CEO Corner

On October 3, 2018, FRB Board Governor Lael Brainard provided remarks on the faster payments initiative which is being undertaken by the Federal Reserve System and the private sector. Her remarks were supportive of a faster payments environment in which payments are executed in real time on a 24 x 7 x 365 basis. While her remarks were positive, there was little in the way of updates on a framework solution or the role the Federal Reserve System would play.

The Federal Reserve has requested comments relative to the faster payments initiative – Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments (12CFR Chapter 11, Docket No. OP-1625). The request basically covers two areas. First, should the Fed develop a service for real time gross settlement of faster payments on a 24 x 7 x 365 basis and / or what potential actions should the Fed take to support the initiative? Second, should the Fed provide a liquidity management tool that meets the industry’s needs?

Our position at ACBB is that they should play a role in both. If the Fed develops a faster payments service, community financial institutions will have more choices and a trusted partner which helps ensure the integrity of a payment system.

While core processors have developed and are developing solutions, the vendors and framework are still a work in progress. This is the primary reason core processors have been encouraging their customers to make choices now. It is our opinion that it is too soon.

It will be interesting to see how receptive the core processors will be to allowing other parties to connect to them. What is clear is that any providers of a faster payments service will need to connect to the core processors for a sufficient funds check. What is also becoming clear is that community financial institutions need partners who are willing to connect to each other via Application Programming Interfaces (‘API’). The greater number of participants and connections, the more choices community banks will have in finding a solution for their particular market and customers.

By the Fed developing a faster payment service, banks will have a safe choice, a competitive alternative, and a partner almost everyone can connect to.

As relates to the Fed offering or supporting a liquidity management tool, we again support the Feds involvement.

In a faster payments world, liquidity is a major concern. Payments are being executed 24 x 7 x 365 and financial institutions will need to have sufficient funds to cover these transactions on the same 24 x 7 x 365 basis.

One of the current proposals is to collateralize these positions. It would be our recommendation that the Fed consider a solution whereby institutions could utilize their existing collateral at the Fed’s Discount Window in addition to utilizing liquidity lines institutions have with correspondent and bankers’ banks.

At ACBB, we maintain approximately $1.5 billion in liquidity facilities to our customers. These facilities, if permitted to be utilized to support faster payments, could prevent financial institutions from potentially providing additional collateral by accessing a mechanism already in place.

I would encourage everyone to read the Fed’s comment letters and respond in a way that seeks fairness to all institutions, no matter their size, promotes more choices, and ensures a safe and sound framework.

All comments should be forwarded to Ann Misback, Secretary Board of Govenors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington D.C. 20551 by December 14, 2018.