U S Payment System Policy Issues Faster Payments and Innovation September 23 2019 Congressional Research Service https crsreports congress gov R45927 SUMMARY U S Payment System Policy Issues Faster Payments and Innovation Technological advances in digitization and data processing and storage have greatly increased the availability and convenience of electronic payments New products and services offer faster more convenient payment for individuals and businesses and the numerous options on offer foster competition and innovation among end-user service providers Currently many new payment services are layered on top of existing electronic payment systems which may limit their speed Most payments flow through both retail and wholesale payment systems before they are completed Consumers access retail payment systems to purchase goods and services pay bills obtain cash through withdrawals and advances and make person-to-person transfers Consumers’ financial institutions access wholesale systems to complete the payment In the United States systems accessed by consumers are operated by the private sector whereas systems accessed by banks to complete those transactions are operated by the Federal Reserve Fed or the private sector R45927 September 23 2019 Cheryl R Cooper Analyst in Financial Economics Marc Labonte Specialist in Macroeconomic Policy David W Perkins Specialist in Marcoeconomic Policy Regulation of retail payment systems is dispersed across multiple state and federal regulators For example payment systems are subject to federal consumer protection regulation under the Electronic Fund Transfer Act P L 95-630 anti-money laundering requirements under the Bank Secrecy Act P L 91-508 and various state licensing safety and soundness anti-money laundering and consumer protection requirements Private wholesale payment systems are regulated by the Fed and if they are systemically important they can be designated as “financial market utilities” and subject to heightened oversight Although faster and potentially less costly payment systems may benefit consumers and businesses the use of new technology in existing and new payment systems raises a number of questions for policymakers Some observers have argued that certain innovative financial technology or fintech payment companies would be more effectively regulated through the federal banking regulatory framework whereas opponents of this idea assert it would result in the preemption of important state-level consumer protections and in an inappropriate combination of banking and commercial activities The increased prevalence of data generation collection and analysis in payment systems has caused observers to question whether existing regulation adequately addresses issues related to data privacy and cybersecurity Although the traditional high-levels of industry concentration and the recent entry by technology giants have raised concerns over market power and industry competition competition to date has been robust and certain analysts argue that internet-based payments that do not require a large investment in infrastructure will prevent the market concentration that exists in older payment services What effect technological innovation in payments will have on consumer access and whether consumers are adequately protected against potential problems such as fraudulent or erroneous transactions are also subjects of debate In August 2019 the Fed announced plans to create an interbank real-time payments RTP system by 2023 or 2024 The Fed stated that the new system will be available to all banks with a reserve account at the Fed and it will require banks using this new system to make those funds available to their customers immediately after being notified of settlement In addition several private-sector initiatives are also under way to implement faster payments some of which would make funds available to the recipient in real time with deferred settlement and some of which would provide real-time settlement Businesses and consumers would benefit from the ability to receive funds more quickly particularly as a greater share of payments are made online or using mobile technology The main policy issue regarding the Federal Reserve and RTP is whether Fed entry in this market is desirable given similar private-sector developments are already under way There is debate about whether competition from the Fed would be beneficial in terms of cost efficiency safety innovation ubiquity and financial stability In the 116th Congress H R 3951 and S 2243 among other bills would require the Fed to create a RTP system and would require banks to make payments to account holders in real time Congressional Research Service U S Payment System Policy Issues Faster Payments and Innovation Contents Background on Payments 1 Payment Systems and Financial Technology 3 Faster Retail Payments Policy Issues 4 Regulatory Framework 4 Cybersecurity 6 Data Privacy 7 Consumer Protection 8 Financial Access and Underserved Groups 9 Market Concentration 10 Wholesale Payment Systems and Real-Time Payments 11 History of the Fed’s Role in the Payment System 11 Real-Time Payments Initiatives 12 Policy Issues 13 Regulation 16 Figures Figure 1 Parts of the Payment System 2 Figure 2 Trends in Noncash Payments from 2006 to 2015 3 Tables Table A-1 U S Payments Selected Interbank Payment Clearing and Settlement Systems 17 Appendixes Appendix Selected Interbank Payment Clearing and Settlement Systems Involved in U S Payments 17 Contacts Author Information 20 Congressional Research Service U S Payment System Policy Issues Faster Payments and Innovation his report examines technological innovation in payment systems generally and particular policy issues as a result of retail i e point of sale payment innovation The report also discusses wholesale payment clearing and settlement systems that send payment messages between banks and transfer funds including the “real-time payments” service being introduced by the Federal Reserve 1 This report includes an Appendix that describes interbank payment clearing and settlement systems related to U S payments T Background on Payments The U S financial system processes millions of transactions each day to facilitate purchases and payments In general terms a payment system consists of the means for transferring money between suppliers and users of funds through the use of cash substitutes such as checks drafts and electronic funds transfers The Committee on Payment and Settlement Systems CPSS consisting of representatives from several international regulatory authorities has developed generally accepted definitions of standard payment system terminology 2 As defined by the CPSS a payment system is a system that consists of a set of instruments banking procedures and typically interbank funds transfer systems that ensure the circulation of money These systems allow for the processing and completion of financial transactions From the typical consumer’s perspective making a payment is simple A person swipes a card clicks a button or taps a mobile device and the payment is approved within seconds However the infrastructure and technology underlying the payment systems are substantial and complex To simplify a payment system has three parts see Figure 1 First the sender i e the person making the payment initiates the payment through an end-user service such as an online payment service or mobile app instructing the payer’s bank to make a payment to the recipient The payer and recipient interact only with end-user services which comprise the “retail” portion of payments Second the payer’s bank sends a payment message containing payment details to the recipient’s bank through a payment system sometimes called a clearing service Third the payment is completed or settled when the two banks transfer funds through a settlement system Different systems can perform each of these parts and systems’ developers and operators compete with each other to provide payment and settlement services to consumers businesses and banks These final two interbank steps are the “wholesale” portion of payments 3 1 Achieving ubiquitous real-time payments involves ongoing innovation in both the retail and wholesale payment services However since the speed of many existing retail services is ultimately limited by what happens with wholesale payment systems discussed in more detail in the “Payment Systems and Financial Technology” section this report focuses on real time payments in these systems 2 Bank for International Settlements Committee for Payment and Settlement Systems A Glossary of Terms Used in Payments and Settlement Systems Basel Switzerland March 2003 at http www bis org publ cpss00b pdf 3 For the sake of brevity this report refers to end-user services accessed by consumers as retail services and as interbank payment clearing and settlement PCS systems as wholesale systems unless otherwise noted Federal Reserve “Potential Federal Reserve Actions To Support Interbank Settlement of Faster Payments Request for Comments ” 83 Federal Register 57355-57357 November 15 2018 Congressional Research Service 1 U S Payment System Policy Issues Faster Payments and Innovation Figure 1 Parts of the Payment System Source Federal Reserve Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments 83 FR 221 November 15 2018 p 57356 at https www govinfo gov content pkg FR-2018-11-15 pdf 2018-24667 pdf Note See text for details End-user services which are operated by the private sector facilitate a consumer’s ability to purchase goods and services pay bills obtain cash through withdrawals and advances and make person-to-person payments Retail payments tend to generate a large number of transactions that have relatively small value per transaction Retail payment services can be accessed through many consumer financial products including credit and debit cards and checking accounts The most common methods of payment are debit cards cash credit cards direct debits and credits via an automated clearing house ACH checks and prepaid debit cards see Figure 2 4 In the United States the Federal Reserve Fed operates some of the key bank-to-bank payment clearing and settlement PCS systems that process retail or wholesale transactions and privatesector organizations operate other systems that clear and settle bank-to-bank payment including those described in the Appendix 5 4 Claire Greene and Joanna Stavins The 2016 and 2017 Surveys of Consumer Payment Choice Summary Results Federal Reserve Bank of Boston Research Data Reports 2018 at https www bostonfed org publications researchdata-report 2018 the-2016-and-2017-surveys-of-consumer-payment-choice-summary-results aspx Federal Reserve The Federal Reserve Payments Study 2018 Annual Supplement p 3 at https www federalreserve gov newsevents pressreleases files 2018-payment-systems-study-annual-supplement-20181220 pdf 5 For background information on retail and wholesale payment systems see Federal Financial Institutions Examination Council FFIEC Retail Payment Systems IT Examination Handbook Washington DC April 2016 at https ithandbook ffiec gov media 274860 ffiec_itbooklet_retailpaymentsystems pdf and FFIEC Wholesale Payment Systems IT Examination Handbook Washington DC July 2004 at http www ffiec gov ffiecinfobase booklets Wholesale whole pdf Congressional Research Service 2 U S Payment System Policy Issues Faster Payments and Innovation Figure 2 Trends in Noncash Payments from 2006 to 2015 Source The Federal Reserve Payments Study 2018 Annual Supplement p 3 at https www federalreserve gov newsevents pressreleases files 2018-payment-systems-study-annual-supplement-20181220 pdf Note ACH Automated Clearing House payments Payment Systems and Financial Technology Technological advances in digitization and data processing and storage have greatly increased the availability and convenience of electronic payments In recent years the use of electronic payments has risen rapidly whereas the use of cash and checks has declined see Figure 2 According to the Fed’s most recent triennial payment study released in 2016 the number of transactions of three electronic payment methods—debit card credit card and ACH—grew at annual rates of 7 1% 8 0% and 4 9% respectively Together they totaled more than 144 billion transactions with a value of almost $178 trillion in 2015 6 Meanwhile check payments declined by an annual rate of 4 4% during that period and totaled 17 3 billion transactions worth almost $27 trillion in 2015 7 Less data are available on cash usage and the value of cash transactions in part because they are person-to-person and do not involve a digital record However a Fed survey estimates that between 2012 and 2015 the share of transactions made in cash fell from 40 7% of all transactions to 32 5% 8 6 Federal Reserve System The Federal Reserve Payments Study 2016 December 2016 p 12 at https www federalreserve gov newsevents press other 2016-payments-study-20161222 pdf hereinafter cited as Federal Reserve System Federal Reserve Payments Study 2016 7 Federal Reserve System Federal Reserve Payments Study 2016 p 12 8 Wendy Matheny Shaun O’Brien and Claire Wang The State of Cash Preliminary Findings from the 2015 Diary of Consumer Payment Choice Federal Reserve System Cash Product Office November 2016 pp 1-4 at https www frbsf org cash files FedNotes-The-State-of-Cash-Preliminary-Findings-2015-Diary-of-ConsumerPayment-Choice pdf Congressional Research Service 3 U S Payment System Policy Issues Faster Payments and Innovation This trend is probably due at least in part to various new technological products and services that offer fast convenient payments for individuals and businesses Payment apps linked to bank accounts and payment cards can be downloaded onto mobile devices that allow individuals to send payments to each other or to merchants These services include Venmo owned by PayPal Zelle owned by a consortium of large U S banks and Cash App owned by Square Other companies provide hardware and software products that allow individuals and small businesses to accept debit and credit card payments online or in person These companies include PayPal Square and Stripe Another advance in payments is allowing consumers to make payments using a mobile device wherein debit card credit card or bank account information is stored in a “digital wallet” and sensitive information is protected by transmitting surrogate data a process called tokenization at the point of sale This service includes Apple Pay Google Pay and Samsung Pay These services are generally layered on top of traditional electronic payment systems To use these services the consumer or business often must link them to a bank account debit card or credit card The payments are still ultimately settled when the money from the payer’s account is deposited in the recipient’s account An exception is payments made by cryptocurrencies discussed in the text box 9 Cryptocurrencies Cryptocurrencies are a financial innovation that allow users to make payments entirely outside existing systems using cryptographically secured ledgers and protocols to record and validate transactions instead of centralized intermediaries such as banks and other financial institutions Examples include Bitcoin the first cryptocurrency and Libra a proposed cryptocurrency announced by Facebook Proponents of cryptocurrencies assert this technology will one day displace existing payment systems However to date evidence indicates that cryptocurrencies are very rarely used to buy goods and services pay bills or as money For this reason this report does not cover cryptocurrencies in detail For information on cryptocurrencies see CRS In Focus IF10824 Financial Innovation “Cryptocurrencies ” by David W Perkins and CRS Report R45427 Cryptocurrency The Economics of Money and Selected Policy Issues by David W Perkins Faster Retail Payments Policy Issues Although faster and potentially less costly payment systems benefit consumers and businesses the use of new technology in existing and new payment systems raise questions about whether existing regulation adequately addresses issues related to cybersecurity and data privacy industry competition and consumer access and protection 10 Regulatory Framework How payments are federally regulated depends in part on whether they are being provided by banks Banks are subject to a variety of prudential regulation enforcement and supervision by federal bank regulators Nonbank payment processors are subject to similar regulation and 9 Alternatives to a banking-based payment system have been proposed or pursued in other countries For example Mpesa a mobile payment system that does not use banks has achieved high levels of usage in parts of Africa 10 Cryptocurrencies which is briefly mentioned above could be used for faster payments but in practice have not been widely used for payments Facebook’s proposal to introduce the Libra cryptocurrency if successful could become a widely adopted form of faster payments For more information see CRS In Focus IF10824 Financial Innovation “Cryptocurrencies ” by David W Perkins and CRS Report R45427 Cryptocurrency The Economics of Money and Selected Policy Issues by David W Perkins Congressional Research Service 4 U S Payment System Policy Issues Faster Payments and Innovation supervision but not enforcement by bank regulators if they are a service provider to a bank but otherwise are not Nonbank companies that do not provide services to banks may be regulated as money transmitters at the state level by state agencies and as money service businesses at the federal level by the Department of the Treasury’s Financial Crimes Enforcement Network and subject to applicable laws and regulations These services are subject to federal consumer protection regulation under the Electronic Fund Transfer Act P L 95-630 11 anti-money laundering requirements under the Bank Secrecy Act P L 91-508 12 and various state licensing safety and soundness anti-money laundering and consumer protection requirements 13 A broad issue that permeates many of the specific issues examined in this report is the debate over whether the various companies providing retail payment services are effectively and efficiently regulated Nonbank money transmission is largely regulated at the state level Some observers have argued that this state-by-state regulatory regime designed to protect against risks presented by traditional money transmitters such as Western Union is overly onerous and illsuited when applied to new technology-focused payment companies 14 State regulators assert they are best positioned to regulate these companies noting their experience and recent efforts to coordinate and streamline state regulation 15 A greater federal role in payment regulation could impose more or less stringent standards with federal preemption of state regulation in the latter case than any given state’s current standards One potential solution for concerns that the current system is too fragmented and overly burdensome could be to allow certain nonbank payment companies to enter the bank regulatory regime Two potential mechanisms are under consideration that could allow a technology-focused payment company to be federally regulated—the Office of the Comptroller of the Currency OCC special purpose national bank charter and a state-level industrial loan company ILC charter with Federal Deposit Insurance Corporation FDIC insurance Both could be particularly desirable for payment firms if they provide an avenue to directly access Fed wholesale payment systems However both mechanisms are controversial and subject to contentious debate The OCC and proponents of the special purpose charter generally view the charter as a way to free companies from what they assert is the unnecessarily onerous regulatory burden of being subject to numerous state regulatory regimes while not overly relaxing regulations—under the special purpose charter the companies would become subject to the OCC’s national bank regulatory regime 16 Opponents generally assert that the OCC does not have the authority to 11 P L 95-630 P L 91-508 13 U S Department of the Treasury A Financial System That Creates Economic Opportunities Nonbank Financials Fintech and Innovation Executive Order 13772 Report to the President July 2018 pp 144-146 at https home treasury gov sites default files 2018-08 A-Financial-System-that-Creates-Economic-Opportunities— Nonbank-Financials-Fintech-and-Innovation pdf 14 Benjamin Lo “Fatal Fragments The Effect of Money Transmission Regulation on Payments Innovation ” Yale Journal of Law and Technology vol 18 no 1 2017 pp 111-141 15 Conference of State Bank Supervisors Vision 2020 for Fintech and Nonbank Regulation video June 7 2018 at https www csbs org vision2020 16 Office of the Comptroller of the Currency OCC “OCC Begins Accepting National Bank Charter Applications From Financial Technology Companies ” press release July 31 2018 at https www occ gov news-issuances newsreleases 2018 nr-occ-2018-74 html and Testimony of Nathanial Hoopes executive director of the Marketplace Lending Association U S Congress House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit Examining Opportunities and Challenges in the Financial Technology Fintech” Marketplace 115th Cong 2nd sess January 30 2018 pp 9-10 at https financialservices house gov uploadedfiles hhrg-115-ba15wstate-nhoopes-20180130 pdf 12 Congressional Research Service 5 U S Payment System Policy Issues Faster Payments and Innovation charter these types of companies and that doing so would inappropriately allow fintech firms offering fast payment services to circumvent important state-level consumer protections 17 State regulators have filed lawsuits to block the granting of such charters 18 To date no companies have applied for such a charter although ongoing legal uncertainty is likely a discouraging factor 19 ILC charters are controversial because they allow commercial firms—such as retailers manufacturers or technology companies—to own banks The United States has historically adopted policies to separate commerce and banking and the FDIC has not approved deposit insurance for a new ILC since 2006 20 Opponents of ILC charters argue that by creating an avenue for a commercial firm to own a depository institution 21 they blur the line between commerce and banking exposing the U S economy to related risks such as creating possible incentives for imprudent underwriting inappropriately exposing taxpayers to losses through federal deposit insurance and leading to entities that can exercise market power 22 Proponents of ILC charters assert these concerns are overstated They cite the potential benefits of mixed arrangement e g economies of scale risk diversification information efficiencies customer convenience and savings and note that certain other stable developed countries allow more blending of banking and commerce than the United States with they argue no or little ill effect 23 Recently three fintech companies submitted applications to the FDIC for ILC deposit insurance Two companies however have since withdrawn their applications and the company with a pending application Square is a payment system provider Cybersecurity All payment methods expose users to some risks including money theft or fraudulent payments made using their accounts or identities In general improving technology reduces one type of risk but may expose users to new risks For example if a pickpocket steals a person’s cash the victim has little recourse If instead the pickpocket steals a payment card the victim can cancel the card and generally would not be held liable for fraudulent purchases 24 However identity thieves can steal card information using card reader skimmers allowing thieves to open and use lines of credit in victims’ names without their knowledge Conference of State Bank Supervisors “CSBS Responds to Treasury OCC Fintech Announcements ” press release July 31 2018 at https www csbs org csbs-responds-treasury-occ-fintech-announcements 18 Conference of State Bank Supervisors “CSBS Sues OCC Over Fintech Charter ” press release October 25 2018 at https www csbs org csbs-sues-occ-over-fintech-charter and Jonathan Stempel “New York Sues U S to Stop Fintech Bank Charters ” Reuters September 17 2018 at https www reuters com article us-usa-treasury-fintech-lawsuit newyork-sues-u-s-to-stop-fintech-bank-charters-idUSKCN1LU21O 19 Rachel Witkowski “Google and PayPal Explored OCC’s Fintech Charter Then Walked Away ” American Banker June 16 2019 20 Independent Community Bankers of America ICBA Industrial Loan Companies Closing the Loophole to Avert Consumer and Systemic Harm March 19 2019 p 4 at https www icba org docs default-source icba advocacydocuments reports ilc-white-paper pdf hereinafter cited as ICBA Industrial Loan Companies 21 Depository institutions include credit unions and savings associations as well as banks Neither type of institution is generally allowed to mix commercial activity with banking activity 22 ICBA Industrial Loan Companies pp 3-12 15-18 23 James Barth et al Industrial Loan Companies Supporting America’s Financial System The Milken Institute April 2011 at https assets1b milkeninstitute org assets Publication ResearchReport PDF ILC pdf 24 P L 95-630 The Electronic Fund Transfer Act limits consumer liability to $50 see 15 U S C §1693g In practice banks and credit card companies often do not hold consumers liable for any amount to foster customer satisfaction See Latoya Irby “How a Zero Fraud Liability Policy Protects Your Credit Card ” The Balance July 22 2019 17 Congressional Research Service 6 U S Payment System Policy Issues Faster Payments and Innovation Similarly new payment technologies reduce certain risks but create others For example digital wallets on mobile devices can eliminate the need to carry physical cards that can be lost or stolen and can protect sensitive information at the point of sale through tokenization However the device itself can be compromised by software designed to gain unauthorized access to devices called malware which may lead to fraudulent charges In addition storing payment information on multiple websites apps and devices creates more opportunities for hackers to steal it than if the information existed only on the card itself 25 Recent breaches at various financial and nonfinancial companies in which people’s sensitive information was compromised illustrate the potential risk and have raised questions over whether policymakers should implement stricter cybersecurity requirements 26 Some possible policy responses include    enacting a federal breach notification law creating federal cybersecurity standards or increasing federal authority to penalize companies that fail to adequately protect consumer data Data Privacy Payment systems necessarily collect detailed consumer information on transactions including the retail stores a consumer shops at the businesses and individuals the consumer pays and the dates times and amounts of each transaction 27 Through analysis these data have the potential to reveal a lot of information about individual consumers including where they live and their gender age race ethnicity and approximate income Such data are valuable from a business perspective for example for targeting product marketing to consumers 28 In addition scammers could use these data to facilitate fraud 29 Electronic payments have resulted in a proliferation in the availability and use of personal information which has raised policy concerns about how companies use the data whether consumers understand how their data will be used and whether consumers should have more control over its use Payment data have the potential to improve consumer outcomes For example personal financial management apps or other digital tools could help consumers more easily track payments automate saving and budgeting and more efficiently shop for financial products that meet their personal needs 30 Consumers could also in the future share these data with financial institutions to 25 European Union Agency for Network and Information Security Security of Mobile Payments and Digital Wallets December 19 2016 at https www enisa europa eu publications mobile-payments-security at_download fullReport 26 For examples see CRS Insight IN10792 The Equifax Data Breach An Overview and Issues for Congress by N Eric Weiss and CRS Report R43496 The Target and Other Financial Data Breaches Frequently Asked Questions by N Eric Weiss and Rena S Miller 27 Federal Trade Commission FTC Paper Plastic or Mobile An FTC Workshop on Mobile Payments FTC Staff Report March 2013 p 13 at http www ftc gov os 2013 03 130306mobilereport pdf 28 For more information on data brokers’ and lead generators’ use of consumer financial data see Bureau of Consumer Financial Protection CFPB Mobile Financial Services A Summary of Comments from the Public on Opportunities Challenges and Risks for the Underserved November 2015 pp 60-62 at https files consumerfinance gov f 201511_cfpb_mobile-financial-services pdf hereinafter cited as CFPB Mobile Financial Services Summary of Comments 29 CFPB Mobile Financial Services Summary of Comments p 7 30 For more information on payment apps see FTC What’s the Deal An FTC Study on Mobile Shopping Apps August 2014 at https www ftc gov system files documents reports whats-deal-federal-trade-commission-study-mobileshopping-apps-august-2014 140801mobileshoppingapps pdf and CFPB Mobile Financial Services Summary of Congressional Research Service 7 U S Payment System Policy Issues Faster Payments and Innovation apply for loans or other banking products 31 Given these benefits as well as possible privacy concerns the question becomes how much access should companies have to individuals’ information Privacy policy disclosures to consumers are an important element of privacy policy that might be more difficult as payments become faster using new technology For example according to the Bureau of Consumer Financial Protection CFPB stakeholders suggest that “providing disclosures that are clear and sufficient for consumers to make informed decisions is difficult” in the mobile environment due to small screens which may make it difficult to read long technical disclosure documents 32 These stakeholders indicate that clear privacy policies and more consumer control over the use of consumer data may be important considerations in this new digital environment 33 Consumer Protection When developing a new or faster retail payment system consumer protection is an important consideration 34 Although new technology offers consumers many potential benefits it raises issues of concern such as consumer liability for fraudulent payment and consumer error or nonreceipt of goods resolution The Electronic Fund Transfer Act 35 currently implemented by the CFPB through Regulation E is the most relevant consumer protection law applying to financial payments 36 Regulation E protects individual consumers who engage in electronic fund transfers It mandates consumer disclosures limits consumer liability for unauthorized transfers and maintains procedures for resolving errors Other regulations may also be relevant to a new faster payment system depending on its structure For example the Expedited Funds Availability Act P L 100-86 37 currently implemented by the Federal Reserve as Regulation CC 38 prescribes how quickly banks must make funds available to customers When developing a new faster payment system Congress and federal regulators may consider how a new system should comply with relevant regulations such as Regulation E 39 Depending on the structure of the new system regulators might decide to update these regulations to tailor them as appropriate For example current consumer protection rules might not cover all aspects of the system leaving consumers at risk of financial loss without clear recourse for some Comments pp 24-26 31 CFPB “Request for Information Regarding Consumer Access to Financial Records ” 81 Federal Register 8380883809 November 22 2016 and FinRegLab The Use of Cash-Flow Data in Underwriting Credit Empirical Research Findings July 2019 at https finreglab org wp-content uploads 2019 07 FRL_Research-Report_Final pdf Note that the Dodd-Frank Wall Street Reform and Consumer Protection Act P L 111-203 provides for consumer rights to access information codified at §12 U S C 5533 32 CFPB Mobile Financial Services Summary of Comments p 60 33 CFPB Mobile Financial Services Summary of Comments pp 7-8 34 For a more detailed discussion of payment dispute resolution processes see FTC Paper Plastic or Mobile An FTC Workshop on Mobile Payments FTC Staff Report March 2013 pp 5-11 at http www ftc gov os 2013 03 130306mobilereport pdf 35 P L 95-630 36 12 C F R §1005 37 Title VI of P L 100-86 38 12 C F R Part 229 39 12 C F R §1005 Congressional Research Service 8 U S Payment System Policy Issues Faster Payments and Innovation payment-related disputes or other negative impacts 40 In this spirit in 2015 the CFPB released nine consumer protection principles for new faster payments systems including consumer control over payments fraud and error resolution protections and disclosed and clear costs 41 The CFPB has not acted on these principles through rulemaking or other initiatives since their release in 2015 Financial education might be another consumer protection policy option As new technology is introduced into financial products consumers may need to learn new skills sometimes referred to as digital financial literacy which includes “knowing how to use devices to safely access financial products and services via digital channels in ways that help consumers achieve their financial goals protect against financial harm and enhance ability to know where to get help ”42 This type of financial education might be particularly important to ensure that lower-income and older consumers are included in a new faster payment system 43 Financial Access and Underserved Groups Innovations in the payment system may benefit some consumers and fail to reach others New retail payment options that are linked to bank accounts internet-based or require mobile devices could disadvantage consumers who rely on cash payments 44 do not have easy internet or mobile access or do not feel comfortable using this new technology 45 As long as payments remain based on the banking system the unbanked and underbanked may encounter participation limits to faster payments 46 In contrast innovation in technology may help marginalized groups gain access to the financial system The ability to access digital channels using cash may be particularly important for including underserved consumers 47 leading to the development of new payment products—such as pre-paid cards and services—that allow cash to be placed in an account that can be used to make online payments The cost of internet and mobile data plans might limit the ability of underserved consumers to access a faster payment system that is internet- or mobile-based 48 However as internet access and mobile devices continue to proliferate and decline in cost barriers to accessing those 40 For example accounts attached to a new payment system may not be insured by the FDIC For more information see CFPB Mobile Financial Services Summary of Comments pp 69-71 41 The CFPB’s nine consumer protection principles are 1 consumer control over payments 2 strong data and privacy standards 3 fraud and error resolution protections 4 transparency 5 disclosed and clear costs 6 accessible broadly for consumers to use 7 funds available faster for consumers to use 8 security and payment credential value and 9 strong accountability mechanisms that effectively curtail system misuse See CFPB Consumer Protection Principles CFPB’s Vision of Consumer Protection in New Faster Payment Systems July 9 2015 pp 3-4 at https files consumerfinance gov f 201507_cfpb_consumer-protection-principles pdf 42 CFPB Mobile Financial Services Summary of Comments p 65 43 CFPB Mobile Financial Services Summary of Comments pp 65-66 44 For more information see CRS Report R45716 The Potential Decline of Cash Usage and Related Implications by David W Perkins 45 CFPB Mobile Financial Services Summary of Comments p 8 46 Other proposals include having the government directly provide accounts to retail customers through the Federal Reserve or Postal Service See Morgan Ricks John Crawford and Lev Menand A Public Option for Bank Accounts or Central Banking for All Vanderbilt Law Research Paper 18-33 and UC Hastings Research Paper No 287 January 26 2019 47 CFPB Mobile Financial Services Summary of Comments p 36 48 CFPB Mobile Financial Services Summary of Comments p 66 Congressional Research Service 9 U S Payment System Policy Issues Faster Payments and Innovation technologies may decline For example most consumers including unbanked and underbanked consumers have access to mobile phones and smartphones and the use of these technologies is growing 49 According to a national survey in 2017 83% of underbanked and 50% of unbanked consumers had access to a smart phone 50 The survey noted that underbanked consumers were more likely to use mobile banking services than the rest of the U S population 51 A faster payment system may provide certain other benefits besides access for low-income or liquidity-constrained consumers colloquially those living “paycheck to paycheck” who may more often need access to their funds quickly In particular many lower-income consumers say that they use alternative financial services such as check cashing services and payday loans because they need immediate access to funds 52 Faster payments may also help some consumers avoid checking account overdraft fees 53 Note however that some payments that households make would also be cleared faster—debiting their accounts more quickly—than the current system which could be harmful to some underserved households Market Concentration Traditional payment systems generally are characterized by strong economies of scale and are subject to network effects wherein the more widespread a payment method’s use and acceptance becomes the more incentive additional consumers and businesses have to adopt it These economic characteristics may mean payment industries naturally become highly concentrated because a small number of widely used systems are more efficient than many narrowly used systems For instance established payment systems currently have high market concentrations Debit card payment processing networks are dominated by Visa and Mastercard and credit card processing networks are mostly operated by Visa Mastercard American Express and Discover 54 Some observers are concerned that market concentration will also be a feature in new payment systems Others argue that new payment systems based on the internet may avoid similar concentration observed in traditional systems because they do not require new entrants to make large initial investments in infrastructure 55 To date the entry of multiple new services and companies into the market for end-user payment systems has supported competition and consumer choice Whether the industry will eventually consolidate remains to be seen Creating additional concentration concerns is the entrance of some of the largest global technology companies into the payment industry including U S companies such as Google Google Pay Apple Apple Pay Amazon Amazon Pay and Facebook Facebook Pay and the 49 Unbanked households do not have an account at an insured institution and underbanked households have obtained financial products and services outside of the banking system in the past year According to the 2017 National Survey of Unbanked and Underbanked Households 6 5% of households in the United States are unbanked and 18 7% of households are underbanked See Federal Deposit Insurance Corporation FDIC FDIC National Survey of Unbanked and Underbanked Households October 2018 p 1 at https www fdic gov householdsurvey 2017 2017report pdf hereinafter cited as FDIC FDIC National Survey 50 FDIC FDIC National Survey p 27 51 FDIC FDIC National Survey p 28 52 Aaron Klein “Real-Time Payments Can Help Combat Inequality ” Brookings Institution March 5 2019 at https spotlightonpoverty org spotlight-exclusives real-time-payments-can-help-combat-inequality 53 CFPB Consumer Voices on Overdraft Programs November 2017 pp 16-19 at https files consumerfinance gov f documents cfpb_consumer-voices-on-overdraft-programs_report_112017 pdf 54 Alina Comoreanu “Market Share by Credit Card Network ” WalletHub March 7 2017 at https wallethub com edu cc market-share-by-credit-card-network 25531 55 Aaron Rosenbaum et al “Faster Payments Market Structure and Policy Considerations ” Federal Reserve Bank of Boston Current Policy Perspectives vol 17 no 4 September 21 2017 Congressional Research Service 10 U S Payment System Policy Issues Faster Payments and Innovation Libra proposal Such companies already have large market shares in various technology-related industries and collect huge amounts of consumer data which could increase as they now seek to expand their scope into the payment industry Were they to dominate electronic payments it could pose competition concerns in the payment industry as well as increase their dominance in their core industries In addition these developments raise concerns discussed above see the “Regulatory Framework” section relating to the implications of mixing commerce with what has traditionally been a core banking activity Wholesale Payment Systems and Real-Time Payments Payments between two parties who are both members of the same end-user service—a closed loop payment—can occur in real time because the service can instantly communicate between the two parties verifying that the payer has sufficient funds in the account to make the payment However a payment in which one party is outside of a single end-user service typically travels through the banking system and thus cannot occur in real time unless real-time messaging clearing and settlement of the payment are available through wholesale payment systems For example a debit or credit card payment to a merchant needs to transfer funds from the sender’s bank in the case of a credit card the card-issuing bank and send them to the recipient’s bank Real-time payment can only occur in this scenario if settlement occurs in real-time or if payment occurs before settlement putting the recipient’s bank at risk that the transfer never occurs Even within an end-user service that would provide real-time payment if the transfer were made between two members entirely using existing balances within the service delivery of funds could be delayed if the payer needs to add funds to their account to make payment via direct debit or credit card transfer for example or if the recipient wishes to withdraw funds from the payment service to deposit in its bank account Thus the speed of many existing end-user services are ultimately limited by what happens with wholesale payment systems On August 5 2019 the Fed announced plans to create a wholesale real-time payment RTP system This section discusses the history of the Fed’s role in the payment system compares recent RTP initiatives by the Fed the private sector and abroad and analyzes policy issues raised by these initiatives History of the Fed’s Role in the Payment System The Fed was originally created as a “banker’s bank” to improve the functioning of a national banking system that was dominated at the time by small local banks To that end providing bank-to-bank check-clearing services was one of the Fed’s original primary functions Problems with private clearinghouses were one of the central issues in the financial panic that led to the Fed’s creation As other payment methods have emerged over time the Fed has also provided other types of bank-to-bank payment and settlement systems 56 The Fed provides these services by linking the accounts that all banks maintain at the Fed to comply with reserve requirements 57 56 For more background see Federal Reserve Purposes and Functions Chapter 6 October 2016 at https www federalreserve gov aboutthefed files pf_complete pdf 57 In this context banks refer to any financial institution that maintains a reserve account at the Fed All depository institutions and a limited number of nondepository financial institutions are permitted to maintain reserve accounts Direct access to Fed payment systems is limited by statute to these entities Congressional Research Service 11 U S Payment System Policy Issues Faster Payments and Innovation Throughout the Fed’s history the private sector has operated competing payment and settlement systems that the Fed has regulated see Appendix for more details For example the Fed and the private-sector Electronic Payments Network owned by The Clearing House an association of large banks currently operate competing automated clearinghouse ACH systems which are payment systems that allow banks and certain other financial institutions to send direct debit and credit messages that initiate fund transfers 58 The Fed also operates two wholesale settlement systems for payments Fedwire Funds Service and the National Settlement Service 59 The Clearing House Interbank Payment System CHIPS is a competing private-sector gross settlement system The Fed does not operate any end-user service directly accessed by individuals or nonfinancial businesses Real-Time Payments Initiatives A typical bank-to-bank electronic payment is currently settled on the same or next business day 60 The Fed plans to introduce an RTP system called FedNow in 2023 or 2024 61 FedNow would be “a new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality to support faster payments in the United States ” that “would process individual payments within seconds and would incorporate clearing functionality with messages containing information required to complete end-to-end payments such as account information for the sender and receiver in addition to interbank settlement information ”62 According to the Fed FedNow will be available to all banks with a reserve account at the Fed It will require banks using FedNow to make funds transferred over it available to their customers immediately after being notified of settlement 63 In a November 2018 proposal the Fed also sought comment on the possibility of the Fed creating “a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments whether those services are provided by the private sector or Federal Reserve Banks ”64 The purpose of this For more information see Federal Reserve “Automated Clearinghouse Services ” June 12 2019 at https www federalreserve gov paymentsystems fedach_about htm and Nacha “Learn About Electronic Payments Network ” at https electronicpayments nacha org 59 For more information see Federal Reserve “Fedwire Funds Services ” at https www federalreserve gov paymentsystems fedfunds_about htm and Federal Reserve “National Settlement Service ” at https www federalreserve gov paymentsystems natl_about htm 60 Federal Reserve “Potential Modifications to the Federal Reserve Banks’ National Settlement Service and Fedwire® Funds Service To Support Enhancements to the Same-Day ACH Service ” 84 Federal Register 221223 May 16 2019 at https www federalregister gov documents 2019 05 16 2019-09949 potential-modifications-to-the-federal-reservebanks-national-settlement-service-and-fedwire-funds The Fed sought comments on this proposal in November 2018 See Federal Reserve “Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments ” 83 Federal Register 221 November 15 2018 p 57351 at https www govinfo gov content pkg FR-2018-11-15 pdf 2018-24667 pdf 61 The Federal Reserve stated “it will likely take longer for any service whether the FedNow Service or a privatesector service to achieve nationwide reach regardless of when the service is initially available ” Federal Reserve Federal Reserve Actions to Support Interbank Settlement of Faster Payments August 5 2019 Docket No OP-1670 at https www federalreserve gov newsevents pressreleases files other20190805a1 pdf hereinafter cited as Federal Reserve Federal Reserve Actions OP-1670 62 Federal Reserve Federal Reserve Actions OP-1670 pp 72-73 63 Federal Reserve Federal Reserve Actions OP-1670 64 Federal Reserve “Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments ” 83 Federal Register 221 November 15 2018 p 57351 at https www govinfo gov content pkg FR-2018-11-15 pdf 2018-24667 pdf 58 Congressional Research Service 12 U S Payment System Policy Issues Faster Payments and Innovation tool would be to accommodate the need for banks to move funds between their accounts at the Fed continuously including outside of business hours in real-time settlement In the August notice the Fed stated it was exploring whether this goal could be accomplished by expanding Fedwire Funds Service and the National Settlement Service to permit 24x7x365 real-time gross settlement Previously the Fed proposed expanding same-day payment settlements on Fedwire and the National Settlement Service 65 Several private-sector initiatives are also under way to implement faster payments some of which would make funds available to the recipient in real time with deferred settlement and some of which would provide real-time settlement 66 Notably the Clearing House introduced its RTP network with real-time settlement in November 2017 according to the Clearing House it currently “reaches 50% of U S transaction accounts and is on track to reach nearly all U S accounts in the next several years ”67 In addition both the Fed and private-sector companies can set joint standards rules and a governance framework to facilitate the adoption of faster payments whether those systems are operated by the Fed or the private sector and promote interoperability between systems The Fed convened the Faster Payments Task Force composed of more than 300 stakeholders which has issued a number of recommendations to facilitate the adoption of faster payments 68 Policy Issues Other countries have already introduced or are in the process of introducing RTP 69 According to Fed Chair Jerome Powell “the United States is far behind other countries in terms of having realtime payments available to the general public ”70 Businesses and consumers would benefit from the ability to receive funds more quickly particularly as a greater share of payments are made online or using mobile technology Some have argued that RTP would be especially beneficial to low-income liquidity-constrained individuals as described in the “Financial Access” section above 71 The main policy issue regarding the Federal Reserve and RTP is whether Fed entry in this market is desirable The Fed bases decisions on whether to introduce new payment systems or system features on three principles Federal Reserve “Potential Modifications to the Federal Reserve Banks’ National Settlement Service and Fedwire® Funds Service To Support Enhancements to the Same-Day ACH Service ” 84 Federal Register 221223 May 16 2019 at https www federalregister gov documents 2019 05 16 2019-09949 potential-modifications-to-the-federal-reservebanks-national-settlement-service-and-fedwire-funds 66 For an overview see Nacha “Faster Payments 101 ” at https www nacha org system files 2019-05 FasterPayments101_2019 pdf 67 The Clearing House “The RTP Network For All Financial Institutions ” at https www theclearinghouse org payment-systems rtp institution 68 Faster Payments Task Force The U S Path to Faster Payments Final Report Part Two A Call to Action July 2017 at https fasterpaymentstaskforce org wp-content uploads faster-payments-task-force-final-report-part-two pdf 69 Nacha The U S Path to Faster Payments Final Report Part One The Faster Payments Task Force Approach January 2017 p 29 at https fasterpaymentstaskforce org wp-content uploads faster-payments-final-report-part1 pdf 70 Federal Reserve Transcript of Chair Powell’s Press Conference July 31 2019 at https www federalreserve gov mediacenter files FOMCpresconf20190731 pdf 71 Aaron Klein The Fastest Way to Address Income Inequality Implement a Real Time Payment System Brookings Institute January 2 2019 at https www brookings edu research the-fastest-way-to-address-income-inequalityimplement-a-real-time-payment-system 65 Congressional Research Service 13 U S Payment System Policy Issues Faster Payments and Innovation    “The Federal Reserve must expect to achieve full recovery of costs over the long run The Federal Reserve must expect that its providing the service will yield a clear public benefit including for example promoting the integrity of the payments system improving the effectiveness of financial markets reducing the risk associated with payments and securities-transfer services or improving the efficiency of the payments system The service should be one that other providers alone cannot be expected to provide with reasonable effectiveness scope and equity ”72 Stakeholders are divided over the introduction of FedNow 73 Some question whether in light of these principles the Fed can justify creating a RTP system in the presence of competing private systems 74 Some fear that FedNow will hold back or crowd out private-sector initiatives already under way and could be a duplicative use of resources 75 The Treasury Department supports Fed involvement on the grounds that it will help private-sector initiatives at the retail level 76 Others including many small banks fear that aspects of payment and settlement systems exhibit some features of a natural monopoly because of network effects and in the absence of FedNow private-sector solutions could result in monopoly profits or anticompetitive behavior to the detriment of financial institutions accessing RTPs and their customers merchants and consumers 77 In 2017 the Justice Department sent the Clearing House a letter stating that it did not plan to challenge the Clearing House’s RTP system on antitrust grounds based on the Clearing House’s plans at that time 78 From a societal perspective it is unclear whether it is optimal to have a single provider or multiple providers in the case of a natural monopoly particularly when one of those competitors is governmental Multiple providers could spur competition that might drive down user costs but more resources are likely to be spent on duplicative infrastructure 72 Federal Reserve Policies The Federal Reserve in the Payment System 1990 at https www federalreserve gov paymentsystems pfs_frpaysys htm The underlying statute is 12 U S C §248a The Fed states that it will take more than 10 years to fully recover costs for FedNow See Federal Reserve Federal Reserve OP-1670 p 58 73 According to the Fed 90% of comment letters it received in response to its request for information were in favor of the Fed building a real time settlement system Lael Brainard “Delivering Fast Payments for All ” speech at the Federal Reserve Bank of Kansas City August 5 2019 at https www federalreserve gov newsevents speech brainard20190805a htm 74 Thomas Wade Primer What Is A Real-Time Payments System And Who Should Operate It American Action Forum Insight June 11 2019 at https www americanactionforum org insight primer-what-is-a-real-time-paymentssystem-and-who-should-operate-it 75 The Clearing House comment letter Docket No OP-1625 December 14 2018 at https www federalreserve gov SECRS 2019 February 20190207 OP-1625 OP-1625_121418_133156_423844567989_1 pdf 76 U S Department of the Treasury A Financial System That Creates Economic Opportunities July 2018 p 156 at https home treasury gov sites default files 2018-08 A-Financial-System-that-Creates-Economic-Opportunities— Nonbank-Financials-Fintech-and-Innovation_0 pdf 77 ICBA comment letter Docket No OP-1625 December 14 2018 at https www federalreserve gov SECRS 2019 March 20190315 OP-1625 OP-1625_121418_133342_402680988614_1 pdf Open Payment Network comment letter Docket No OP-1625 December 14 2018 at https www federalreserve gov SECRS 2019 April 20190408 OP-1625 OP-1625_121418_133340_452781016249_1 pdf 78 U S Department of Justice Letter Re The Clearinghouse Payments Company LLC Business Review Request September 21 2017 at http business cch com ald tch_business_review_letter_0 pdf Congressional Research Service 14 U S Payment System Policy Issues Faster Payments and Innovation RTP competition between the Fed and the private sector also has mixed implications for other policy goals 79      Innovation Competition typically fosters innovation but the Fed’s unique cost structure could potentially undermine the private sector’s success limiting the latter’s willingness to invest in innovations Ubiquity The Fed argues that RTP ubiquity is more likely with its involvement because it has existing relationships with all banks and because no single payment system has ever achieved ubiquity historically However the Fed’s entry into RTP could delay the achievement of universal RTP in the next few years if banks decide to wait until FedNow is available instead of joining the Clearing House’s network Interoperability Interoperability the ability to make payments across different systems is more difficult to achieve with competing firms but the Fed argues that if no single RTP system is ubiquitous the ability of any two given institutions to exchange funds is improved if competing systems increase ubiquity The ability to make payments across ACH networks is an example of how interoperability has currently been achieved between competing Fed and Clearing House systems However the technology involved in RTP may make interoperability more difficult In its proposal the Fed did not commit to ensure interoperability but stated that it was a desirable goal 80 Equity The Clearing House has attempted to assuage equity concerns by pledging access to its system on equal terms to all banks regardless of size but these terms could change and small banks have raised concerns that they may since the system is owned by large banks The Clearing House has pointed to the Fed’s volume discounts for existing payment systems as evidence that FedNow may not be equitable however Security Security across competing systems could be difficult to coordinate but systems might also attempt to compete by providing better security features The Fed argues that competing RTP systems reduce operational and systemic risks because a system with only one provider has a “single point of failure ” Repeated data breaches at large financial institutions point to the difficulty of monitoring cybersecurity in private systems although government has also proven to be vulnerable to data breaches The Fed states that “participating banks would continue to serve as a primary line of defense against fraudulent transactions as they do today” under FedNow 81 The Fed and by extension the taxpayer is exposed to default risk because of its provision of intraday and overnight credit some of which is uncollateralized when banks use its payment and settlement systems Currently when banks use Fed payment and settlement systems the time lag between payment and settlement can cause mismatches in the amounts due and the amounts available in their accounts As a result the Fed extends intraday credit for a fee if uncollateralized to avoid settlement failures Daily overdrafts have been relatively low in recent 79 See Aaron Rosenbaum et al Faster Payments Market Structure and Policy Considerations Federal Reserve Working Paper no 2017-100 September 2017 at https www federalreserve gov econres feds files 2017100pap pdf 80 Federal Reserve “FAQs ” August 5 2019 at https www federalreserve gov newsevents pressreleases files other20190805a2 pdf 81 Federal Reserve Federal Reserve Actions OP-1670 p 84 Congressional Research Service 15 U S Payment System Policy Issues Faster Payments and Innovation years but peaked at $186 billion during the 2007-2009 financial crisis 82 Introducing real-time payments with deferred settlement could increase the use of intraday credit The Fed does not state in its final rule whether it expects the level of intraday credit to be affected under FedNow although it notes that it might need to extend the availability of intraday credit to off-hours Note that the Fed provides this credit to reduce systemic risk to the banking system so eliminating intraday credit has the potential to reduce financial stability 83 Regulation RTPs offered by the private sector could fit into the existing regulatory framework The Fed already regulates and supervises private payment systems for risk management and transparency but not pricing 84 RTP could potentially alleviate some existing risks e g if settlement is in real time credit risk is reduced for the recipient institution while posing new risks e g RTP requires more active liquidity management Any RTP system and regulation would need to account for these changing risks To address systemic risk concerns a private RTP system could be designated as a systemically important Financial Market Utility FMU under Title VIII of the Dodd-Frank Act P L 111-203 The Dodd-Frank Act allows the Financial Stability Oversight Council a council of financial regulators led by the Treasury Secretary to designate a payment clearing or settlement system as systemically important on the grounds that “the failure of or a disruption to the functioning of the FMU could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U S financial system ”85 FMUs currently including the Clearing House Interbank Payments System are subject to heightened regulation and the Fed has supervisory and enforcement powers to ensure those standards are met 86 Policymakers could consider whether systemic risk concerns are better addressed through Fed operation of payment and settlement systems or Fed regulation of private systems Data available at the Fed’s website at https www federalreserve gov paymentsystems psr_data htm The Clearing House’s RTP system also has access to Fed intraday credit through Fedwire Funds Service 84 Federal Reserve Payment System Risk web page https www federalreserve gov paymentsystems psr_about htm The Fed does not have plenary regulatory or supervisory authority over the payment system however Federal Reserve Federal Reserve Actions OP-1670 p 12 and Lael Brainard “Delivering Fast Payments for All ” speech at the Federal Reserve Bank of Kansas City August 5 2019 at https www federalreserve gov newsevents speech brainard20190805a htm 85 The designation requires a two-thirds vote that must include the Treasury Secretary U S Department of Treasury Financial Stability Oversight Council FSOC “Designations ” at https www treasury gov initiatives fsoc designations Pages default aspx FSOC’s deliberations on whether to designate a system as an FMU are confidential it does not notify the public until a designation has been made See FSOC “Authority to Designate Financial Market Utilities as Systemically Important ” 76 Federal Register 144 July 27 2011 p 44763 at https www treasury gov initiatives fsoc rulemaking Documents Final%20Rule%20on%20Authority%20to%20Designate%20Financial%20Market%20Utilities%20as%20Systemically %20Important pdf 86 For more information see CRS Report R41529 Supervision of U S Payment Clearing and Settlement Systems Designation of Financial Market Utilities FMUs by Marc Labonte 82 83 Congressional Research Service 16 Appendix Selected Interbank Payment Clearing and Settlement Systems Involved in U S Payments Table A-1 U S Payments Selected Interbank Payment Clearing and Settlement Systems Name The Clearing House Interbank Payments System CHIPS CRS-17 Type Regulator Large-value payment system with real-time final settlement of payments Regulated by the Federal Reserve Owners Operators Users Participants The Clearing House which is owned by the largest U S banks or the U S branches or affiliates of major foreign banks Approximately 50 depository institutions are direct participants Uses Functions CHIPS payment instructions are settled against a positive current position in its account at the Federal Reserve Bank of New York FRBNY or simultaneously offset by incoming payments or both Payments become final on completion of settlement which occurs throughout the day At the end of the day remaining payment instructions are netted on a multilateral basis CHIPS participants in a net debit position fund their residual net positions through Fedwire funds transfers to the CHIPS account at the FRBNY Transactions CHIPS processes bank-to-bank wire transfer payments Name Type Regulator Owners Operators Users Participants Uses Functions Transactions Fedwire Funds Service Real-time gross settlement system RGSS Payments are continuously settled on an individual order-byorder basis without netting Federal Reserve Depository institutions U S Treasury federal government agencies Sending funds to other institutions including for customers Payment orders by depository institutions are processed individually and settled in central bank money upon receipt The U S Treasury and other federal agencies use this service to disburse and receive funds Purchase and sale of federal funds depository institutions lend balances at the Federal Reserve to other depository institutions overnight purchase sale and financing of securities transactions disbursement or repayment of loans settlement of cross-border U S dollar commercial transactions settlement of real estate transactions and other highvalue time-critical payments Transfer of funds is final and irrevocable when settled National Settlement Service NSS Multilateral settlement service Settlement finality occurs on day of settlement Federal Reserve Depository institutions that settle for participants in clearinghouses financial exchanges and other clearing and settlement groups Key privatesector system users include Depository Trust Company and National Securities Clearing Corporation for end-of-day cash settlement Fixed Income Clearing Corporation for fundsonly settlement Electronic Payment Network The Options Clearing Corp and several large and regional check clearinghouses Settlement agents acting on behalf of depository institution participants in a settlement arrangement electronically submit settlement files to the Federal Reserve Banks The files are processed upon receipt and entries are automatically posted to a depository institution’s Federal Reserve account NSS arrangements established by financial market utilities check clearinghouse associations and automated clearinghouse networks CRS-18 Name Type Regulator Owners Operators Users Participants Uses Functions Transactions FedACH Service Electronic payment system providing automated clearing house ACH services Federal Reserve Depository institutions U S Treasury federal government agencies The ACH system exchanges batched direct debit and direct credit payments among business consumer and government accounts Pre-authorized recurring payments such as payroll Social Security mortgage and utility payments Non-recurring payments such as telephoneinitiated payments and the conversion of checks into ACH payments at lockboxes and points of sale Also outbound crossborder ACH payments through FedGlobal service Electronic Payments Network EPN ACH operator The Clearing House which is owned by the largest U S banks or the U S branches or affiliates of major foreign banks Depository institutions The ACH system exchanges batched direct debit and direct credit payments among business consumer and government accounts Pre-authorized recurring payments such as payroll Social Security mortgage and utility payments Non-recurring payments such as telephoneinitiated payments and the conversion of checks into ACH payments at lockboxes and points of sale Source The Congressional Research Service CRS-19 U S Payment System Policy Issues Faster Payments and Innovation Author Information Cheryl R Cooper Analyst in Financial Economics David W Perkins Specialist in Marcoeconomic Policy Marc Labonte Specialist in Macroeconomic Policy Disclaimer This document was prepared by the Congressional Research Service CRS CRS serves as nonpartisan shared staff to congressional committees and Members of Congress It operates solely at the behest of and under the direction of Congress Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role CRS Reports as a work of the United States Government are not subject to copyright protection in the United States Any CRS Report may be reproduced and distributed in its entirety without permission from CRS However as a CRS Report may include copyrighted images or material from a third party you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material Congressional Research Service R45927 · VERSION 4 · NEW 20