provided only that the accounts in question 
are designed to facilitate settlements on private payments networks. 
Congress should also have the Government Accountability Office (GAO) 
occasionally review the Fed's handling of applications for such joint 
accounts, to ensure that it continues to abide by its current 
guidelines for granting them.
Abuse of Monetary Control Act Loopholes
    Finally, I wish to point to the risk that the Fed will take 
advantage of loopholes in the 1980 Monetary Control Act (MCA) to charge 
prices for its FedNow services that fail to cover their full costs, as 
that act requires. Thanks to its monopoly of paper currency, the Fed 
earns substantial ``seigniorage'' revenue it can use to cross-subsidize 
its other payment services to the extent that MCA loopholes allow it.
    Although the MCA is supposed to rule out such cross-subsidies, 
there are at least two defects in its provisions that can prevent it 
from doing so. One concerns the Act's requirement that the Fed's 
service fees cover its costs ``over the long run.'' Because it fails to 
define ``the long run,'' the Act as written allows the Fed to interpret 
the phrase as it pleases. In contrast, private-sector payment service 
providers must generally be able to recover the cost of new services 
rapidly enough to achieve a positive present value for those services.
    Fed officials claim that they generally endeavor to recover the 
Fed's expenditures for established services within a 10-year period, 
but that they expect FedNow's ``first instance of long-run cost 
recovery to occur outside'' that 10-year cost recovery period. \24\ 
However, they do not say how far outside, and the Fed incurs no 
penalties for failing to recover its costs within any specific length 
of time. \25\ It follows that the Fed's investment in FedNow needn't 
have a positive present value, so that it can set FedNow fees below 
what a private-sector provider of an equally costly service could 
afford.
---------------------------------------------------------------------------
     \24\ 84 FR 39314.
     \25\ GAO, ``Federal Reserve's Competition With Other Providers 
Benefits Customers, but Additional Reviews Could Increase Assurance of 
Cost Accuracy'', GAO-16-614, August 2016. Available at https://
www.gao.gov/assets/680/679388.pdf.
---------------------------------------------------------------------------
    A second MCA loophole leaves to the Fed itself the choice of an 
internal cost accounting system by which the Fed allocates its 
expenditures among its various activities, while failing to provide for 
periodic and systematic external reviews of that accounting system to 
assure its adequacy. In consequence the last external review of the 
Fed's cost accounting system took place in 1984! External assessments 
of the Fed's success in complying with the MCA's cost recovery 
provisions, such as that undertaken by the GAO in 2016, \26\ are 
therefore only as accurate as the Fed's own internal audits--a highly 
unsatisfactory circumstance.
---------------------------------------------------------------------------
     \26\ Ibid.
---------------------------------------------------------------------------
    By closing these MCA loopholes, Congress can prevent the Fed from 
underpricing its payments services, including FedNow. To do so, it 
should insist that the Fed offer compelling proof that it will be able 
to recover the costs of FedNow rapidly enough to give that project a 
positive present value using an equitable and competitive fee 
structure. Congress should also follow the GAO's 2016 recommendation 
that it provide for periodic independent reviews of the Fed's cost-
accounting practices. \27\ Together these changes should go far in 
assuring that the Fed competes fairly with private payment service 
providers.
---------------------------------------------------------------------------
     \27\ Ibid., p. 64: ``Having [the Fed's] cost accounting practices 
periodically subject to independent testing would provide greater 
assurance that the Federal Reserve is complying with the Monetary 
Control Act.''
---------------------------------------------------------------------------
Conclusion
    I conclude my testimony by observing that none of the steps I have 
recommended to Congress would prevent the Fed from doing all that it 
can possibly do to facilitate faster payments in the United States. My 
recommendations will only serve to make sure that in competing with 
private-sector payment service providers, the Fed plays by the rules, 
as it must if it is to contribute to rather than hinder the speeding-up 
of U.S. payments. A well-intentioned Fed should therefore have no 
objection to them, while an ill-intentioned one will make them 
indispensable.
             STATEMENT OF THE AMERICAN BANKERS ASSOCIATION
             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



STATEMENT OF THE CREDIT UNION NATIONAL ASSOCIATION
           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



STATEMENT OF FINANCIAL INNOVATION NOW
                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


STATEMENT OF FOOD MARKETING INSTITUTE
                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


STATEMENT OF NACHA
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


STATEMENT OF THE NATIONAL ASSOCIATION OF FEDERALLY-INSURED CREDIT 
                                 UNIONS
                                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



STATEMENT OF THE RETAIL INDUSTRY LEADERS ASSOCIATION
          
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]