[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF REAL-TIME PAYMENTS
=======================================================================
HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 26, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-55
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-355 PDF WASHINGTON : 2020
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
DAVID SCOTT, Georgia FRENCH HILL, Arkansas, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida BLAINE LUETKEMEYER, Missouri
CINDY AXNE, Iowa TOM EMMER, Minnesota
BEN McADAMS, Utah WARREN DAVIDSON, Ohio
JENNIFER WEXTON, Virginia BRYAN STEIL, Wisconsin
C O N T E N T S
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Page
Hearing held on:
September 26, 2019........................................... 1
Appendix:
September 26, 2019........................................... 29
WITNESSES
Thursday, September 26, 2019
Benson, Carol, Founding Partner, Glenbrook Partners.............. 10
George, Esther L., President and Chief Executive Officer, Federal
Reserve Bank of Kansas City.................................... 4
Sinha, Harsh, Chief Technology Officer, TransferWise............. 6
Steen, Bob, Chairman and Chief Executive Officer, Bridge
Community Bank, on behalf of the Independent Community Bankers
of America (ICBA).............................................. 7
Williams, Rodney, Co-Founder and Chief Commercial Officer, LISNR. 9
APPENDIX
Prepared statements:
Benson, Carol................................................ 30
George, Esther L............................................. 32
Sinha, Harsh................................................. 49
Steen, Bob................................................... 55
Williams, Rodney............................................. 62
Additional Material Submitted for the Record
Lynch, Hon. Stephen:
Written statement of the American Bankers Association........ 64
Written statement of Americans for Financial Reform and
various undersigned organizations.......................... 70
Written statement of Consumer Reports........................ 73
Written statement of Financial Innovation Now................ 78
Written statement of Food Marketing Institute................ 79
Written statement of Main Street Alliance.................... 82
Written statement of Nacha................................... 84
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 88
Written statement of the Retail Industry Leaders Association. 90
Written statement of The Clearing House Payments Company..... 92
Axne, Hon. Cindy:
Written responses to questions submitted to Bob Steen........ 108
Hill, Hon. French:
Written responses to questions submitted to Carol Benson..... 109
Written responses to questions submitted to Harsh Sinha...... 111
Written responses to questions submitted to Bob Steen........ 113
THE FUTURE OF REAL-TIME PAYMENTS
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Thursday, September 26, 2019
U.S. House of Representatives,
Task Force on Financial Technology,
Committee on Financial Services,
Washington, D.C.
The task force met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Stephen F. Lynch
[chairman of the task force] presiding.
Members present: Representatives Lynch, Scott, Gottheimer,
Lawson, Axne; Hill, Luetkemeyer, Emmer, Davidson, and Steil.
Ex officio present: Representatives Waters and McHenry.
Also present: Representatives Pressley, Hollingsworth, and
Riggleman.
Chairman Lynch. Good afternoon. The Task Force on Financial
Technology will now come to order. Without objection, the Chair
is authorized to declare a recess of the task force at any
time. Also, without objection, members of the full Financial
Services Committee who are not members of this task force are
authorized to participate in today's hearing.
Today's hearing is entitled, ``The Future of Real-Time
Payments.'' I now recognize myself for an opening statement.
Thank you for being here. I want to thank our esteemed
panel of witnesses as we discuss the future of real-time
payments in America.
Today, we will examine how the nearly instantaneous
clearing and settlement of payments stands to benefit consumers
and small businesses, as well as the challenges it presents to
both operations and security. This is a timely conversation.
Both consumers' and institutions' expectations have demanded
innovation. And, in fact, just a few days after we announced
this hearing, the Federal Reserve announced their intent to
roll out a 24-hours-a-day, 7-days-a-week, 365-days-a-year
wholesale real-time payment system called FedNow.
Much of the wider discussion surrounding FinTech is focused
on consumer-facing applications like digital banking or
applying for a loan on your smartphone. Along with these other
applications, payments technology has seen a similar
revolution. Every day, consumers use apps on their phone to
split the check at restaurants or the utility bill at their
apartment.
But unlike other FinTech applications, payment technology
is still largely dependent on old infrastructure that only
allows settlement to occur intermittently. For example, if you
make a transaction or transfer money on a weekend, it might
take up to 3 days for your account to reflect that transaction.
Americans have come to expect that they can make a payment
with the tap of a button, and now our financial system is
racing to catch up. For families living paycheck to paycheck,
real-time payments mean that payday actually means payday,
without having to resort to payday loans or other predatory
alternatives while waiting for a check to clear. For gig
workers, it means the option to get paid immediately after a
job, something that can be the difference between paying a
couple of dollars for a cup of coffee or paying $35 for a cup
of coffee and an overdraft fee.
For small businesses, it means having instant access to the
money customers pay, reducing the need for short-term borrowing
to pay employees or finance the purchase of goods. This will
allow our businesses to cut down on the cost of borrowing
capital and spend that money on growing their businesses.
There is a wide array of benefits to be gained from moving
to a real-time payment system, but it is not without some risk.
Faster payments can mean a faster way for scammers to rip off
unsuspecting victims, and the additional data used to track a
real-time payment can serve as an inviting target for cyber
criminals.
We are faced with the meeting of two cultures: the rules-
based cultures of banking; and the move-fast-and-break-things
culture of tech, which sometimes burns through investor cash
early on, and that is a philosophy that has not worked well in
banking.
Today's panel has a wide array of expertise from
government, financial institutions, and financial technology
firms. I am looking forward to hearing the testimony of our
witnesses on the benefits and the risks of real-time payments,
the hurdles that we still face on our way to universal
adoption, and what lessons we can learn from other countries.
With that, I would like to recognize my friend and
colleague, the gentleman from Arkansas and ranking member of
the task force, Mr. Hill of Arkansas, for an opening statement
of 5 minutes.
Mr. Hill. Thank you, Mr. Chairman. Thank you for having
another good hearing in our FinTech Task Force to talk about
another critical element in our research on how best to propose
policy changes, both regulatorily and legislatively, to enhance
innovation in the United States, to make sure the United States
remains a global leader in FinTech on the credit side, the
payment side, and the depository side, both among incumbent
financial institutions as well as nonbank innovators.
It is going to be good to have this conversation about the
payments arena, because it is completely evolving and
transforming as new technology, as you have noted, is brought
on board. And throughout my over 40 years in finance, I have
certainly seen every innovation that has happened since the
mid-1970s, whether you are talking about checks or debit cards
or credit cards, wires, or now paying through Apple Pay or from
your watch.
And that payment space has been a big, important part of my
personal career. I was a founder of the Southwest's largest
shared ATM EFT network, PULSE, back in 1980, which is now owned
by Discover. At the time, that was the cutting-age technology
for retail banking, and it was interesting to see that. And
then when I was a community banker in Little Rock, before
coming to Congress, when Google AdWords first was created, we
built an entire digital bank online through Google AdWords,
specializing in health savings accounts. So, I have sort of
seen this emerging technology as an incumbent player.
But during the first half of 2019, we have seen the
extraordinary change globally in this with the venture capital
business looking at payments, and then some of the biggest
transactions on the world stage are in payments. First,
Fiserv's acquisition of First Data, and then, Global Payments
acquisition of Total System Services (TSYS), and those were $20
billion transactions. And then finally, recently, just a few
months ago, Fidelity's agreement to merge with Worldpay at $43
billion. So, payments is a hot topic.
And real-time payments is a gateway for further FinTech
innovation. We don't have the future of digital banking without
real-time payments, just like we don't have any of that if we
don't have real private authentication and have a real national
privacy standard and real individual identification. Those are
the building blocks, the foundational blocks, whether you are
doing a credit product, a payment, or opening up a new way to
do banking.
We have rudimentary innovation there. Visa Direct,
Mastercard Send, these are real-time payments sort of, right?
We have experiments there. If you have a person in college, you
know all about Venmo, PayPal's Venmo. I thought for a while
this was the best friend of my daughter in college, because
Venmo kept getting money every week, and I figured out, no, of
course not.
But these are our payments working around the existing
system, which is why we need real-time payments that are
broader, and more innovative, with a bigger reach. And so, I
look forward to talking today about the payment space that we
have. I look forward to talking to our friends at the Federal
Reserve about their operations in this space, learning more
about what is being proposed by The Clearing House, to offer
their real-time payments network, and also the timing of all
that, because that is important. Because America has a long
history of being a leader and an innovator in this space, and
we don't want to delay that. And as I say, if you want a future
that is digital, that is blockchain digital, then privacy,
personal identification, and this issue of real-time payments
that have fraud protections are essential.
I look forward to the conversation today. And I would like
to yield some time to my good friend, the ranking member of the
full Financial Services Committee, Mr. McHenry.
Mr. McHenry. Thank you, Mr. Hill, for your leadership on
this, and I appreciate the testimony today.
While we spent the last few years ``updating'' from swipe
to PIN--which is not a newer technology, it is an older one--
China created entire new world payments that connect consumers
directly with their banks and merchants, where payments can be
made at the click of a button. So, it is happening in real time
there. It is happening on a very different scale there than
here in the United States. And I don't know how we get it there
in the United States. I don't know how we choose to get there,
but what I do know is we have to get there. And if we don't, if
we don't build our real-time payments here in the United
States, rest assured, China will. Let's get on with it, let's
be aggressive, let's be bipartisan, and let's get this thing
done.
I yield back.
Chairman Lynch. Today, we welcome a panel of esteemed
witnesses. First, the Honorable Esther George, president and
chief executive officer at the Federal Reserve Bank of Kansas
City. President George also chairs the Financial Services
Policy Committee which oversees payment services in the United
States. I thank you for being here, President George.
Second, Mr. Harsh Sinha, the chief technology officer at
TransferWise, one of Europe's largest FinTech companies, which
focuses on helping customers cheaply transfer money
internationally.
Third, Mr. Bob Steen, chairman and CEO of Bridge Community
Bank in Iowa. He serves as a member of the Iowa Bankers
Association Payments Council, and on the Independent Community
Bankers of America's Technology and Payments Committee.
Fourth, Mr. Rodney Williams, co-founder and chief
commercial officer of LISNR, a company that has developed
technology to use inaudible tones to transmit payment data
between retailers and mobile devices.
And finally, we have Ms. Carol Benson, founding partner of
the consulting firm Glenbrook Partners. Ms. Benson has
significant experience in the payments field, having also
worked at Visa. And she co-authored the book, ``Payment Systems
in the U.S.''
Thank you all for being here.
Our witnesses are reminded that your oral testimony will be
limited to 5 minutes. And without objection, your written
statements will be made a part of the record.
President George, you are now recognized for 5 minutes for
an opening statement.
STATEMENT OF ESTHER L. GEORGE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL RESERVE BANK OF KANSAS CITY
Ms. George. Thank you. Ranking Member McHenry, Chairman
Lynch, Ranking Member Hill, and members of the task force,
thank you for this opportunity.
Chair Powell 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
payment system and the recently announced proposal to support
faster payments through the development of a new service called
the FedNow Service.
Since our 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. 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 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 this 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 many small community banks serving rural
areas of the central United States, I can tell you that 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 payment
system and reducing payment 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
industry-wide fraud-mitigation standards. Development of the
service will also enhance the 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 for 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 real-time payments system. We are in the
process now of engaging with stakeholders for their input on
features of the FedNow Service through a Federal Register
notice which was issued last month. I am confident that
together, we can achieve our public policy objectives for
broadly accessible, safe, and efficient, faster payments.
Thank you, and I will be happy to respond to your
questions.
[The prepared statement of Ms. George can be found on page
32 of the appendix.]
Chairman Lynch. Thank you.
Mr. Sinha, you are now recognized for 5 minutes.
STATEMENT OF HARSH SINHA, CHIEF TECHNOLOGY OFFICER,
TRANSFERWISE
Mr. Sinha. Chairman Lynch, Ranking Member Hill, and members
of the task force, thank you for the invitation to testify
today. My name is Harsh Sinha, and I am the chief technology
officer at TransferWise, a global technology company with the
mission to build the best way to move money around the world. I
have spent the last 4 years scaling the technology and product
teams in TransferWise. Before that, I was working in Silicon
Valley for more than a decade leading and developing e-commerce
and payment products for companies like PayPal and eBay.
TransferWise was founded in 2011, and now has more than 6
million customers moving $5 billion every month. It is one of
the fastest-growing financial technology startups in the world,
and offers international money transfer service, a multi-
currency stored value product that can be linked to a debit
card, and an application programming interface that can be
integrated directly into large enterprises and banks.
Our company is attempting to solve the problem of cross-
border payments. It is really hard to move money between
different currencies and countries. The corresponding banking
infrastructure is expensive, slow, inconvenient, and lacks
transparency. That is why we have created our own cross-border
payments network that serves 71 countries, including the United
States.
The technology that powers our product relies on technical
and regulatory understanding of local payment systems around
the world. We connect directly to local payment systems as in
the U.K., where we became the first nonbank to gain direct
access to the Faster Payments scheme.
We strongly agree that the Federal Reserve should create a
real-time payment system. Specifically, it should be a real-
time, gross settlement system based on ISO 20022 standards, and
the Federal Reserve should extend Fedwire hours to enable 24/7,
365 settlement.
There are four main reasons I believe the Fed should build
the system. First, ubiquity and reach. The Federal Reserve
already connects to over 10,000 financial institutions in the
United States.
Second, pricing. FedNow should have a lower cost structure
longer term, given their price recovery approach taken by the
Fed.
Third, competition. Having multiple systems promotes market
competition.
And fourth, a longer-term strategy. Real-time payment
systems are here to stay. It would be prudent to not have a
single system run by a single provider.
Hence, there is a clear public interest in the Federal
Reserve building a fair and ubiquitous system accessible to
every financial institution and payments provider that operates
at low margins over time.
But as we talk about real-time payments, it is important to
cover the rules that govern its access. In the U.S., to access
a domestic payments infrastructure, a nonbank financial
institution must partner with a bank to settle payment
transactions. That results in added costs and complexity and
partner dependence. In order to facilitate competition and
ensure that the benefits of faster payments are passed on to
the consumers, the U.S. should prioritize the accessibility and
inclusion of nonbanks in the faster payment system.
Additionally, diversification will reduce systemic risks that
arise from a handful of banks hosting all indirect nonbank
participants.
Finally, as we talk about payments, we should not only
think about domestic payments but global payments. To make
cross-border payments cheaper and faster for all Americans, we
need to address two main areas.
First, transparency in fees. Every year, people and small
businesses transfer $10 trillion internationally and lose $200
billion in bank fees, mostly hidden in inflated exchange rates.
The average global remittance cost is 7 percent, and the World
Bank says the lack of transparency is the major reason for the
high fees. Governments around the world are working to make
sure customers see what they are really charged, and we believe
the U.S. should do so, too, as the largest originator of cross-
border payments worldwide.
Second, implementing to international standards. With the
U.S. lagging behind other major markets on faster payments, we
can use this timing to our advantage and learn from other
countries. The U.S. has the opportunity to leapfrog from having
limited real-time payments domestically to having all payments,
including international, being instant.
In conclusion, I believe there should be more than one
real-time payment system in the United States, and the Fed is
best positioned to deliver this and unlock the benefits for
consumers, businesses, and the economy at large.
Thank you for the opportunity to testify today. I am happy
to answer any questions.
[The prepared statement of Mr. Sinha can be found on page
49 of the appendix.]
Chairman Lynch. Thank you.
Mr. Steen, you are now recognized for 5 minutes.
STATEMENT OF BOB STEEN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
BRIDGE COMMUNITY BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY
BANKERS OF AMERICA (ICBA)
Mr. Steen. Chairman Lynch, Ranking Member Hill, Ranking
Member McHenry, and members of the task force, I am Bob Steen,
chairman and CEO of Bridge Community Bank in Mount Vernon,
Iowa. I am testifying today on behalf of the Independent
Community Bankers of America, where I have played an active
role over the years, including service on the payments
committee. Thank you for the opportunity to testify today.
I believe it is imperative that the U.S. develop a robust,
real-time payment 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 the goal is critical. A real-time payment
system is too important to be entrusted to a private monopoly.
The two dozen largest banks simply cannot own and operate the
U.S. payment system. ICBA strongly supports the Federal
Reserve's decision to build FedNow, a real-time payment system
that will give direct access to all financial institutions and
our customers.
Bridge Community Bank is a $96 million community bank
founded in 1903 and owned by our 20 employees. We serve real
communities in growth markets in and around Cedar Rapids and
Iowa City with small business, agriculture, 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 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 our community banking. This is why
I have invested so much of my career in payment innovation and
have developed multiple payments 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 can participate and others are excluded.
All financial institutions and all customers must have access
to real-time payments. And even those who live in small or
rural communities are 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 all of those
institutions have access to a settlement account and a service
connection with the Fed. The Fed already operates a universally
accessible check, Automated Clearing House (ACH), and wire
transfer service. If history is any guide, the Fed will
maintain an 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 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. 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 community banks. As a
neutral, real-time settlement network, FedNow will be critical
to our ability to continue to innovate. For example, my bank,
in partnership with another community bank, developed a mobile
app we call ExcheQ, which allows a user to send money to anyone
in the U.S. who has an account at any financial institution
without a payment application on the receiver's end. Once
FedNow is fully operational, ExcheQ will allow real-time
transactions without being dependent on a core system. That, in
and of itself, is transformational. Once ubiquity is achieved
through FedNow, new use cases and new 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 this hearing. I be happy to
answer any questions you may have.
[The prepared statement of Mr. Steen can be found on page
55 of the appendix.]
Chairman Lynch. Thank you, Mr. Steen.
Mr. Williams, you are now recognized for 5 minutes.
STATEMENT OF RODNEY WILLIAMS, CO-FOUNDER AND CHIEF COMMERCIAL
OFFICER, LISNR
Mr. Williams. Chairman Lynch, Ranking Member Hill, members
of the task force, thank you for the opportunity to testify
today. My name is Rodney Williams. I am the co-founder and
chief commercial officer at LISNR, an ultrasonic proximity
company that enables a universal and secure proximity mobile
payment method. I am pleased to participate in this hearing
panel alongside my esteemed colleagues.
As a financial technology founder, I have spent the past 7
years creating technology around the inefficiencies of how we
pay and how we access funds for individuals in discretionary
need. Both innovations were driven by the limitations of our
current payment infrastructure and my experience growing up
disenfranchised.
LISNR was founded in 2012 with a simple idea: A way to
transmit data between two devices using software and a mobile
device's speaker and microphone. Since then, LISNR has advanced
the security and flexibility of our transmission method to
support proximity-based payments and checkout experiences.
Today, LISNR is actively working with the world's leading
merchants and card networks on what will become a better way to
pay.
LISNR's premise in payments has always been
straightforward: Anyone with a mobile phone should be able to
pay in proximity securely and universally. Today, secure mobile
payments in a store are driven by card networks and mobile
device manufacturers' use of near-field communication (NFC).
This control limits the use of NFC only to mobile device
manufacturer services, as all third-party mobile applications
are restricted from using NFC for payment services. This
significantly restricts what is considered a safe and secure
way to pay as it is limited to the mobile device manufacturer's
branded application.
This has driven many of our top retailers towards QR codes
and barcodes as a method to pay in their mobile applications,
incurring additional transaction costs and risks, which
ultimately hurts the value that these merchants can give to the
end consumer. Our company is addressing this core problem as
LISNR allows a universal and secure way to pay for any mobile
device or merchant at a better cost structure than today's
alternatives.
We provide software that is inserted into a mobile
application. Within these applications, we enable the speaker
and microphone as a method to wirelessly send and receive
proximity noncloud-based data. Merchants can leverage this
method to transmit any series of proximity-based and
verification data points to initiate and complete a
transaction. A transaction can happen safely within a few
inches or even up to 10 feet, powering more payment and
checkout experiences than ever before.
Today's consumers expect to pay wherever they are
instantly. These experiences are expected to happen on every
device in every retail environment. We see a world where
ultrasonic proximity verification will live across all payment
scenarios globally. As we think about the future real-time
payment system, it must democratize the proximity payment
method at the edge of the mobile device securely so that anyone
with a phone can pay with whatever source their mobile wallet
holds.
Our technology relies heavily on financial regulatory
infrastructure, an infrastructure that is due for innovation in
real-time payments. We strongly agree that all payments should
be instant and universal at proximity.
I grew up in Baltimore, Maryland, as an offspring of
hardworking Jamaican parents. I personally experienced
challenges of being underbanked and costs associated with being
poor, as cash is expensive. As a kid, I can remember counting
down to my parents' payday, as the electricity could be turned
off. In this simple scenario, we were being taken advantage of
as the fees, delays in funds availability, and the manual task
associated with checking, or cash checking, became significant.
My childhood was filled with many such memories as my parents
tried to ensure proper cash flow to run the household. Walking
to the ATM or money transfer services, paying bills in cash,
and taking predatory cash advances were far too normal
experiences. Looking back, even where I grew up, I believe that
there was a genuine desire for advancement, to play by the
rules, except the rules were not written for them.
This situation highlights the silent cost of payments and
its unfair transfer to the poor and certain segments of our
population. There is a social cost that many pay in the form of
invisible tax. It is time that we use data networks and
technology to eliminate delays and reduce costs. The time is
now. The global widespread use of real-time payment systems
lends compelling evidence to a discussion that is needed in the
United States. The Federal Reserve must take the lead in
building this vital social, commerce infrastructure with a
heightened sense of urgency.
Thank you again for this opportunity.
[The prepared statement of Mr. Williams can be found on
page 62 of the appendix.]
Chairman Lynch. Thank you, Mr. Williams.
And Ms. Benson, you are now recognized for 5 minutes.
STATEMENT OF CAROL BENSON, FOUNDING PARTNER, GLENBROOK PARTNERS
Ms. Benson. Hello, Chairman Lynch, Representative Hill, and
members of the task force. We are in the midst of a once-in-a-
generation shift in how payment systems work. The United States
is joining countries around the world in bringing to its people
a new class of payment systems. These systems work just the way
you would want them to work, just the way you think they should
work: You tell your bank you want to make a payment, and the
money shows up in the receiver's account.
My firm, Glenbrook Partners, is working with the payments
industry, both here and around the world, on the introduction
of these new systems. Some countries are introducing these
systems to improve efficiency and user experience. Others are
primarily concerned with financial inclusion, ensuring that
underbanked and unbanked people can use financial products. The
same real-time payment systems support both goals.
Our objective, I believe, is to ensure that these systems
are accessible, affordable, and secure. These are universal
goals for such systems. But a real-time payment system must
also be ubiquitous, that is, it must allow someone to pay
anyone and be paid by anyone, regardless of where their funds
are being held--a credit union, a community bank, a large
national bank, or some other licensed financial services
provider. This ubiquity is key to the vision put forth by the
Faster Payments Task Force.
When we look around the world, most countries are meeting
this goal by having a single, national faster payments
platform, which all banks access. With the announcement of
FedNow, it is clear that the United States is choosing a
different model, with two or more providers of real-time
payment systems. This mirrors our ACH system, which has two
operators.
To achieve the goal of ubiquity in a multiple network
model, these systems must connect. In the terminology of our
industry, they must interoperate. That is what our ACH system
does. That means that I can send you money even if my bank and
your bank are using different systems. The only alternative is
to have each financial institution implement every system, a
daunting concept.
Let me be clear that there is no real technical challenge
to interoperability; rather, it is a question of governance.
The various systems should live underneath a common rule set,
as is the case with our ACH. A common governance structure
would also help to ensure that the industry works together,
rather than in separate and fractious groups, on issues such as
transaction security, payments addressing, and the ability to
eventually connect to other countries.
Payments addressing is important. Today, when you use a
debit card or write a check, you are giving your account
information to someone who uses that to pull funds out of your
account. We all know how that can go wrong. Faster payment
systems, in contrast, can be designed so that an alias, a
payment address, your mobile phone number, or ``Carol 123'',
can be used to push money into your account. This address can
never be used to pull funds from your account. That is a huge
security benefit. The directory of these aliases, which is a
critical piece of infrastructure, needs, in my opinion, to be a
central utility, not separate directories for every service.
Australia has moved in this direction with the establishment of
what they call PayID. India is doing the same thing.
The industry's establishment of the U.S. Faster Payments
Council is a good move in this direction, but the imperative is
interoperability. Cooperation without that will be of little
utility.
Last week, Glenbrook Partners launched an online survey
with the Faster Payments Council to gain further insight from
the industry on this. Findings of that will be available in
November.
Other countries are already ahead of us on this journey. We
have a large economy and a sophisticated infrastructure. I hope
that we can cooperate and connect going forward.
Thank you.
[The prepared statement of Ms. Benson can be found on page
30 of the appendix.]
Chairman Lynch. Thank you, Ms. Benson.
I now yield myself 5 minutes for questions.
President George, I think everyone was encouraged when we
heard that the Fed was going to move to a real-time payment
system. I know that the initial announcement, which only came
recently, laid out a timeframe of perhaps late 2023 or 2024.
With the velocity of change that we see in technology around
the globe, can we wait that long? And is that something that--
do you think that timeframe works or is there some way we could
expedite that?
Ms. George. We are now beginning the process of getting the
input for the design and features of this system which we think
are critical to laying the foundation for that system. It was
important to me that we have the dates and the Federal Register
notice as a way to set expectations to talk about what the
timeline might be. But I think we are very interested in moving
as quickly as possible, and I believe we have the right team to
be able to do that.
Chairman Lynch. Okay. Now, do we have--obviously, we have
outside help, we have our contractors involved on that. I know
that The Clearing House is already involved in a parallel
system. Are we learning from other countries in terms of how
they have proceeded? Are we using the best practices that are
out there?
Ms. George. Yes, Chairman Lynch. This was a very important
part of our effort the last few years through the Faster
Payments Task Force, was to bring together a broad range of
stakeholders in that payment system that include innovators,
the FinTech, all the way through the banking system. We looked
carefully at what other countries were doing to inform the work
that we will be undertaking now. So, we have looked broadly,
and I feel good that those inputs will position us to be able
to move forward with a design that we can serve as a foundation
to the country for.
Chairman Lynch. Great, thank you.
Mr. Sinha, when the U.K. adopted their system, at least
initially, we did see a spike in fraud; it jumped about 132
percent. Since then, though, it has modulated, it has come
down. What were some of the reasons for that, and is there some
way we could avoid the same occurrence?
Mr. Sinha. Yes. I think we can learn a lot from the
implementation that was done in the U.K. around security
measures. Over time, the U.K. system and the banks who give
access to customer funds implemented more checks and balances
to confirm you are who you say you are, and that means not just
having you sign into your online banking account with a user
name and password, because we know customers, we use passwords
all over the place, but actually requiring a unique code being
sent either to your mobile device or your email to authenticate
that you have the device and sanctioned the payment. That, I
think, reduced fraud a lot.
And then from there, they have gone on to put in a
regulation which recently came into effect on September 15th,
which was called the Secure Customer Authentication regulation.
And I think that is a step change which requires customers to
verify themselves before initiating any payments. I think that
is a very important part of the implementation in the United
States that we can learn from other countries.
Instant payments and security go hand-in-hand, but the
security should be moved into verifying the customer before the
payment is initiated.
Chairman Lynch. Great, thank you.
Mr. Steen, as a community banker, there are some of your
colleagues from around the country who are a bit concerned
about how competition for customers might occur where you have
a traditional banking system with the rule of law and a whole
menu of regulation competing with a stripped down, bare-bones
operation that might not even have a storefront in terms of
competing for banking business. Do you feel comfortable that at
least with FedNow, it would help you to compete in that world?
Mr. Steen. Yes, Chairman. It gives us a chance to be
relevant in the payment space. What you described is a battle
we are fighting as we speak. A number of nonbank payments
systems are being used by my customers. They believe they are
real-time. They are not. But as long as they have the money
when they want it, it seems real-time to them. There is credit
risks in those circumstances, and I think that we can solve a
lot of those problems for our own industry, plus our consumers,
with FedNow.
Chairman Lynch. All right. Very good, thank you.
I now yield to the ranking member, Mr. Hill, for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman. It was a great panel,
and I thank everybody for being here today.
Mr. Williams, I really enjoyed your discussion about your
family cash management issues growing up, and that is so
important as a part of this. If we have the privacy, if we have
authentication and security, both businesses and families will
have more control over that cash management situation at a
lower cost, ultimately. There are a lot of building blocks to
get there, but I thought you made some very good points, and
you can envision a world with no accounts payable and no
accounts receivable, and that is going to affect bank lending
to some degree, but lowering those agency costs for both small
businesses and for families is an ultimate objective of
FinTech, in my view.
I am interested, Ms. Benson, you mentioned this famous buzz
word of all the testimony I have read: interoperability. And in
The Clearing House letter that they have submitted here for the
record, they really talk specifically about not just rules as
being the key to that, so really the definitions of it, and it
is not really bound by technology. Do you agree with that
assessment?
Not to say that it is not technological, but the
interoperability is more about definitions, rules of the road,
than it is purely a technical issue. How do you feel about
that?
Ms. Benson. Yes, Mr. Hill. I agree that they are separate
things. I am not sure I would say one is more important than
the other, that technical interoperability is relatively
simple, switch kind of mechanism exists in payment systems
around the world. Frankly, the the role that the National
Automated Clearing House Association (NACHA) plays, of having
one rule umbrella over different operators is more challenging
to put in place. And where we have seen situations where that
doesn't happen--and I would note that the bill payment process
in the United States is like that--there is no coordinated way
in which that happens.
Mr. Hill. Right. It just flows haphazardly through the ACH
system.
Ms. Benson. And you look at another country that has put
the rules in place for that, and it all works very--
Mr. Hill. Yes, thank you for that.
President George, the Fed has certainly been, for a hundred
years, engaged in the payments process, no doubt. And in all
the principal payment arenas, both wholesale and retail, the
Fed is a player in some way. We have talked about ACH and we
have talked about Fedwire. But I noticed in a 2015 study that
there were recommendations made that both the National
Settlement System and Fedwire stay open longer and make it more
convenient for innovators and for banks, and yet you really
haven't done that.
And yet, we are now looking to you to very quickly--you say
in 5 years, I agree with my chairman, that seems like a
lifetime in this business--have real-time payments. What is the
Fed doing to extend customer service now with the products that
you have now and Fedwire and the National Settlement System?
Ms. George. Across all of our current payment services, we
are focused on improvements that would help with speed and
security. In the most recent Federal Register notice, even as
we are going out to look for the features of the FedNow system,
we have agreed to explore how extending Fedwire hours can help
facilitate private sector operations in this space.
Mr. Hill. I think that is important, whether you are in Mr.
Steen's bank or over in London doing a transaction. We are the
biggest economy in the world, and it seems like we are all
bragging that we are faster and better and it's going to be
wonderful in 5 years, when we have fantastic systems now, that
if you were just open on the weekends and Federal holidays, it
would be pretty nice for everybody, in my life. So, I encourage
you to do that. And I hope you will make that a priority for
the Fed.
Mr. Steen, in your testimony, on page 3, you talk at length
about the Fed having fair, flat prices, but President George,
doesn't the Fed, because of the Monetary Control Act, actually
require to earn a return on all Fed investments and
infrastructure, and, therefore, you do offer volume discounts
and differential pricing for your products, don't you?
Ms. George. With our ACH, the law requires us to recover
our costs, and so, yes, we have aligned our pricing relative to
market practices. We have made that transparent as a way to,
not only recover our costs, but to lower the cost overall for--
Mr. Hill. Sure, no, I think it makes sense to me. I am not
complaining about it, as someone who looks out around here
occasionally for the taxpayers. I think it is a good idea.
Would this FedNow process also be subject to that Monetary
Control Act issue?
Ms. George. Absolutely.
Mr. Hill. Yes, I think that is good.
Well, I just want to make it clear to all of our listeners
here that the Fed too recaptures its cost of capital and
attempts to design systems that compete fairly in the private
sector and that there is not some free lunch in Fed systems
compared to a system run by one of the private competitors,
whether it be ACH, or what I understand is proposed from The
Clearing House, to talk about what they are proposing. They are
not here today to answer questions about it, so I don't know
that I can turn to that.
I yield back, Mr. Chairman. And thank you for the panel.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentleman from Georgia, who
has been a long-time Member with a keen interest in FinTech,
and is a great member of this task force. The gentleman from
Georgia, Mr. Scott, is now recognized for 5 minutes.
Mr. Scott. Thank you very much, Chairman Lynch. And, Mr.
Chairman, let me also commend you for the outstanding
leadership that you are providing on FinTechs. As you know, our
FinTech industry is the new frontier of our great financial
services industry, and you are certainly providing great
leadership on it. And also, I am very excited about working
with you on our FINTECH Act, where we will be dealing with
harmonization of regulatory agencies as well as privacy, and I
might mention also, with Ranking Member French Hill. And so we
are all a team ready to go here, and I am really just proud to
be a part of this great team. I'm very excited about it.
Let me just start out by making this very brief statement.
The development of our faster payments framework in the United
States, that indeed holds incredible potential for our payment
system, advanced technological developments in our payment
space, readily improves access to funds for consumers, and
increases the convenience of availability of payment process.
And, of course, this is very important to my State of Georgia.
Georgia leads the nation: We produce and provide 70 percent of
all of the electronic transaction payments. We have great
companies down there like TSYS, Kabbage, and NCR, and we are
very excited about the role we play in the nation.
But first I would like to discuss the mechanics of any
faster payment system. As exciting as this new technological
development is, it is also increasingly complex. For example,
under the current payments infrastructure, payments can be
either initiated by a sender, which is the push payment, or
required by the recipient, which is the pull payment.
Now, this flexibility also includes certain protections
under Reg E to ensure that consumers have some ability to
recoup funds that were sent out without their authorization. A
real-time payment system, however, is primarily a push payment
system, meaning that once I hand over my money, it is going to
be very difficult to get it back. Now, this is fine when
considering correctly authorized payments. But as you all know,
we live in a world where consumers must constantly be guarding
against fraud and against cyber attacks.
So, President George, do you see any advantage or
disadvantage that a real-time payment system may bring with
regard to a consumer's ability to recoup funds that were
initiated without authorization?
Ms. George. You have raised a very important question,
because consumers will be initiating and the payment will go in
real time. And this will be an area, as we work with the
industry, on how education will work. Banks work closely with
their customers on making sure they understand how their
systems work, and I expect that will continue. We, of course,
will be working with the industry more generally on other kinds
of fraud mitigation standards and things that may help the
system as a whole.
I concur with your concern about consumer protection, and
we will continue to keep that in the forefront as we do the--
Mr. Scott. Tell me, Madam President, what about payments
that were sent erroneously, perhaps incorrectly spelling the
recipient's name, for example?
Ms. George. We have not designed the features of our
system. Banks are dealing with this issue today and are
operating within the legal structures to serve their customers,
including with their own agreements with those deposit
accounts. So I agree with you, it is an important issue, and
one, as we provide the foundation here, we will engage with the
industry on.
Mr. Scott. Mr. Sinha, very quickly, how are consumers and
recipients notified of a real-time fraudulent payment, and what
is the dispute process like for such a payment?
Mr. Sinha. Congressman, there are multiple ways we can
notify the consumer. One is when they initiate the payment,
they should be authorizing the payment with a separate code
that only belongs to them. And that is done--sent to them in
real time once, for one-time use. The second one is, in some
faster payments networks now, we are seeing the regulation
coming in to check for beneficiary name, confirmation of pay to
be matching the actual name of the payment recipient with the
name of the account.
And then, I think as President George said, there is quite
a bit of work that still needs to be done in this space, but I
think the crucial part is to make sure we give the control to
the consumer and make them understand and educate them that
they should authorize the payment, and once payments are sent,
they are final.
Mr. Scott. Thank you very much.
And thank you, Mr. Chairman, for that extra time. Thank
you.
Chairman Lynch. The gentleman yields back.
The gentleman from Ohio, Mr. Davidson, is now recognized
for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman.
Witnesses, thank you for being here and for talking about
an incredibly important feature of America's economy.
Ms. George, initially, the Federal Reserve had signaled to
the market that the Fed wasn't going to take this payment
system over as they have in a number of other things. So, there
was all this investment in R&D in the space, and then the Fed
decided that they wanted a do-over and they were going to take
it over. What do you say to them about all the billions of
dollars they invested in the space only to have you guys
capitalize on it with somewhat less investment?
Ms. George. The Federal Reserve has a history of working
alongside the private sector. Every payment system we have
today, the Fed is involved, alongside a private sector
operator. Since the start of our work in this area, we have
supported the private sector solution, first by providing an
account, a special account at the Fed, where they would be able
to set up their particular real-time solution. The next step in
that process is for the Board of Governors to determine whether
a single private sector operator is able to achieve the public
policy goals of having broad access in the United States of an
efficient payment system and--
Mr. Davidson. Why would we want a single operator? Why
wouldn't we want multiple operators to be able to use whatever
you want to use as a system?
Ms. George. Multiple operators, I think, are desirable, and
the competition that comes from having the Fed move into an
operator role is one of the objectives.
Mr. Davidson. When you can come in and take over a market,
is that partially because you serve as regulator, the
dominant--I mean, you pay out the interest rate on excess
reserves (IOER) and all kinds of other things. So, if you
choose to be in a space, does anyone have a vote? You guys just
decide. It is not really optional, is it?
Ms. George. Under the authorities of Congress, we are
required to be very transparent--
Mr. Davidson. Of course, Congress could tell you that you
are not going to do it. That could potentially happen. But
short of that, the market isn't going to tell you that you
can't do it, right?
Ms. George. Actually, in working with the market through
our Faster Payments Task Force, we were looking for the private
sector to step up and respond. This is a business of
considerable scale and network effects.
Mr. Davidson. Of course. Why it is a big deal, why the Fed
takes it over and continues to serve as regulator. One of the
criteria that the Fed has to meet is to recover their cost in
the long run.
During your testimony yesterday at the Senate Banking
Committee hearing, you stated that the Fed has historically
done this, and you expect it to continue to be the case under
the FedNow proposal. By ``historically done this,'' I assume
that you mean such as Fedwire and the Fed's automated clearing
services, correct?
Ms. George. Yes, sir.
Mr. Davidson. And these fees associated with these
services, are they based on volume, or do you have effectively
high volume discounts where you pay a lower price if you
deliver a lot of volume and a higher price if you have less
volume?
Ms. George. We publish our pricing schedules each year so
that customers can see, and those prices are set to allow us to
recover fully our costs.
Mr. Davidson. But they are based--there is a different
schedule based on your volume, correct?
Ms. George. Those are priced--there are fee structures per
item charges, there may be volumes, discounts involved in--
Mr. Davidson. Right. But fundamentally, JPMorgan Chase is
paying lower per transaction than, say, Osgood Bank in Osgood,
Ohio?
Ms. George. Actually, our smallest banks are benefiting
from the volumes that come through the Federal Reserve--
Mr. Davidson. Because they couldn't set it up on their own;
I got it. So, why does the Fed charge the--I guess, in the
assumption that you make that the FedNow takeover of the
private capital invested here, do you assume that you pay for
that based off being able to do volume discounts?
Ms. George. We have not set our pricing yet, but as soon
as--
Mr. Davidson. Well, you haven't set the pricing, but you
had to model it, right? You are saying it is going to break
even. Is that just, you are hoping it is going to break even,
or you are confident that you can charge whatever you want
because the market doesn't really have a vote in it?
Ms. George. No, sir. Our pricing requires us to recover our
costs, which means we have to compete with the private sector
to do so. Sso in a FedNow Service, we will be required to
demonstrate what those costs will be, and as soon as the system
is designed, before it is launched, the Board of Governors will
go out with public comment showing that--
Mr. Davidson. In the dialogue, I would like to associate
myself with Mr. Quarles' public remarks in your hearing, which
is skeptical. You are crowding out private investment. In the
meantime, frankly, the fact that you can't launch this anytime
soon, is killing the market. And when you talk about people
being able to pay right now, Uber is paying their drivers up to
5 times a day in the current payment system. This, to me, seems
like a step back, and it is crowding out, in a monopolistic
way, private capital that has already been invested.
I wish I had more time to get to Mr. Williams, and
hopefully you will come back to Cincinnati. I would love to see
you there, come back home from L.A., and it's just great to see
a local company doing well. So, thanks for that.
I yield back.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentleman from Florida, Mr.
Lawson, for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman. And witnesses, welcome
to the task force.
I am trying to understand the consumer aspect of this.
There are many issues that are important in the payment space,
but I would like to focus in on the consumer aspect. Can you
all speak to what challenges you have seen in the payment space
with regards to access to immediate funds by those who are
underbanked, those in an emergency situation?
Howard University said that they were doing a 6-week course
on how to use FinTechs. What happens if there is no money? How
does this affect the consumer when they are trying to go
through, when things are recorded in their account at a later
date? What do you do? What do they do? Anyone can respond to
that.
Ms. George. I will start by saying the Federal Reserve has
looked carefully at the issues affecting the underbanked and
unbanked in this country and through some of our community
development work have raised these issues.
In the case of real-time payments, we see that having the
ability to manage your money more directly is a benefit that
will benefit the country. Economically, it certainly benefits
individuals in being able to have the flexibility to control
their finances. So, we see it as a positive move forward for
those individuals who most need this kind of finance
flexibility.
Mr. Lawson. Go ahead, Mr. Sinha.
Mr. Sinha. Congressman, I think one of the big things that
we see with slower payment systems and when things are delayed
is people who are underbanked, they have the biggest impact on
access to funds and they end up going to more expensive
options, like check cashing or having to go into overdraft,
which are very high-cost services. I think having real-time
payments where you know when your payroll is going to hit your
account and then you can set up that, if your pay hits on
Friday morning, you know it is going to come Friday afternoon,
you pay your bills, and you know it is going to get shipped so
that it will be there and hit the utility bill so the
electricity is not being turned off on the weekend.
I think that is imperative. It is very, very important to
remove that doubt of whether my money will make it from one
place to the other. So, I think that is a very big advantage
for real-time payments.
Mr. Lawson. Mr. Steen?
Mr. Steen. I would use a couple of examples. In our case,
we are a small bank. We are working with several different
FinTechs trying to deliver payments faster. We are still
dealing with the current infrastructure.
In the example of the Uber drivers able to get their
payment 5 times a day, they actually pay for each one of those,
and the employer is actually providing them availability of
funds they don't yet have and so, hopefully, with immediate
settlement, they can bring that cost down for those Uber
drivers. That would be one example.
Mr. Lawson. Mr. Williams?
Mr. Williams. One example, Congressman, is a company called
SoLo Funds, of which I am a co-founder. The premise of it was
to actually provide cash in real time to individuals in need.
In building that product, we had to work around and through so
many different infrastructure challenges. But what I want to
say is, what we have allowed is individuals to actually lend to
other individuals in real time, and the individuals actually
received the benefit, providing the capital, while the person
in need gets the capital immediately. That is called SoLo
Funds, but that is how we are addressing that issue.
Mr. Lawson. Okay. Ms. Benson?
Ms. Benson. I would like to address two parts of this and
say that in emerging economies in Asia and Africa, there is
overwhelming evidence that the availability of real-time mobile
payments is bringing people into the formal financial
ecosystem. They are opening bank accounts and other forms of
transaction accounts and are able to participate in digital
commerce and things like that as a result. So, that is a good
thing.
I would also say that, although I think these faster
payments are immune to certain types of fraud that exist, say,
in our card payment systems, there are other kinds of fraud
that will rear their heads. And, again, I would like just to
emphasize how important it is that we take a collective view on
managing these frauds and not have every little system and
company doing it separately.
Mr. Lawson. Okay. My time has run out.
Mr. Chairman, I yield back.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. Steil. Thank you very much. I appreciate that.
President George, we have had a lot of conversation today
about the pricing. I know you discussed that yesterday,
particularly with Senator Toomey asking you about some of that.
So, I want to part that conversation a little bit because I
think we have heard kind of the broad picture of how you are
looking at it.
I want to dive in, if I can, Mr. Steen, and get the
perspective of local banks, your bank in particular, or other
community banks, what the impact of that pricing would be if
the Fed deviated away from a flat fee structure.
Mr. Steen. Well, currently, we are not in a flat fee
structure and so, for example, our bank was very early in check
imaging and as soon as we started implementing that, our costs
of check clearing went down 60 percent.
Mr. Steil. When you implemented what?
Mr. Steen. Check imaging.
Mr. Steil. Okay.
Mr. Steen. For the Check 21 Act, we were very early. And so
our check for Check 21 or check clearing went down 60 percent.
Our ACH transaction is--it is true. Others probably get it less
than we do, but it is a quarter of a cent, and I can manage
that. So, I think they bring my costs down as much as they can,
and we see through with technology advances. I am good with the
pricing structure that I am living with.
Mr. Steil. And where you are good is, do you see that also
with your colleagues across community banks, comfort with the
Fed's pricing structure? Do you see in that a bit of a
dialogue? Can you provide flavor to that?
Mr. Steen. Well, many of my peers deal indirectly with the
Fed through banker's banks and corporate credit unions, but
everybody is working off the same base pricing. And so, I don't
hear a lot of criticism or complaining about the pricing
structure of payments in the rails that we work with, that
being Check 21 and ACH.
Wire, they brought the price of a wire down, since we can
connect directly to FedLine Advantage. But internally--it would
be just for security purposes--in our small bank, we have three
people involved in every wire. So, there are some internal
costs, but the cost that the Fed is charging me for wire is the
least of my concerns.
Mr. Steil. Thank you. I appreciate your insight.
I want to shift gears a little bit, but go back to you,
President George. We have discussed a lot of the international
comparisons in the real-time networking area; I assume you
spent some time looking at these. Are there examples of
government-run systems operating parallel to the private sector
that you have seen internationally? And, if so, are they
interoperable?
Ms. George. As Ms. Benson noted earlier, many of these
countries operate with a single provider. It has long been the
case in the U.S. that for competition and safety and
accessibility, we have had dual operators to achieve the
outcomes we want for the public. The European Central Bank
(ECB) is a system that is dealing with multiple providers, and
we have looked closely at how they have developed their real-
time payment system and talked about interoperability.
Mr. Steil. Thank you very much. I appreciate you all being
here today.
I yield back.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentlewoman from Iowa, Mrs.
Axne, for 5 minutes.
Mrs. Axne. Thank you, Mr. Chairman. And thank you to the
witnesses for being here.
Mr. Steen, it's always good to see you. Thank you so much
for being here from Iowa today.
I would like to start by asking you, what do you think are
some examples of how Iowans back home could benefit from a
real-time payment system?
Mr. Steen. Well, I think the people, our customers, many of
whom are making what they believe are real-time payments--I
addressed that a little earlier--but I think that the idea of
being able to pay somebody in real time, particularly in a late
payment or a late-immediate payment circumstance is really key,
and that happens all the time. People forget things. And we
have seen from experience the value of same-day ACH and missed
payroll files. It was a nightmare if you missed a payroll file
prior to the same-day ACH. Today, we may not get it as early in
the day as they are used to, but we can get them paid, and it
is huge advance in payments.
Mrs. Axne. Absolutely. Thank you. We want to make sure that
we pay people as expeditiously as possible.
What you just mentioned, those situations are why I was
happy to cosponsor Representative Pressley's Payments
Modernization Act, H.R. 3951, and I want to thank her for her
leadership on this issue. An updated version of the bill, which
we are considering today, would require the Fed to complete
that system within 3 years and would require banks to make
deposits available more quickly.
I did hear some feedback that the limited hours for the
National Settlement Service and the Fedwire could cause some
problems with doing this.
Ms. George, I know the Fed is considering extending those
hours. Is that something that could be done faster than the
currently proposed 4-year timeline for FedNow?
Ms. George. Our commitment to explore this issue will be
handled separately from the timeframe that we have designated
to build a FedNow Service. The issue about extending our funds
transfer system is one that will require the Board to do some
analysis, because this is a system whose operational
characteristics will require us to engage with the industry to
understand what the implications are. But the Federal Register
notice that we issued last month does indicate in there that
the Board will explore extending those hours.
Mrs. Axne. Thank you.
I have spoken to Representative Pressley, and we have
agreed that expanding NSS and Fedwire hours will also be
included in the bill. So, thank you for your work on that.
I want to change topics here a little bit. As I understand
it, there is some question of if FedNow is going to be
interoperable with The Clearing House's system or others. We
have been talking about that throughout the day. Considering
that the system hasn't even been built yet, claims that these
systems can't fully work together, to me, seems very premature.
My husband and I own and run a digital design firm. We deal
with The Clearing House. We deal with wire payments
internationally. We are very familiar with setting up payment
systems for our customers. This is not something that I have
never used. I am familiar with this to some degree.
And I certainly recognize the challenge of getting
different systems to work. We deal with that all the time. But
solutions, quite honestly, can almost be found almost all the
time. And so, I really think that shouldn't be anything that
should be considered to be an obstacle in this.
Mr. Steen, we know that Iowa has far more small banks than
most other States per capita, and that those community banks,
in many cases, are the only banks in our rural communities. Can
you explain for us how important it is for smaller banks like
yours that those systems be operable? You touched a little bit
on it earlier, but especially, I would like to hear about the
terms of reduced cost in connecting to all of these systems.
Mr. Steen. Well, the connecting systems is always the
friction, but I would tell you that it is essential if we are
going to have a legitimate real-time payment system in the
United States that extends beyond our borders, that we simply
have to be interoperable with each other.
It is challenging because our friends at The Clearing House
have said that theirs is not interoperable and it is going to
be very difficult for them. But one of the key desired outcomes
of the 2015 study was collaboration. We went through that 4-
year task force, and it turns out that there was an
interoperable system being built.
Mrs. Axne. Do you think if we are not able to make this
interoperable, it is really going to limit your ability to
provide good services for your customers moving forward?
Mr. Steen. That would be very difficult, but I am operating
under the belief that the market will force interoperability.
Mrs. Axne. All right. Thank you so much.
I yield back.
Chairman Lynch. The gentlewoman yields back.
The Chair now recognizes the gentleman from Virginia, Mr.
Riggleman, for 5 minutes.
Mr. Riggleman. Thank you, Mr. Chairman, for calling this
hearing today and for allowing me to participate. I appreciate
it.
And I thank all of you for being here today.
While I am appreciative that you allowed me to join this
hearing with this esteemed panel, I just heard some things, and
I have one little gripe. I could not help but notice we do not
have a representative from The Clearing House Association here
today, the only institution that has successfully developed a
real-time payment system in the U.S., and I wanted to ask them
some questions. Since they are unable to answer questions and
provide input today, I would like unanimous consent to submit
into the record a statement from them.
Chairman Lynch. Without objection, it is so ordered.
Mr. Riggleman. Thank you.
Mr. Chairman, I also saw the legislation that was noticed
with this hearing as Congresswoman Pressley's Payments
Modernization Act. I also am going to introduce legislation on
this issue, H.R. 3928, the Federal Reserve Accountability and
Justification Act. So, my questions will focus on these pieces
of legislation as well as some other topics.
I do wish we had more people here. My background was
interoperability with massive datasets, data sources, and also
governance. So, I am excited to have some questions here today.
President George, if Congress passed the Payments
Modernization Act and the President signed it into law, how
would the Federal Reserve accomplish real-time settlement today
as that legislation requires?
Ms. George. We are proceeding today under the authorities
that we have under the Federal Reserve Act to begin to design a
system that will deliver real-time payments as another provider
here in the United States.
Mr. Riggleman. Thank you.
And given that the Board recently announced its FedNow
system would not be operational until 2023 at the earliest, I
could take that as an indicator that the Payments Modernization
Act could be a complete disaster for the United States payment
system based on the amount of time and cost.
Ms. Benson, based on what we learned from yesterday's
Senate Banking Committee hearing, as well as the information in
the Board's August proposal, not only has the Fed not
determined how their system will be interoperable with the
private sector, but apparently, there isn't even an agreed-upon
definition of ``interoperability.''
When Chair Powell was testifying before this committee in
July, I asked him about interoperability, and he admitted it
was a complex and currently unsolved issue. Your testimony
addresses this topic and said that interoperability is not a
technical issue but one of governance. Given that the Fed has
not yet defined interoperability, what steps should they take
to address this?
Ms. Benson. That is a good question. I think that it is a
matter of working with The Clearing House. And I would also
like to acknowledge what Mr. Hill said earlier, that there are
other networks like Visa and Mastercard who have real-time
payment systems in place today. And how we get to the place of
having a governance umbrella over these systems, I don't know
exactly what the path to that is, but I think we did do that
with the ACH, and with the right will, we should be able to
accomplish it.
Mr. Riggleman. What I was interested about when you talked
about governance, as you know, sometimes governance determines
the exact data element needs based on what the releasability of
that data is or who can see that data or even how you target or
track the data elements in that specific data. That is why I
was so interested in it.
But if it is about just governance, which I hope it is,
and, President George, if the issue of interoperability is
simply a governance issue, why did the Fed not address it prior
to the August notice?
Ms. George. As part of our work with the Faster Payments
Task Force, that group did conclude that governance would be
important, and put together a Faster Payments Council. It is
just coming together, and we are watching that carefully to see
whether that will be an effective way to go about the
governance process here.
Mr. Riggleman. And the reason I am asking this, and I think
some people might be curious about it, is that governance also
determines cost. When I was looking at TCH and looking at what
they talked about cost, they were talking about close to a
billion dollars. I know that governance and the complexity of
that governance could actually affect the cost based on data,
specifically in the sharing and interoperability of that data.
So, that is why I am asking some of these questions.
And, Mr. Steen, my district is very rural, and the
financial institutions that serve many of your constituents are
small banks and credit unions. I agree with your sentiment and
your testimony that institutions such as yours provides a very
critical service to the economy and payments are a vital
component to that.
When I talk with my bankers, their number one concern on
this topic is not who offers the faster payment service, but
that they are getting a fair deal. My legislation would simply
codify the Fed's own policy statement into a formal rulemaking
so that Congress and small banks are given absolutely clarity
regarding cost recovery which is related to pricing.
The TCH has committed to a flat fee structure, whereas the
Fed has not, and the Fed has also announced that cost recovery
will likely take longer than 10 years. As you support the Fed's
decision, would you also support transparency, especially on
pricing and cost recovery, and are you prepared to wait what
could be 5 to 10 years for the FedNow system to become
operational?
Mr. Steen. In my role in the Faster Payments Task Force
from the beginning, the steering committee, et cetera, I have
been pounding the table as much as I can for the Fed to move
faster. So, we all agree on that.
I think that the pricing is transparent. I think they give
us a pricing list. We get to make our decisions. But it is
never fast enough, and I remind them I am old and I want to see
this happen. So, we have to keep moving. But I am very
confident that they can move this forward on a timeline, and
governance evolves. I don't know that we will know exactly
every rule we need when we start, and I would just suggest that
we need to launch this. We have an industry that can work
together when we have to, and we will do that.
Mr. Riggleman. Sir, I thank you kindly.
And I thank you all kindly.
And I yield back the balance of my time.
Chairman Lynch. The gentleman yields back.
I thank the gentleman from Virginia for his remarks. And I
did hear yesterday that the Minority wanted to ask The Clearing
House to come on in. If I had known in advance--the Minority
did have an opportunity to pick them as their witness. I think
they would be a wonderful witness. I think you also chose
wisely, though, in Ms. Benson, in having her as the Minority
witness. But I would certainly leave it wide open to having The
Clearing House in at a later time.
Mr. Riggleman. Ms. Benson is very capable and intelligent.
And thank you, sir. I wasn't blaming you, I promise.
Chairman Lynch. Okay. Thank you.
The Chair now recognizes the gentlelady from Massachusetts,
Ms. Pressley, for 5 minutes.
Ms. Pressley. Thank you, Chairman Lynch. I appreciate the
opportunity to be able to participate in this hearing,
especially given the issue.
Working families should not have to wait days at a time
just to access their own hard-earned money. As I said to
Chairman Powell a few months ago, when you are living paycheck
to paycheck and rent is due the first of the month, there can
be no room for error.
After the Federal Reserve's August announcement, this is no
longer a question of if, but when and how fast--how this faster
payment system will develop. Unfortunately, the longer it takes
to build this system, the more families and small businesses
will suffer. That is why I was proud to introduce the Payments
Modernization Act in partnership with Representative Chuy
Garcia and Senators Warren and Van Hollen.
This is the only legislation that holds the Fed accountable
for developing a faster payment system that prioritizes
consumer protection, fraud prevention, and equal access in a
more reasonable timeframe. My bill requires the Fed to build
this system in 3 years, allowing the U.S. to remain competitive
and to not fall further behind in the global payment space.
There is still more work necessary to ensure a smooth
payments modernization process. That is why my bill requires a
GAO study on the U.S. payment system and what regulatory and
legislative changes are necessary in order to promote consumer
protection, reduce fraud, and to promote stronger cybersecurity
practices.
Now, there are some who believe that this pressing need can
somehow be met by the private sector alone. However, the
existence of both ACH and The Clearing House's private
settlement service suggests otherwise.
I want to ask each of you a simple yes-or-no question. Can
The Clearing House alone reach all of the nation's almost
11,000 financial institutions? We can just start with President
George and go all the way down the line.
Ms. George. The Board's analysis concluded that they would
have significant challenges in doing so.
Ms. Pressley. Yes or no?
Mr. Sinha. No.
Mr. Steen. No.
Mr. Williams. No.
Ms. Benson. Not in the timeframe you are indicating, no.
Ms. Pressley. It is clear that the current system is
insufficient. Small and local banks and small businesses alike
do stand to benefit from this proposal.
Mr. Steen, how does your bank plan to use real-time
payments, and how will this benefit your customers,
particularly small businesses and low-income people?
Mr. Steen. We are currently working with some partners,
otherwise known as FinTechs, targeting underbanked, underserved
customers. We structured a virtual branch. We are creating bank
accounts for these folks. There is a debit card associated with
it, and we believe that we can bring these folks into the
system. And we are working with a group, targeting Latino
churches and Latino church associations.
But even in our core customer base, which is a rural
community and we know most of our customers, virtually all of
our customers, we know they have needs, and many of them live
paycheck to paycheck. And we have improved things with online
banking. They can see their account much more readily. We know
from our own experience that overdraft volume is going down
significantly year over year. We think that is a good thing. We
are not trying to make money on overdraft fees. Our overdraft
fees are relatively low. We don't charge on continual fees. We
cap overdraft fees. We do everything we can because we know how
much of an impact that makes.
Ms. Pressley. Thank you, Mr. Steen.
And, Mr. Williams, how will the added transparency and
quicker access to funds protect working people from otherwise
predatory products such as payday loans or punitive measures
like overdraft fees?
Mr. Williams. I think when there is a need for capital and
it is a gap between what a family or someone needs today versus
next week, there also needs to be safe resources for that
capital. But I think that is one part of it. I think the other
part of it is that if there is transparency and when funds will
be readily available, families and this group of Americans will
have a better chance at planning properly. What is causing the
biggest concern is the emergency. It is the things that were
unplanned.
Ms. Pressley. Thank you, Mr. Williams.
Mr. Chairman, I ask for unanimous consent to submit into
the record a letter of support for our legislation from the
Main Street Alliance, a leading voice for small businesses.
And I just want to thank Representatives Axne and Tlaib,
and Chairman Meeks, for their support of this effort, and I
urge the remainder of my colleagues to do the same.
Thank you, and I yield back.
Chairman Lynch. The gentlelady yields back.
And without objection, the letter will be made a part of
the record.
Without any further Members, I would like to thank our
witnesses for their testimony today.
And without objection, letters from the following
organizations will be submitted for the record: Consumer
Reports; the American Bankers Association; Americans for
Financial Reform; Financial Innovation Now; the Food Marketing
Institute; NACHA, which is the National Automated Clearing
House Association; the National Association of Federal Credit
Unions; and the Retail Industry Leaders Association.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned. Thank you.
[Whereupon, at 3:29 p.m., the hearing was adjourned.]
A P P E N D I X
September 26, 2019
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