Ending months of speculation, the Federal Reserve confirmed Monday it will launch a real-time payments service by 2023 or 2024. The banking regulator, which also published Monday a notice in the Federal Register outlining its plan and requesting comment, will thus take what it says is its biggest move in payments since setting up 40 years ago as an operator in automated clearing house transactions.
The new service, dubbed FedNow, will reach “every bank in every community in the country,” said economist and Fed governor Lael Brainard in making the announcement in an afternoon presentation at the Federal Reserve Bank of Kansas City. Besides ubiquity, Brainard cited four other considerations favoring the service: equitable access for users, payments safety, increased competition for private-sector players, and a neutral platform for innovation.
The arrival of the Fed in real-time payments comes as a ubiquitous service has already been established, in some cases for years, in a number of other countries. It also comes as private-sector players, most notably The Clearing House Payments Co., have already launched services in the United States. Owned by 25 big banks, New York City-based TCH introduced its Real Time Payments service in 2017 and has made efforts to recruit small and mid-size institutions. It has 16 institutions live so far on RTP, and says the network reaches 51% of the country’s demand-deposit accounts.
Steve Ledford, senior vice president for product and strategy at TCH, argues RTP is already filling gaps the Fed says it sees in the market. “We don’t think there’s a need for a public-sector option,” he says. “I’m not sure the Fed necessarily has an advantage. This is not ACH. This is not wire transfer. This is a different animal.”
The work so far on RTP, Ledford notes, has required an investment of more than $1 billion. “There’s been a substantial investment, probably an unprecedented investment,” he says. But at the same time, he adds, TCH is committed to pricing on a cost-recovery basis. The concern some critics have alleged that TCH will ultimately seek profits for its owners with onerous pricing, he says, “is not well-founded.” Ledford says the FedNow announcement didn’t surprise him. “I’m rarely surprised by anything,” he says. “You move on.”
In a comment it released on FedNow, the American Bankers Association noted the time it will take for the service to begin operating and encouraged banks in the meantime to consider connecting to TCH’s system. The association also encouraged the Fed to create a liquidity tool the regulator has contemplated that would help banks manage funds availability for real-time settlements.
Despite the availability of TCH’s platform, however, merchants and smaller institutions have been seen as largely favorable to a public-sector offering. Some players argue the public option will provide enough competition to keep pricing low and service quality high. The Fed’s entry “was a certainty,” says Bob Steen, chairman and chief executive of Bridge Community Bank, Mechanicsville, Iowa. “We just didn’t know how long it would take.”
Brainard, too, stressed the Fed’s historic advantage in linking to virtually every financial institution through its ACH connections. “No private-sector provider has ever achieved 100% reach,” she said. “The Fed already has invested in connections with nearly every bank across the country. We’re uniquely positioned.”
Brainard further cautioned against reliance on a dominant player for real-time payments service. “If the Fed doesn’t stand up a service, there will be a single provider, and there’s a safety issue in a single point of failure,” she noted, without mentioning TCH by name.
Citing a need for a public-sector alternative, merchant groups and independent community bank organizations hailed the Fed’s decision. Some payments experts, too, argued it was time for the Fed to get more deeply involved.
“The winners from the FedNow decision are the users of the payments system–consumers, merchants/corporates, and financial institutions of all sizes,” says Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consultancy. “The Fed has more than proved its mettle in payments—ACH, wires, checks—so it makes perfect sense to do digital payments as well.”
The announcement of FedNow follows months of suspense since officials said in October the Fed would take comments on whether it should become a real-time payments operator. Some 90% of the 350 comments received favored the Fed taking that role, officials said.
But Monday’s decision to get involved as an operator also represents a dramatic departure from years in which the Fed has acted more as an umpire, encouraging private companies to develop faster-payment systems. In 2015, it created and convened task forces on faster payments and security, both populated by executives from private payments companies.
Now that the Fed will itself compete for real-time payments, even champions of its deeper involvement say the road ahead will be tough. While he sees the 2023 or 2024 target as achievable, Steen adds that a lot of work remains to be done to bring FedNow to market. “We just have to keep our eye on the ball,” he says. “I know this is well-intentioned, but it’s going to be hard.”