Fed to Build New U.S. Realtime Payments Rail

U.S. financial institutions are getting closer to payments speeds on par with what for much of the world is commonplace, as the U.S. Federal Reserve announced plans August 4 to launch its own realtime payments system. Dubbed FedNow, the service is expected to be available in 2023 or 2024, “eventually,” as The Economist put it.

The push for faster payments has intensified in the United States in recent years. Coverage in the past month has more sharply drawn the historic lines of contention between big banks and small banks and, in a larger sense, over local control.

The Fed stepped in to ensure that realtime payments are available to and priced for all financial institutions. The demand for such systems is real, as are the potential benefits – 24/7, year-round payment processing offers more convenience for consumers, as well as financial professionals looking for more flexibility in shifting capital.

“We only get to make this kind of decision once every 30 or 40 years,” said Fed Board Governor Lael Brainard at a Kansas City conference. “At the end of the day, we really had to look into the future and the most decisive question was: Ten years from now, 20 years from now if we decide not to invest in realtime payment infrastructure will we have carried out our responsibilities to the U.S. financial system and the U.S. economy?”

The plan, now formally adopted, has been making strides to accelerate payment speeds for years now, centered on a proposal for a Real-Time Gross Settlement System (RTGS), published in the Federal Register in October 2018. In essence, the proposal calls for banks to make funds available to consumers immediately and settle with their Fed accounts continuously, 24 hours a day, 7 days a week, 365 days a year.

The nationwide interbank settlement system will promote broad access and resilience and ensure that banks of all sized have access to real-time payments over the long term. Initial Fed study of the development of faster payments in the United States shows gaps that pose challenges in safety and accessibility. Such nationally-organized real-time payments are not unheard of to central banks on the world stage, nor are they new to consumers internationally. However, the IT development, system processing, and accounting demands of real-time processing are high and will take time to develop for the Fed and financial institutions – which is why the planned rollout remains several years away.

That international gap pushes some urgency for the process – the U.S. lagged for more than a decade behind the United Kingdom in developing systems like RTP, and a truly ubiquitous service still does not exist. However, the challenges to implementation are higher in the U.S., with more than 100,000 financial institutions entities dotting the landscape as points that will need to be integrated.

Despite the difficulties, there are proven advantages for companies to participate in the process; trends in countries that have adopted faster-payment schemes show generally consumer increasing uptake, and there is no reason to think that U.S. consumers would react any differently.

Plans have been developing since 2012, but while progress has taken quite a bit of time, its road to this recent announcement accelerated over the past year with the foundation of the U.S. Faster Payments Council, structured to reflect the perspectives of the 27-member Governance Framework Formation team, who also developed the framework for the Fundamental Payroll Certification.

The Fed is uniquely positioned in a way that private alternatives – like the Clearing House’s RTP system – have not been to drive a change in the standard. Its ACH system has moved trillions of dollars since its inception in the 70s, and as planned, this new shift to RTGS is a basic technology upgrade that should be able to make use of existing infrastructure to push adoption at a reasonable cost.

That’s good news for smaller banks, along with technology companies such as Google, who previously stood to find themselves at the mercy of big banks like Citigroup and J.P. Morgan, who have more than $1 billion in their own instant-payments systems.

Those large banks do have concerns with the Fed’s entry into the field, however; the digital drive is going to continue to spur the need for investments in security. The biggest concern, though, is centered on that 2023-2024 planned launch. “We have a real-time payments network. It’s operating,” said Steve Ledford, senior vice president for product and strategy at The Clearing House, in an interview with Pymnts. “If the Federal Reserve decides to launch its own network, it’s just delaying the access to faster payments to everybody.”

However long it takes, the drive to real-time payments is a shift that is ultimately inevitable and necessary for all organizations. If seized upon now, tomorrow’s consumer expectation can be today’s business innovation.