By Mike Faden
The Fed says it is developing this public-sector real-time payments system because it offers the best opportunity for making real-time payments available to all users of the nation’s roughly 10,000 banks. Additionally, it believes real-time payments can potentially yield economic benefits for businesses and individuals by providing them with more flexibility to manage their money and make time-sensitive payments.2
"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," Federal Reserve Board Governor Lael Brainard said in a speech. "FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers."3
But the Fed’s development plan has been opposed by some large banks, which have reportedly spent roughly $1 billion to develop RTP, a competing private-sector real-time payment system that is already operating.4
The U.S. has lagged other countries in establishing a national real-time payments infrastructure. According to FIS’ 2018 Flavors of Fast report, at least 40 faster payment systems are operating worldwide, and some have been in use for more than a decade. The systems generally deliver payments within seconds, 24 hours a day, at low cost to businesses and consumers.5
But in the U.S., experts say that the primary existing system for real-time B2B payments is RTP, which was launched in late 2017 by The Clearing House (TCH), a payments provider owned by roughly two dozen large banks. According to The Washington Post, RTP is currently used by just 16 large U.S. banks and other financial institutions—which, according to TCH, makes RTP available to more than 51 percent of U.S. bank account holders.6,7
The Fed has been researching real-time payments for several years, as part of its role in promoting an accessible, safe, and efficient U.S. payment system. Until recently, the central bank focused on supporting private-sector initiatives rather than building its own infrastructure. But that changed in October 2018, when the central bank proposed two possible new developments, soliciting public comment on each: a public-sector real-time gross settlement system (RTGS) that would deliver real-time payments, and a liquidity tool that would facilitate 24/7 operation of real-time payment systems operated either by the Fed or by the private sector.
The Fed said that among the roughly 350 commenters that took a position on the RTGS proposal, more than 90 percent—including many small banks—were in favor of the Fed developing the system. Many of those commenters said they believed the Fed would provide equitable access to banks of all sizes and facilitate nationwide reach for faster payments. Some also cited potential advantages, such as reduced risk in the event of a financial crisis, greater efficiency, increased competition, lower costs, and greater innovation. About 30 commenters—mostly large banks and private-sector operators, including those involved in RTP—were against the proposal, arguing that a Fed-operated system was unnecessary and could actually slow adoption of real-time payments since some banks might wait until it becomes available.8
The Fed said that its decision to move ahead with developing FedNow was based on this analysis and comments. It noted that it already has long-standing relationships with more than 10,000 U.S. banks through operating the older ACH and wire-transfer payment systems. That provides a channel to reach thousands of smaller institutions in the United States that might otherwise not have access to an RTGS infrastructure for faster payments, according to the Fed. In contrast, “a single private-sector provider of such services is unlikely to connect to the thousands of small and midsize banks necessary to yield nationwide reach, even in the long term. No traditional payment system … has ever achieved nationwide reach through a single private-sector provider,” according to the Fed.9
The implementation of the FedNow service will create a situation analogous to that which exists with other electronic payment systems, such as ACH and wire transfers, where both public-sector (the Fed) and private-sector (TCH) operators are involved. In a statement, TCH said it remains focused on operating the RTP network, which is experiencing growing transaction volume and extending its reach to all banks.10
Next, the Fed plans to engage with industry to gather feedback on the key features and functionality of the real-time payment service. The Fed said it would explore interoperability between FedNow and private-sector real-time payment systems, although the ability to directly exchange payments between services might not be supported in the initial implementation. The Fed said it is committed to launching the service as soon as possible—2023 or 2024—although it will take longer for the system to become widely used.11
The Fed also said it would continue to explore a second proposal: The creation of a liquidity tool that could support both private-sector and public-sector real-time payment systems. This proposal received almost universal support from commenters.12
The Federal Reserve plans to introduce a new domestic real-time payment system, called FedNow, within a few years, enabling businesses and consumers to make near-instantaneous payments of up to $25,000, 24 hours a day, every day of the year. By introducing the service, the Fed aims to help make real-time payments available to users of all the nation’s roughly 10,000 banks.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “FedNow Service Frequently Asked Questions,” U.S. Federal Reserve; https://www.federalreserve.gov/paymentsystems/fednow_faq.htm
2. “Federal Reserve announces plan to develop a new round-the-clock real-time payment and settlement service to support faster payments,” U.S. Federal Reserve; https://www.federalreserve.gov/newsevents/pressreleases/other20190805a.htm
4. “Banks Confront Fed on Faster Financial Payments,” The Wall Street Journal; https://www.wsj.com/articles/banks-confront-fed-on-faster-financial-payments-11564911000?mod=searchresults&page=1&pos=3
5. Flavors of Fast, FIS; https://www.fisglobal.com/flavors-of-fast/introduction
6. “Fed says it will develop faster digital banking system. But Wall Street fears tech incursion,” The Washington Post; https://www.washingtonpost.com/business/2019/08/05/fed-says-it-will-develop-faster-digital-banking-system-wall-street-fears-tech-incursion/
7. “The Clearing House Remains Focused on Operating and Growing the RTP® Network,” The Clearing House; https://www.theclearinghouse.org/payment-systems/articles/2019/08/tch_remains_focused_operating_growing_rtp_network_08-05-19
8. Federal Reserve Actions to Support Interbank Settlement of Faster Payments, U.S. Federal Reserve Federal Register Notice; https://www.federalreserve.gov/newsevents/pressreleases/files/other20190805a1.pdf
10. “The Clearing House Remains Focused on Operating and Growing the RTP® Network,” The Clearing House; https://www.theclearinghouse.org/payment-systems/articles/2019/08/tch_remains_focused_operating_growing_rtp_network_08-05-19
11. “FedNow Service Frequently Asked Questions,” U.S. Federal Reserve; https://www.federalreserve.gov/paymentsystems/fednow_faq.htm
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