The Federal Reserve announced Monday it will develop technology to eliminate the frustrating delay many Americans face between when they deposit a check and when it’s recognized in their account.
The delay costs billions in late fees and overdraft charges for millions of people living paycheck-to-paycheck, industry experts and regulators say.
Federal Reserve Governor Lael Brainard said Monday the Fed will invest in a new service to be known as Fed Now.
“Everyone deserves the same ability to make and receive payments” quickly, she said in a speech at the Federal Reserve Bank of Kansas City. “Immediate access to funds could be especially important to households with fixed incomes.”
The announcement will thrust the Fed into a fight with some of the country’s biggest banks, including Bank of America and JPMorgan Chase, who have already developed rival technology and fear that Silicon Valley could use the Fed system to push their way further into the banking world.
America’s payment system lags behind many parts of the world and U.S. banks are concerned about being left behind, said Aaron Klein, the policy director for the Center on Regulation and Markets at the Brookings Institution. “I think some of the large banks don’t want to be the taxi medallions and be uberized,” he said, a reference to the impact of ride-sharing on taxi owners. “The rest of the world went to real-time payments a long time ago.”
The Fed’s announcement comes at a time when big technology companies are finding other ways into the banking world. Wall Street has raised concerns about Facebook’s efforts to create an alternate global currency system, known as Libra. Meanwhile, Square, the mobile payment company, and Rakuten, known as the Amazon of Japan and operator of U.S. rewards program Ebates, have applied for a special banking license that would allow the companies to offer checking and savings accounts.
In 2005, Walmart waged a two-year battle for a similar bank charter but withdrew its application after small banks objected. But more than a decade later, Silicon Valley may pose a bigger threat to the stranglehold banking industry holds on key parts of the financial world.
For decades, banks flew planes across the country filled with paper checks ready to be processed. Now, depositing a check is as simple as snapping a photo with your phone.
But there is still often a delay of a couple of days before the money will be deposited into an account, a frustrating feature of America’s antiquated payment system, industry experts say.
The current electronic payment system was built in the 1960s with physical checks in mind, not splitting a check with friends on a mobile phone app, industry experts say. Retailers bundled physical checks into batches before taking them to the bank to be processed. That same type of process is now used for electronic payments.
The Clearing House, which is owned by 24 of the country’s largest financial institutions, has spent millions building a system that brings the typical processing time from a few days to less than five seconds, said Steve Ledford, a senior vice president at the company.
The real time payments system launched in 2017 but is currently being used by less than 20 of the 10,000 banks and credit unions across the country.
If the Fed develops a rival technology that could slow adoption even further, said Ledford. “The numbers are ramping up,” he said, but “one of the complicating factors has been this Fed potential to move into the market.”
Community banks have objected to their biggest rivals dominating such a critical part of the financial pipeline. So has Walmart, which told the Federal Reserve in December: “Allowing any one for-profit operator to achieve a monopoly over a payment system would almost certainly result in loss of efficiency and ultimately an inferior product that increases societal costs.”
Several Democratic lawmakers have also called on the Federal Reserve to quickly develop its own system. “You’re seeing the Clearing House and the big banks fighting back harder. We need to move forward now,” Sen. Chris Van Hollen, D-Md., said in an interview. The big banks could raise prices on their smaller competitors, said Van Hollen, echoing concerns from small banks.
But Wall Street sees a bigger threat looming. Big tech companies could use the Federal Reserve’s system to gain direct access to the payment system, bypassing banks that currently act as a gatekeeper, said Greg Baer, chief executive of the Bank Policy Institute, which represents the country’s biggest banks.
The tech industry would like the Federal Reserve to give non-banks direct access to the payment system, said Brian Peters, executive director of Financial Innovation Now, a lobbying group that includes Apple, Amazon and Google. But that is not likely to happen without congressional approval, he said.
“At this point, we just want to make our payment system work faster,” Peters said.