Fed to develop faster payments infrastructure

Lael Brainard
Federal Reserve Board Governor Lael Brainard gives a speech at the “Renewing the Promise of the Middle Class” 2019 Federal Reserve System Community Development Research Conference.

Ending years of will-they-or-won’t-they speculation, particularly from smaller banks, the Federal Reserve announced on Monday, Aug. 5, that it will begin developing a faster payments system. Dubbed FedNow, the project is expected to be completed in 2023 or 2024. 

Calling the payment system, “a vital part of America’s infrastructure that touches everyone,” Fed Governor Lael Brainard explained that the Fed received 350 comments on its proposal to offer a faster payments system, representing nearly 800 organizations. “Fully 90 percent of those comments called for the Federal Reserve to operate a real-time service for faster payments,” she told the crowd assembled at the Kansas City Federal Reserve Bank, where the announcement was made. 

Brainard went on to explain that its nationwide reach and 12 regional Reserve banks will allow the Fed to “offer nationwide access to a new payment and settlement service or faster payments that now will allow faster payments to reach bank of all sizes and customers across the country, which is especially important for rural communities that often struggle with access to financial services.”

The Fed believes that a single, private sector faster payments provider may not make nationwide inclusion a goal, leaving many smaller, community banks without access to such a service. Brainard also noted that safety is a concern. “Stakeholders have noted the importance of having access to more than one real-time payments service for backup purposes in order to provide resiliency through redundancy,” she said. “In fact, many banks already take advantage of having connections to multiple operators today in check, ACH and wire.”  

As to why it will take another four to five years for this payments infrastructure to become available, Brainard said, “For us, nationwide reach is really the concept that is in line with our public mission. And the question of how long will it take … is a quite different question.”

She acknowledged that the Fed is aware that it plays an integral part in the customer service relationships and connections of the 10,000+ depositories around the country that rely on the central bank, in particular rural institutions, and while timeliness will be a consideration the ultimate goal is the nationwide reach she cited earlier. 

Industry groups responded to the announcement as well. Not surprisingly, the Independent Community Bankers of America, which has long lobbied the Fed to develop an RTGS service, applauded the move. “As we have said all along, the Fed is uniquely positioned to provide equitable access to real-time payments,” said ICBA President and CEO Rebeca Romero Rainey. “[The] decision by the Fed will benefit consumers nationwide and serve as a launchpad to future payments innovations. Now, the hard work begins as the Federal Reserve must move quickly to establish the service.” 

While also supportive of the idea, the American Bankers Association took a more patient approach. “The reality is that any Fed-built system will take some time to build, so in the meantime, ABA will continue to encourage all banks to embrace the future and consider whether to connect to the existing real-time payments network offered by The Clearing House,” ABA President and CEO Rob Nichols wrote in a statement. Nichols and ABA believe that any system must be fully interoperable with TCH’s RTP network, remain accessible only to financial institutions and be available through all core processing companies. 

“We also urge the Fed, in its role as market regulator, to ensure that the major core processing companies work quickly with all providers of real-time payments solutions,” Nichols said. “The cores must ensure that their bank customers, regardless of size or choice of provider, are not left behind as customers demand access to real-time payments solutions.”

Moreover, ABA is asking the Fed to also develop a liquidity management tool it proposed in November 2018, which it posits would help financial institutions manage fund balances used to settle faster payment transactions regardless of whether they travel on existing faster payment rails or on any new solutions. 

The Clearing House was less enthusiastic. First, they reminded the industry that it had already developed such a network “nearly two years ago …Today, the RTP network reaches over 51 percent of the demand deposit accounts in the country and is demonstrating steadily-growing transaction volume,” it said in a statement.

The firm touted the many benefits of its existing RTGS system including equitable transaction terms regardless of size, immediate functionality, and message capabilities to support innovation and digital commerce. The statement also included a line reminding banks that “increasingly, consumers and commercial customers are demanding real-time payment capabilities now, and depository institutions on the RTP network are already offering these innovative capabilities to their clients.” 

TCH stated, “While we will stay abreast of the Fed’s efforts to develop its own real-time payments system, which may become available in 2023 or 2024, our focus will remain on ensuring that the RTP network has reach to all depository institutions.”