How the government’s new real-time payments system could transform commerce
On Thursday, the Federal Reserve unveiled new details about FedNow Service—a new real-time payments platform that would enable financial institutions in the U.S. to clear and settle transactions in virtually instantaneous fashion.
The Fed announced its plans for FedNowService almost one year ago to the day, and has since been receiving public comments on the platform, what it should look like, and how it should operate. The goal is to develop a widely accessible, “24x7x365” instant payments infrastructure that would “modernize the U.S. payment system and bring the benefits of instant payments broadly to communities across the country,” according to the Fed.
While the Fed has provided payment and settlement services to the financial system since its founding more than a century ago, FedNow Service would represent an expansive, tech-enabled leap forward—one allowing individuals and businesses to transfer funds in a matter of seconds at any time, on any day (including weekends and holidays).
The U.S. lags behind much of the world in this regard; dozens of developed and developing nations around the world—including the likes of the U.K., India, Poland, Mexico, and Nigeria—already operate their own real-time payments infrastructures. Though The Clearing House—a collective comprising most of America’s largest banks and financial institutions—did launch its own real-time payments platform, known as RTP, in 2017, that system remains far from universally adopted.
The Fed has relationships with more than 10,000 different financial institutions across the country, giving it the ability to develop a real-time payments system that virtually all American banks can access to facilitate the near-instant flow of funds. Individuals and businesses would be able to send up to $25,000 through the FedNow Service, though the Fed said Thursday that it would reevaluate that figure after numerous commenters suggested a larger transaction limit.
The benefits of a state-of-the-art, real-time payment infrastructure would appear to be wide-ranging. In addition to allowing businesses of all types to access funds and manage their cash flow in a more flexible manner, it would also allow individuals to send and receive money more quickly, potentially helping those facing financial constraints to avoid penalties like overdraft and late fees.
While many banks and non-bank payment services (like PayPal and Square) already offer instant payments and transfers through The Clearing House’s RTP network, such services often come with additional fees. By creating a wider-reaching platform, the Fed believes FedNow Service would stimulate “healthy competition” in the real-time payments space, and result in “efficiencies related to pricing, service quality, and innovation.”
As Federal Reserve governor Lael Brainard noted Thursday, the need for a ubiquitous real-time payments system has become increasingly apparent at a time when the U.S. government has had to transfer billions of dollars in stimulus funds to Americans in need of financial assistance during the coronavirus pandemic.
“The rapid expenditure of COVID emergency relief payments highlighted the critical importance of having a resilient instant payments infrastructure with nationwide reach, especially for households and small businesses with cashflow constraints,” Brainard said.
Not all observers agree with the Fed’s approach. The central bank noted Thursday that it received more than 2,200 letters from commenters arguing that it “should not operate in competition with the private sector,” and that FedNow Service would represent “an inappropriate expansion of the Federal Reserve’s role.”
But Fed itself counters by noting that it would be playing the same “operational role” within the national payment system that it always has—one working in conjunction with the private sector, rather than competing against it. It notes that no other “traditional” payment system in the U.S. has only one private-sector provider like The Clearing House’s RTP, and that such a dynamic would “create significant risks to the safety and efficiency of the nation’s payment system”—including “creat[ing] a single point of failure in the nation’s instant payments infrastructure.”
The central bank said its targeted launch date for FedNow Service remains “2023 or 2024,” with a more specific time frame to come. The Fed will take a “phased approach” to rolling out the platform; an initial launch will offer “baseline functionality” with the goal of “help[ing] banks manage the transition to a 24x7x365 service,” and that will be followed by additional features and enhancements to be “introduced over time.”