The Fed Inches Toward Real Time

In August last year, when the Federal Reserve announced it would jump into the real-time payments arena, proponents of the idea were elated. A public sector competitor would be needed, they argued, to offset the rapidly advancing network at The Clearing House Payments Co. LLC, an entity owned by 25 major banks. And this doesn’t even take account of other private-sector initiatives, including Early Warning Services LLC’s Zelle network and the major card networks’ push-payment services.

But what many may not have counted on is that the Fed would take its time. It no sooner announced its entry in the real-time arena than it said its FedNow service wouldn’t go live nationally until 2023, or 2024 at the latest. In the world of digital payments flows, that’s an eternity.

Not only that, the Fed’s competitors are already up and running. TCH announced in September its Real Time Payments service is already able to connect, directly or through core processors, to 56% of U.S. deposit accounts, and has the potential to link to 70%.

So proponents of the Fed initiative were already disappointed when officials of the central bank said this summer they were sticking to the timetable. And last month they reiterated that point. They did announce they were seeking “expressions of interest” from financial institutions, processors, and other parties to participate in an upcoming pilot. But, 14 months after the Fed publicly announced the FedNow project, those officials were silent about the pilot’s details.

Experts are split on the question whether the Fed’s deliberate approach will allow competing private-sector services to lock up volume (see our lead story in Trends & Tactics, this issue). “Financial institutions are moving forward with other real-time payment plans due to the extended timeline of FedNow,” Erika Baumann, an analyst at Aite Group, told us last month. In a survey Aite conducted with more than 100 financial institutions, just 10% said they’d wait for FedNow, even though they had originally intended to move ahead with another service.

But the Fed can’t be underestimated. It is the nation’s central bank, and as such wields immense power. Eric Grover argues in our Endpoint column that, while TCH itself may not want to interoperate with FedNow (“why would it help a competitor become viable?” he asks), its owner banks “will have to bend the knee for the Fed” and pressure TCH to play ball.

We’ll see how that plays out. Our own take hasn’t changed since the Fed’s announcement that it was jumping into real-time payments: It would have been better served to leave this business to the fast-moving private sector.

—John Stewart, Editor, john@digitaltransactions.net