The Federal Reserve’s proposed FedNow real-time payments service won’t be live for more than three years, but bankers and other interested parties peppered two Fed officials with plenty of questions about it Monday.
The occasion was a 90-minute webinar in which the officials reviewed the ambitious FedNow plans unveiled last month and took questions. Much of what was discussed wasn’t new, but some new factoids emerged as well as identification of issues that will be getting much more attention as the service develops.
For example, one inquirer asked about FedNow’s cost. The answer is that pricing hasn’t been set. But Kirstin Wells, principal economist in payment studies at the Fed, said a price structure could take its cues from pricing for existing Fed services, such as for automated clearing house transactions, that have participation and transaction fees.
“We are not going to be announcing any kind of fee or fee structure until closer to implementation because we’re going to be looking at what the market conventions are at the time of implementation and try to correspond closely to those,” Wells said. She added that the Fed is obliged under the Monetary Control Act to recover its costs.
Wells also noted that exactly what the Fed will deem a “real-time” payment hasn’t been determined in terms of settlement time. “It would be within seconds, whether it’s one second, five seconds, 15 seconds, I can’t say, we just don’t know that yet,” she said. “But we’re designing it to be as close to real time as possible.”
Also to be determined is what will happen if something goes wrong in a FedNow payment, which is billed as an irrevocable credit transaction. Receiving banks won’t have the option of automatically returning a payment. The emphasis will be on preventing misdirected payments and other errors before hitting the send button.
“What we envision is that there will be a message sent to the receiving bank to verify that the incoming payment is going to a valid account holder at that bank,” said Wells. “So that kind of gives a check that the receiving bank can perform before the payment even comes in, and if they say no, we don’t have this account, then the payment wouldn’t be sent to them.”
In addition, the Fed “is thinking about other message types,” she said. “For example, if a payment did come in that was for some reason misdirected, that the receiving bank would be able to request to send it back to originating bank. We do recognize that this is an important feature.”
One thing FedNow won’t be doing is settling payments in digital currencies, at least at the get-go. “FedNow transitions will settle to Federal Reserve master accounts in U.S. dollars,” said the other speaker, Connie Theien, a senior vice president at the Federal Reserve Bank of Chicago and the Federal Reserve System’s director of payments industry relations. “At this time there isn’t a contemplation of using other types of currencies.”
FedNow has stirred controversy in the banking and payments worlds because the Fed will be a direct operator in competition with a private-sector operator, The Clearing House Payments Co., which went live with its Real Time Payments service in late 2017. The Fed and the bank-owned TCH are no strangers to each other as both operate ACH switches. Theien said the Fed will “work with” TCH, though exactly how wasn’t discussed.
“Our goal, and the desired outcome for faster payments in the U.S., is that we have an efficient, ubiquitous, safe system,” Theien said. “Our goal is that these capabilities reach all financial institutions and end users, and we intend to work with The Clearing House like we have on ACH and other services to talk about how we together can contribute to that goal of ubiquitous reach.” She also noted that TCH is a founding member of the U.S. Faster Payments Council, a Fed-created industry group charged with developing plans for speedier payments. “We intend to leverage that platform as well,” she said.
A TCH executive said at a recent industry conference that the Fed’s decision to become a direct operator “is done” and that TCH would “concern ourselves with that in 2024.”
The Fed has said that FedNow won’t be live until 2023 or 2024. The central bank is taking comments on its proposal through several channels, including formal comments to the Federal Register until Nov. 7.