MA MasterCard Incorporated

By AnnaMaria Andriotis 

Walmart Inc. and Target Corp. want the Federal Reserve to help them get paid in real time.

The retail giants are among the companies urging the Fed to develop a service to settle interbank transfers in real time, 24 hours a day, seven days a week. Such a service could ultimately eliminate the lag between when consumers use debit cards to pay for items and stores receive the funds.

The Federal Reserve in October announced potential actions to help develop a faster payments system in the U.S., including creating a real-time settlement service. Walmart, Target and trade groups including the National Retail Federation have been in discussions with the Fed regarding faster payments for years, according to people familiar with the matter.

The system could solve a problem that has long vexed retailers. Merchants largely rely on card networks including Visa Inc. and Mastercard Inc. that provide the rails for consumer card transactions, as well as banks and other companies that process the transactions and provide funds to the stores. Merchants often have to wait one to three days to receive funds from debit-card purchases. Payments for purchases made on a Saturday can take until Tuesday to arrive.

Action by the Fed could enable merchants and others to develop faster payment services that allow consumers to pay for items from their checking account without using existing debit-card rails. Potential options include payment services integrated into mobile wallets and merchant smartphone apps with in-store rewards that incentivize shoppers to use them.

This could become a problem for Visa and Mastercard, which could lose transaction volume if such alternative payment methods take off, and card-issuing banks, which reap fees from retailers when shoppers use debit cards to pay for purchases.

Card issuers received an estimated $14.4 billion in debit card interchange fees in 2017, up 5% from 2016, according to trade publication the Nilson Report. Debit-card interchange fees, which are set by card networks, were capped in 2011 after the 2010 Dodd-Frank law instructed the Fed to lower them for institutions with $10 billion or more in assets.

A new payments system would face several hurdles to becoming mainstream. Consumers are addicted to credit cards with generous rewards, which could make it harder to convince them to switch to new payment methods. Payment terminals, which merchants have upgraded over the past few years to accept new chip-based cards, may need to be updated to accommodate the new system.

What's more, the biggest U.S. banks last year began to deploy their own real-time payments network, which so far is mostly being used by companies to pay employees and suppliers. Consumers can also use RTP to send money between their own checking accounts at different banks. The RTP network, as it's known, was created by the big-bank-owned The Clearing House.

"We just think in real time payments we are meeting the need," said Steve Ledford, senior vice president of products and strategy at The Clearing House. "We just wonder why the Fed would need to come into a market that is already being served."

In an October speech, Federal Reserve governor Lael Brainard said the central bank has "the unique ability to provide the infrastructure to reliably settle obligations between banks using balances at the central bank. As such, we have a responsibility to serve the broad public interest by providing a flexible and robust payment infrastructure on which the private sector can innovate."

The Fed's recent moves follow years of discussion between the Fed, regional Fed banks, merchants, card companies and banks, among other parties. The conversations mainly have focused on upgrading the payments system in the U.S. so consumers and businesses can receive funds when they are sent and to create a universal system for money to be transferred in real time between financial institutions, regardless of their size.

The Fed is soliciting feedback on the proposal through Dec. 14.

A Fed-backed system wouldn't replace credit and debit cards but could become an alternative to them, especially at large merchants with a loyal following. Target's debit REDcard, for example, links directly to a customer's bank account and offers 5% discounts on card purchases in stores and on the retailer's website.

Retailers increasingly are bypassing card networks with their own debit-card offerings in an effort to cut down on fees. Consumers spent some $15.6 billion on merchant-issued debit cards last year, up 23% from 2016, according to the Nilson Report.

While such purchases accounted for a tiny sliver of the $2.7 trillion in U.S. debit-card transactions in 2017, their growth is a worrying sign for the banks and card networks.

Merchants and card companies have long had a tense relationship. Large merchants and trade groups have alleged that Visa and Mastercard stifle lower-cost competition in payments and circumvented debit-card regulation. Merchants including Target and Amazon.com Inc. are likely to move forward with legal challenges to credit-card interchange fees.

Paying merchants directly out of deposit accounts is commonplace in markets abroad. In China, mobile wallets Alipay and WeChat Pay command a large share of consumer payments and are often linked to money that consumers have in deposit accounts.

Several U.K. banks are testing payments to merchants online that are linked to consumers' checking accounts via a system powered by Vocalink, a company recently acquired by Mastercard. In the U.S., Vocalink technology will be used to facilitate some real-time online bill payments beginning next year.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

(END) Dow Jones Newswires

December 06, 2018 07:14 ET (12:14 GMT)

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