Big banks are prepared to challenge the Federal Reserve, as the central banking authority develops a new instant payments method to compete with the private system. Banks argue that the Fed project delays their common goal of delivering real-time payments to everyone, a system that could revolutionize financial markets with instant transactions and trades.

Under the current system, transactions are settled en masse three times per day, and payments are only distributed during business hours. For Americans living paycheck to paycheck, these systemic inefficiencies can be costly. A new system would allow people to transfer money instantly; real-time payment networks already exist in countries like Mexico and South Africa, enhancing their financial service sectors. 

Over the past three years, big banks have investment more than $1 billion in launching a system under the Clearing House Payments Co. They argue that a Fed alternative would cut into their new system’s profits and customer base, undermining years of development and marketing work.

“In 2015, the Federal Reserve called on the private sector to build a real-time payments system,” said Greg Baer, president and CEO of the Bank Policy Institute. “Now the Federal Reserve may pull a bait and switch and build its own system – certainly delaying, and perhaps completely undermining, the goal of a ubiquitous system where any U.S. consumer or business can pay any other.”

Smaller institutions have pushed for the Fed to establish a real-time payment system. The Clearing House and the Fed are the two operators of the existing system, settling and distributing payments in scheduled batches. Community banks argue that the Fed has a history of providing services for all financial institutions – upward of 11,000 banks and credit unions – while the Clearing House has exhibited some inefficient and exclusionary practices.

“It’s not the best time and not the best service to conduct this experiment,” said Cary Whaley, vice president of payments and technology policy for the Independent Community Bankers of America. “Community banks are a little wary when they’re receiving services from competitors.”

Big and small banks are lobbying lawmakers on their competing cases, as the issue gains traction on Capitol Hill. If the Fed moves ahead with a new instant payment system, it could see backlash – and even suits – from a collective of banking behemoths.

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