TCH Just Made the Case for a Federal Reserve Real-Time Payments Alternative
For many years, The Clearing House (“TCH”) has occupied an unusual space in the payments industry. Owned by 26 of the largest banks in the United States, TCH is uniquely capable of deploying a set of payment rails that could be transformative. Few can match what TCH brings to the table. TCH operates a wire transfer platform (CHIPS), an ACH network (EPN), a check imaging system and, most consequentially, a real-time payments platform (RTP). RTP can facilitate virtually every type of payment, ranging from B2B to P2P to C2B, across all use cases, for virtually every type of financial services provider, including fintechs. All of this firepower begs a fundamental question – can large banks accustomed to interchange be expected to deploy RTP to introduce more competition in retail payments and risk interchange?
The answer, until now, has been no. There are no signs of RTP being deployed for retail payments. To the contrary, it is increasingly clear that the large banks want RTP to become a dominant provider of non-interchange driven payments, such as B2B or P2P payments. Lest there be any doubt about that, consider TCH’s recent threat to rescind its promise to the Justice Department to charge small banks the same as larger banks. This reversal is part of a relentless TCH strategy to convince the Federal Reserve to back off any plans it might have to offer a competitive real-time payments service. That campaign now includes an op-ed by TCH’s CEO in the American Banker, and most importantly, TCH’s threat to price discriminate against small banks if the Federal Reserve offers a competing set of rails.
What is most remarkable about this gambit is that TCH just admitted, perhaps unwittingly, that it intends to operate a monopoly. How else can one explain its threat to the Federal Reserve? TCH, in essence, is saying that if the Federal Reserve lets TCH occupy the field, it will restrain itself and not behave monopolistically. But if the Federal Reserve acts in accordance with its proper role as the guarantor of the payment system, and enters the market with a competing set of rails, the gloves will come off and TCH will price discriminate against smaller competitors. Price discrimination is evidence of market power. All of this is telling, and not in a positive way, about TCH’s ultimate goals.
The Fed and/or the DOJ should take TCH at its word and call its bluff. Instead of being influenced by TCH’s threat, the Fed should embrace it as a clear sign that an alternative set of rails is necessary to ensure a competitive environment. As for the DOJ, it already knows that the promises TCH made to it back in 2016 are worth little at this point. Whether the Fed enters or not, the DOJ should watch TCH carefully, and it should start by examining the following question: would TCH pull its competitive punches and avoid consumer payments but for the banks’ desire to protect interchange? The answer to that – a resounding no – provides more evidence of interchange’s corrosive and harmful impact on competition and consumer welfare.