Removing Barriers Blog

FedNow Ushers In New Era of Real Time Payments
Posted August 06, 2019 by CUNA Advocacy

The Federal Reserve Board ended months of speculation with Monday’s announcement that it plans to develop a “round-the-clock, real-time payment and settlement service.” Branded FedNow, the service will offer US financial institutions an alternative to the RTP rails launched by The Clearing House in late 2018.

According to the Fed, over 90 percent of the responses to its Request for Comment supported its participation in this arena. CUNA had submitted a comment letter endorsing the Fed’s entry, as did the Independent Community Bankers of America and the Merchant Advisory Group.

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. Presumably the Fed will echo The Clearing House’s philosophy that it’s the role of banks and credit unions to design products delivering value to their customers leveraging these new capabilities, with network operators providing the enabling technology in the background.   

The Clearing House (TCH) is jointly owned by 25 of the nation’s largest banks. TCH has repeatedly emphasized the goal of ubiquity for its RTP system, actively courting non-member banks and credit unions and committing to a pricing structure without volume discounts likely to advantage the largest (presumably owner) FIs. Nonetheless, many smaller institutions express discomfort with relying on an entity owned by its competitors for a critical component of payments infrastructure. In a recent interview TCH’s CEO indicated that it may revisit its pricing structure should a competitor enter the market.

Reaction to the Fed’s announcement has been largely positive. One notable exception is the Wall Street Journal, which harshly criticized the decision as “political” in a Tuesday editorial, calling it needlessly competitive with private banks. It should be noted, however, that the contemplated future state mirrors the one in place for decades in support of the ACH network, in which 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 US 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 another 4-5 years before selecting a real-time provider is certainly 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 US accounts, although RTP volumes to date have been concentrated in corporate transactions.

The American Bankers Association (ABA), whose earlier letter took no explicit stand on Fed entry, issued a statement following yesterday’s announcement reiterating its earlier comment regarding the need for interoperability between networks. CUNA similarly advocated for interoperability in its comment letter, and will likely reinforce this position in response to a newly issued request for comment.