Real-time payments: A new era begins
FedNow will provide a ‘round-the-clock, real-time payment and settlement service.’
Monday’s announcement that the Federal Reserve plans to enter the real-time payments business created as much controversy as the wonky world of back-office processing can muster.
FedNow, a “round-the-clock, real-time payment and settlement service,” will offer U.S. financial institutions an alternative to the RTP rails launched late last year by The Clearing House—once it eventually goes live in 2023 or 2024.
The Fed’s decision—the source of internal and external debate for months—saw proponents and detractors clustering in unusual coalitions.
According to the Fed, more than 90% of responses to its request for comment supported its participation in the real-time arena.
CUNA is a longtime supporter of the Fed developing a real-time payments network. It submitted a comment letter endorsing the Fed’s entry, as did the Independent Community Bankers of America, the Merchant Advisory Group, Consumer Reports, and an alliance of leading technology firms including Apple, Amazon, and Google.
In its statement, the Fed touted the promise of “economic benefits for individuals and businesses by providing them with more flexibility to manage their money and make time-sensitive payments” through faster access to funds.
The Fed is likely to echo The Clearing House’s (TCH) philosophy that the role of designing products delivering value to their customers via these new capabilities resides with credit unions and banks, with network operators providing the enabling technology in the background.
TCH is jointly owned by 25 of the nation’s largest banks. It has repeatedly emphasized the goal of ubiquity for its RTP network, actively courting nonmember credit unions and banks, and committing to a pricing structure without volume discounts likely to advantage the largest financial institutions.
Nonetheless, many smaller institutions express discomfort with relying on an entity owned by its competitors for a critical component of payments infrastructure.
Reaction to the Fed’s announcement has been largely positive. One notable exception is The Wall Street Journal, which in a pair of editorials harshly criticized the decision as “political” and needlessly competitive with private banks.
However, the contemplated future state mirrors the one in place for decades in support of the ACH network, where the Fed and TCH operate parallel sets of payment rails.
The most frequently cited concern regarding the Fed’s entry involves a potential slowing of market adoption of real-time payments, an area in which the U.S. already badly lags most developed economies.
The Fed expects to launch its FedNow service in 2023 or 2024. The prospect of thousands of banks waiting four to five years before selecting a real-time provider is problematic, particularly given that a network’s power is dependent on its ability to reach all endpoints.
TCH’s owner banks account for roughly half of U.S. accounts, although RTP volumes to date have been concentrated in corporate transactions.
The American Bankers Association (ABA), which earlier took no explicit stand on Fed entry, issued a statement following the announcement reiterating the need for interoperability between networks.
CUNA similarly advocated for interoperability in its comment letter. It will engage with an upcoming House Financial Services Committee Task Force in Financial Technology hearing titled, “The Future of Real-Time Payments,” scheduled for Sept. 26.
ABA also called for FedNow to “remain accessible only to chartered financial institutions,” a likely reference to announcements involving Facebook’s Libra and Walmart’s cryptocurrency initiatives.
CUNA’s 2019-20 Environmental Scan Report addresses credit unions’ need to gauge the member need and potential value-add for real-time capabilities, reflecting in their strategic plans the impact of introduction by competing outlets.
The Fed’s announcement adds a new dimension to this analysis, while raising both the stakes and visibility.