CBAI Recommends Payments-System Improvements

CBAI has commented on the Federal Reserve’s involvement in payments-system improvements (System Improvements). In the letter, CBAI presented a detailed analysis and recommendations to support System Improvements that are progressive, competitive and secure, and that offer fair and open access to all community banks regardless of size, charter type or location so that they can meet the existing and evolving payment needs of their customers and communities. Read Letter.

A fast and secure payments system is at the very foundation of our financial services community and economy. The number of payment options and the pace of change in this area are not expected to abate in the future. Unfortunately, community banks do not account for most payment transactions and therefore must rely on the Federal Reserve to provide access, speed and security for all members of the payment system. Community banks, however, provide 50% of the loans to small businesses and an even higher percentage of agricultural loans, so a payments system that does not serve all, or disadvantages community banks, will have a devastating impact on the nation’s consumers, agriculture and small businesses.

CBAI is concerned about System Improvements that are dominated by the largest banks and financial firms as well as private-sector non-bank solutions. The largest banks endangered our financial system and economy during the financial crisis while non-banks present significantly different risks and are not subject to the same safety and soundness regulations as community banks. Therefore, several non-large-bank controlled alternatives should be incorporated into an improved payments system, and non-banks must subject to the same robust safety and soundness regulations (including examination and enforcement) as community banks. Implementing these safeguards will increase competition, reduce concentration and other risks, and be less likely to disadvantage community banks.

CBAI listed a number of desirable attributes for System Improvements and specifically recommended that the Federal Reserve:

  • Provide central-bank settlement;
  • Use its connectivity to provide all financial institutions with access to real-time payments;
  • Serve as an operator for real-time payments as it does for checks, ACH, and wire transfers; and,
  • Operate as a payments directory that would link to financial and other private-sector directories.

Following these recommendations will ensure the Federal Reserve is acting consistent with its own statement of functions and the Payment System Policy Statement and will satisfy their required criteria before introducing a new service or major enhancement.

The Federal Reserve has historically been, and remains, a critically important point of access to the payments system that must be available to every community bank. CBAI urged the Federal Reserve to play a preeminent role in System Improvements to ensure fair and equitable access for all community banks for the benefit of their customers and communities.