The Federal Reserve has announced details of a real-time payment and settlement service called FedNow, designed to support faster payments in the US.
Details of the plan – which would see the FedNow service launch in 2023 or 2024 – were unveiled by Fed governor Lael Brainard on 5 August.
The US market for faster payments is still in relatively early stages of development, and the Fed acknowledges that central banks in other countries have moved more quickly in support of faster payments. For example, the Reserve Bank of Australia and Banco de México have put their weight behind services that enable payment-by-payment, real-time settlement of retail payments at any time.
Delivering an address entitled ‘Delivering Fast Payments for All’ at the Federal Reserve Bank of Kansas City Town Hall in the Mid-West state of Missouri, Brainard – who is in charge of payments at the central bank – said: “Everyone deserves the same ability to make and receive payments immediately and securely, and every bank deserves the same opportunity to offer that service to its community. FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers.”
By popular demand
The move follows a public consultation last year on how the Fed could support faster payments. Of the more than 350 comments that took a position on whether the Fed should develop a new service for faster payments, more than 90% supported the operation of a round-the-clock, real-time payment and settlement service alongside services provided by the private sector.
The current Fed system is only available on weekdays, with transactions potentially taking several business days to be finalised – but market experts believe that quicker payments are important in improving individuals’ and businesses’ cash-flow management, supporting efficiency, and enabling people to avoid high-cost borrowing and penalties. Community groups and smaller banks have been arguing for the Fed to limit the delay, and to create a real-time payments channel run by the public sector.
Take your time: but too much time?
However, questions have been asked as to why the Fed expects to take four or five years to roll out its FedNow service, given how long a period this is in the quick-moving world of payments technology.
Also, as Politico has reported, the plans would put the Fed in competition with a private-sector real-time payments system developed by The Clearing House: a consortium owned by 24 major banks including Citibank, JP Morgan Chase and Wells Fargo.
Although the Fed’s board has approved the decision to develop FedNow, its vice-chairman for supervision, Randal Quarles, was in opposition.
Quarles said the government should only step in to provide payments solutions “when the evidence of market failure is clear and alternative means to achieve public goals are not feasible.”
He said in a statement: “In this case, I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available.”
But the launch of FedNow has been thoroughly scouted. In 2013, the Fed launched its Strategies for Improving the US Payment System (SIPS) initiative. As part of this, it convened a Faster Payments Task Force (FPTF), which published its recommendations two years ago.
‘Critical juncture’ for US payment system
The Fed is now seeking feedback on how the new service might be designed to “most effectively support the full set of payment system stakeholders and the functioning of the broader US payment system”.
In its request for comment, the Fed says that the US payment system “faces a critical juncture in its evolution”.
It says: “Advances in technology have created an opportunity for significant improvements to the way individuals and businesses make payments in today’s economy. Smartphones, high-speed computing and cloud capabilities, extensive communication networks, and other innovations allow individuals and businesses to send and receive messages, post and consume content online, search for and obtain information, and conduct myriad other activities almost immediately and at any time.
“Similarly, today’s technology presents a pivotal opportunity for the Federal Reserve and the payment industry to modernise the nation’s payment system to establish a safe and efficient foundation for the future.”