Disclaimer: This article is not intended as legal or compliance advice, and if legal advice is needed, the opinion of a competent attorney should be sought.
The Federal Reserve Faster Payments Task Force engaged over 200 diverse stakeholders from 2015 to 2017 to identify and assess alternative approaches for implementing safe, ubiquitous, faster payment capabilities in the U.S. This work concluded with the formation of the Faster Payments Council (FPC) in 2018.
On August 5, 2019, the Federal Reserve announced plans to build FedNow and released a Request for Comment. The Federal Reserve received almost 200 responses with the majority in favor of this action. The new service is described as including:
- A new interbank 24x7x365 real-time, gross settlement system (RTGS)
- The enablement of financial institutions (FIs) to deliver end-to-end faster payment services to their customers
- The processing of credit transfers of $25,000 or less in real time (within seconds)
- Provision of liquidity through intraday credit on a 24x7x365 basis under same terms and conditions as current Federal Reserve services
- Adherence to ISO® 20022 standard and provision of access through FedLine® connections
- Allowance of FIs to designate service provider to submit and receive payment instructions on their behalf and settle in accounts of correspondent bank
Federal Reserve implementation of FedNow is forecast for 2023 or 2024 and the Federal Reserve intends to solicit input from stakeholders throughout its process.
On September 25, 2019, the U.S. Senate Committee on Banking, Housing and Urban Affairs conducted hearings on Facilitating Faster Payments in the U.S with the following testimony.
Esther George – President of Federal Reserve Bank of Kansas City on behalf of Federal Reserve System
“The Federal Reserve has provided payment and settlement services promoting an accessible, safe and efficient payment system” over its 100-year history. “…the Federal Reserve is continuing this operational role and preparing to support modernization of our nation’s payment system…” that will 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 established criteria were met.”
- “It is a service other providers alone cannot be expected to provide with reasonable effectiveness, scope and equity…”
- “There will be a clear public benefit, including promoting the integrity of the payments system and reducing payments system risk…”
- “The Federal Reserve will be able to fully recover its cost over the long run…”
Robert Hunter - Executive Managing Director and Deputy General Counsel for The Clearing House Payments Company
“RTP network is a new and exciting part of the national payment infrastructure…” that was “…launched in 2017 by The Clearing House and is fully operational.” “…When the Federal Reserve competes with the private sector, the Federal Reserve must do so in a manner that minimizes the competitive advantages that a government system has, both inherently and as a direct by-product of the Federal Reserve’s role as a supervisor, the supplier of liquidity to the financial system and the central bank.” The Committee asked for testimony on these issues:
- “Current state and evolution of U.S. payment system…”
- “Federal Reserve Faster Payments Task Force’s process, conclusions and recommendations…”
- RTP Network
- “Federal Reserve notice and request for comment on its Actions to Support Interbank Settlement…”
- Comparison of RTP Network to FedNow
Robert A. Steen - Chairman and Chief Executive Officer of Bridge Community Bank, Mount Vernon, Iowa on behalf of the Independent Community Bankers of America (ICBA)
“…it is imperative the U.S. develop a robust real-time payment system to meet consumer demand and stay competitive with the rest of the world. This system must create access for all institutions, regardless of size or charter type, and must be situated in a competitive environment with end user choice. How this goal is achieved is critical. A real-time payments system is too important to be entrusted to a private monopoly. The two dozen largest banks simply cannot own and operate the US payments system. ICBA strongly supports the Federal Reserve’s decision to build FedNow, a real-time payments system that will give direct access to all financial institutions and their customers….”
George Selgin - Director, Center for Monetary and Financial Alternatives, Cato Institute
“…I wish to draw your Committee’s attention to some dangers posed by the Federal Reserve decision to proceed with FedNow—a real-time, retail payments service that will compete directly with private-sector retail payments services….” Mr. Selgin discussed “…ways in which the Fed’s plan might hinder rather than facilitate the achievement of an equitable, efficient, and safe U.S. fast payments system…”, including:
- “Federal Reserve as Payment System Competitor…” – Requires “…a level playing field…”
- “Postponed Fed Settlement System Reform…” – “…availability of 24x7x365 Fed settlements is essential to achieving faster payments on other payment services. But instead of hastening to offer that service, the Fed may delay doing so to limit private payment services’ ability to compete with it…”
- “Volume-Based Pricing Favors Large Banks…”
- “Prejudicial Treatment of Balances in Jointly Held Accounts…” – “…Fed’s ability to refuse to classify balances…as reserves…”
- “Abuse of Monetary Control Act Loopholes…” – “…Fed will take advantage of loopholes in the 1980 Monetary Control Act (MCA) to charge prices for its FedNow services that fail to cover their full costs, as that act requires…”
Sheila C. Bair - Former Chair of Federal Deposit Insurance Corporation – Applaud the Fed’s plans to build “FedNow”.
“…This initiative…will provide the foundation to build the next generation of instantaneous payment services, in partnership with the private sector.” “…the Fed’s operational involvement will ensure the payments system of the future is resilient, safe, and broadly accessible on fair and equitable terms. Payments are the lifeblood of an economy…as such, the payments system is an essential public utility…[and]…cannot be left solely in the hands of private enterprise.” Therefore, “…the Federal Reserve has long played a core role in payment services, typically operating alongside and in support of private sector systems.”
Federal Reserve announces plan to develop a new round-the-clock real-time payment and settlement service to support faster payments
Full Committee Hearing - Facilitating Faster Payments in the U.S.