17-1 The Clearing House Payments Company LLC ("TCH")

DEPARTMENT OF JUSTICE
Antitrust Division
ANDREW C. FINCH
Acting Assistant Attorney General
RFK Main Justice Building
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530-0001
(202)514-2401 / (202)616-2645
(Fax)
September 21, 2017
Mr. Richard Taffet
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Re: The Clearing House Payments Company LLC Business Review Request
Dear Mr. Taffet:
This letter responds to your request
on behalf of The Clearing House Payments Company
LLC ("TCH") for a business review letter from the Department of Justice pursuant to the
Department's Business Review Procedure, 28 C.F.R. § 50.6. Specifically, you have asked for a
statement
of the Departmenfs present enforcement intentions regarding TCH's proposal to
create and operate a new real-time payment rail, the Real Time Payment system ("RTP" or "the
RTP system").
1
Based on the information and representations you provided, and after a thorough
review, the Department presently does not intend to challenge RTP for the reasons explained
below. In accordance with the Department's usual practice, however, it reserves the right to
challenge RTP
in the future if RTP's operations are determined to be anticompetitive in purpose
or effect.
I. Backgroutnd
2
TCH is a joint venture owned by 24 of the largest banks in the United States.
3
TCH's
owner banks hold approximately 60%
of all U.S. deposits. TCH is led by a Supervisory Board
1
Letter from Richard Taffet, Esq., Morgan, Lewis & Bockius LLP, to Renata Hesse, Acting Assistant Att'y Gen.,
U.S. Dep't of Justice (Oct. 11, 2016) [hereinafter Request Letter]; see also Letter from Richard Taffet to Stephanie
Beckett, Att'y Advisor,
U.S. Dep't ofJustice (Jan. 10, 2017) [hereinafter Further Submission].
2
All facts set out in this section regarding the proposed RTP system are based on TCH' s repres.entations to the
Department.
3
TCH's owner banks are: Bank of America, N.A.; Bank of the West; Barclays; The Bank of New York Mellon;
Branch Banking and Trust Co.; Capital One, N.A.; Citibank, N.A.; Citizens Bank; Comerica Bank; Deutsche Bank
Trust
Co. Americas; Fifth Third Bank; HSBC Bank USA, N.A.; JP Morgan Chase Bank, N.A.; KeyBank N.A.;

and a Managing Board, which both consist of senior executives of the owner banks.
4
TCH' s
owner banks
contribute funds to TCH, but they do not receive dividends.
TCH
proposes to introduce a new "payment rail" that is faster than current payment rails.
Payment rails
(also called "payment systems") are the systems that depository institutions use to
transfer money among themselves. Existing payment rails include wire, automated clearing
house ("ACH"),
and check clearing houses. TCH and the Federal Reserve System (the "Federal
Reserve") are
the only operators of the U.S. wire and ACH rails, with TCH processing roughly
half of the
volume of each rail.
Payment
rails are used by banks, thrifts, and credit unions (hereinafter referred to as
"banks"), as well as by "payment service providers," which are non-bank entities that provide
end users with
the ability to send or receive funds.
5
Banks and payment service providers offer
services that
allow end users to transfer usable funds between each other ("fund-transfer
services"). Both
banks and payment service providers generally need to use payment rails to
facilitate their end user customers' fund transfers to or from accounts held at other banks.
In 2015, the Federal Reserve announced an interest in the industry developing a
"ubiquitous, convenient
and cost-effective way for U.S. consumers and businesses to make
(near) real-time payments from any bank account to any other bank account."
6
TCH's proposal
is, in part, a response
to the encouragement of the Federal Reserve.
A. Description of RTP
RTP will
allow banks to complete near-instantaneous fund transfers between each other,
from authorization
to clearing to settlement, at any time of the day, on any day of the week
(including
weekends and banking holidays). As such, RTP will facilitate real-time fund transfers
between end users. In addition, RTP will provide banks (and, in tum, end users) with the ability
to send remittance-advice messages through RTP. This will facilitate end users' linkage of
payments to remittance information.
Manufacturers and Traders Trust Co.; MUFG Union Bank; PNC Bank, N.A.; Banco Santander; State Street Bank &
Trust Co.; SunTrust; The Toronto-Dominion Bank; UBS AG; US Bank N.A.; and Wells Fargo, N.A.
4
In addition, City National Bank and First Citizens Bank share a seat on TCH's Managing Board.
5
According to TCH, "[e]xamples of [payment service providers] include PayPal, Apple (in its role as the provider
of ApplePay), Venmo, Dwolla, and Square." Request Letter, supra note 1, at 4. As is the case with some of the
other terms used in this letter, industry participants sometimes apply different meanings to the phrase "payment
service provider."
6
FED. RESERVE SYS., STRATEGIES FOR IMPROVING THE U.S. PAYMENT SYSTEM 8-9 (2016),
https://fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf. The Federal
Reserve stated that it "would not consider an operational role in providing this faster payments capability unless it
determines, not only that the new service would be expected to yield clear public benefits, but also that other
providers alone could not be expected to provide this capability with reasonable effectiveness, scope and equity and
following public comment." Id at 18.
2

End users will not have a direct relationship with RTP. TCH will not be involved in the
development or pricing
of real-time fund-transfer services that banks offer to their end user
customers
that use RTP. According to TCH, its antitrust policies "will guard against the use of
the RTP system to facilitate competitor collaborations" on "the real time products and services
offered by a depository institution" and ''the pricing for those products and services."
7
TCH plans that any end user with a bank account will be able to make payments through
RTP. RTP will be open to all federally-insured banks, including non-TCH banks. Any bank can
choose to connect
to RTP directly. Alternatively, TCH agreements with third party technology
vendors will allow banks to connect indirectly to RTP. Banks will also be able to connect to
RTP through corporate credit unions and bankers' banks. Many banks already use these third
parties to connect to existing payment rails. Payment service providers will
be able to connect to
RTP by partnering with banks and complying with certain rules, such as a requirement to post a
surety bond.
8
B. Request for Payment Function
TCH will implement a request for payment ("RFP") function as part of its RTP rail,
which will allow banks to develop enhanced electronic messaging services for their end users.
Through the enhanced messaging services, the RFP function will enable end users to send
in real
time a request for payment along with information, such
as an invoice, through the rail itself.
Effectively, this will enable a biller to send a bill to a payer through their respective banks. The
RFP function complements RTP's enhanced messaging capabilities
by allowing a bank to build a
service that lets a biller automatically link an RFP invoice to an RTP payment and any
remittance advice message accompanying the payment, which may reduce businesses' costs
of
reconciling invoices with remittance information. TCH represents that its goal for RFP is for
banks to establish easy-to-use mechanisms that allow payers to respond to RFPs using RTP,
creating a seamless e-billing and e-payment experience for end users.
C. Fees
RTP will charge banks two kinds
of usage fees. First, banks will pay "network fees" to
TCH each time the bank uses RTP to send a payment, an RFP, or a remittance message. These
network fees will be determined
on a cost-plus basis and will not include any volume discounts.
'"[N]etwork fees' will be incurred only.based on actual usage
of the RTP system, so no financial
penalty will attach
if a transaction is cleared and settled over another payment system."
9
TCH's
owner banks will not be paid any portion of the network fees. According to TCH, the network
7
Request Letter, supra note 1, at 13.
8
TCH represents that the surety bond imposed will cover "claims only that (i) relate directly to the RTP system, and
(ii) are for losses that exceed coverage under state bond obligations." Further Submission, supra note 1, at 3.
9
Request Letter, supra note 1, at 14.
3

fees will be used "to reimburse TCH for its costs of operating the RTP system, and to support
TCH's continuing innovation of new functions and features for the system."
10
Second, TCH plans to implement an interbank fee for using RFP, called the "RFP
Incentive Fee."
11
The RFP Incentive Fee will be paid by the biller's bank to the payer's bank,
but only if the payment requested via the RFP message is completed using RTP. This RFP
Incentive Fee will reward banks whose payers respond to RFPs by making RTP payments. TCH
contends that payers currently
do not have an adequate incentive to use e-billing, even though
doing
so would be economically efficient, and the RFP Incentive Fee could help correct this
problem. Thus, for example, a bank
may be incentivized by the incentive fee to build an
interface that makes it easy for end-user payers to respond to RFPs
by making payments through
RTP. TCH asserts that the RFP Incentive Fee is necessary to achieve sufficient scale.
The RFP Incentive Fee will be a flat per-transaction fee that will be set by a panel
of two
or three outside economists. TCH' s CEO will have the authority to reject the panel's
recommendation and refer the matter back to
the panel for further consideration, while stating
specific grounds for doing
so. After considering the CEO's position, the panel may, but will not
be required to, change its recommendation. The panel members will be selected
by members of
TCH's senior management and counsel, not by TCH's Supervisory Board or Managing Board.
The economists selected for the panel will be compensated at their standard rates, will be given
renewable five-year contracts, can be terminated only for nonfeasance or malfeasance, and will
meet at least annually to determine whether to change the fee. According to TCH, the panel's
goal will be "ensuring that [the RFP Incentive Fee] properly balances biller and payer interests
and remains
in equilibrium."
12
For both of these kinds of fees, TCH has represented that it will not impose anti-steering
rules. That is,
RTP's rules will preserve bank customers' ability to steer usage away from the
RTP payment rail.
For example, the rules will allow a biller to include surcharges in bills to
cover the fees the biller must pay and allow a biller to provide its customers with incentives
(either monetary or in-kind) to use another method
of payment, including particular brands of
payment. Also, TCH will not be involved in the pricing ofRTP or RFP services that banks
provide to their end user customers.
H. Analysis of the Proposed RTP System
The Department analyzes the operation of this joint venture under the rule of reason.
Because RTP may create significant procompetitive benefits, and we
do not believe that
10
Id. at 22.
11
TCH does not plan to implement an interbank fee for making an RTP payment without using the RFP function.
12
Further Submission, supra note 1, at 10.
4

significant anticompetitive effects are likely, the Department has no present intention to
challenge R TP.
The development
of the RTP system may yield procompetitive benefits. Many other
countries already have such a system, and the Federal Reserve has encouraged its development
in the United States. The need for a: faster payment rail is predicated on the value that end users
get from real-time fund-transfer services, and the risks currently undertaken by banks and
payment service providers that provide these services using existing payment rails. Currently, a
bank that immediately releases funds to an end user payee assumes settlement risk because the
payer's bank could fail to complete the promised fund transfer. This risk could be eliminated
with the real-time settlement mechanism that RTP offers. The lack of a real-time payment rail
may cause banks and payment service providers to impose limitations on the real-time fund-
transfer services they provide to end users. For example, TCH claims thatthe existing real-time
fund-transfer services that payment service providers offer to their end user customers "do not
provide for real-time transfers between bank accounts, have other limitations
(e.g., only enrolled
users
of a service may send and receive funds), and generally utilize existing payment rails to
settle transactions."
13
Thus, TCH's development of RTP could create a payment rail that
facilitates real-time fund-transfer services for end users and reduces banks' and payment service
providers' risks.in providing those services.
By creating a new payment rail, RTP also may increase the variety of payment rails
available to banks, payment service providers, and ultimately their end user customers.
TCH
represents that it will allow banks and payment service providers to use other payment rails in
addition to RTP, and TCH will not steer banks toward using RTP. Also, TCH asserts that it will
continue to offer ACH and wire services, and that RTP will "creat[e] no barriers to the continued
use
of existing payment systems."
14
TCH also asserts that RTP will offer other advantages to its customers (the banks) and
end users. For example, banks may be able to offer services that implement RTP's enhanced
messaging capabilities such
as its RFP function, which may reduce end users' payment
reconciliation and billing costs.
Many collaborations
of significant competitors, such as TCH, have some potential to
harm competition.
15
None of TCH's currently-proposed rules seem to limit rivals' ability to
access RTP in a way that appears to be anticompetitive, although we note that TCH retains the
right to change its rules at any time, and it has complete discretion over enforcement and
implementation decisions. The Department has no current reason to believe, however, that TCH
will use RTP to harm the rivals
of the TCH owner banks. In light of the lack of current evidence
13
Request Letter, supra note I, at 6; see also id at 6-7 (discussing limitations ofbanks' existing real-time fund-
transfer services offered to end users),
14
Id at2.
15
The Department also considered whether TCH' s RTP may be an over-inclusive joint venture - i.e., whether some
subset of TCH owner banks could create an RTP-like product. Based on TCH's representations and the
Department's investigation, that does not appear to be likely.
5

of likelyanticompetitive effects and the likelihood of pro competitive benefits, the Department
has no present intention to challenge RTP. To the extent any anticompetitive effects arise
in the
future,
they would be balanced against RTP's procompetitive benefits under the rule of reason.
III. Conclusion
Based on TCH's representations regarding its proposed new RTP system, which has the
potential to offer improved services to banks, businesses, and consumers, the Department has
no
present intention to take antitrust enforcement action against TCH' s proposed conduct.
This letter expresses the Department's current enforcement intention and is predicated
on
the accuracy of the information and assertions that you have presented to us, as well as the
additional qualifications set forth
in this letter. In accordance with our normal practices, the
Department reserves the right to bring an enforcement action
in the future if the actual operation
of the proposed conduct proves to be anticompetitive in purpose or effect.
This statement is made
in accordance with the Department's Business Review Procedure,
28 C.F.R. § 50.6. Pursuant to its terms, your business review request and this letter will
be made
publicly available immediately, and any supporting data
you submitted will be made publicly
available
within 30 days of the date of this letter, unless you request that part of the material be
withheld
in accordance with paragraph 10( c) of the Business Review Procedure.
Sincerely,
Andrew
C. Finch
6