By Donielle Tigay Stutland, J.D.
Amongst praise from lawmakers and industry groups, the Federal Reserve announces plans to develop a real time payment system by 2023 or 2024.
On Aug. 5, 2019, the Federal Reserve Board announced plans to develop a real-time payment system for banks. The Fed anticipates this service, called FedNow, to be available in 2023 or 2024, and to support transfers of $25,000. The goal of the FedNow Service would be to process and settle individual payments within seconds, 24 hours a day, 7 days a week, 365 days a year. The Fed noted that the FedNow Service would be like other payment and settlement services offered by the Federal Reserve, in that it would settle obligations between banks through adjustments to balances in banks' master accounts at the Reserve Banks; these funds will be eligible to earn interest and count toward banks' reserve requirements. Use of the FedNow Service will require participating banks to make the funds associated with individual payments available to their end-user customers immediately after receiving notification of settlement from the service. This announcement comes as U.S. lawmakers have been calling on the Fed to implement such a service to ensure that small banks, as well as consumers who are more impacted by fees associated with delays in funds, are on the same playing field as others.
"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," said Fed Governor Lael Brainard. "FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers."
The Fed is seeking comments on how FedNow can most effectively support potential users and stakeholders. Comments about FedNow will be accepted for 90 days after the proposal is published in the Federal Register.
Background. This measure comes just a couple of weeks after a group of Democratic legislators, including Sens. Chris Van Hollen (D-Md) and Elizabeth Warren (D-Mass) and Representatives Ayanna Pressley (D-Mass) and Jesus Garcia (D-Ill), introduced the Payments Modernization Act of 2019. That bill would amend the Expedited Funds Availability Act to require that funds deposited be available for withdrawal in real-time. The bill was proposed in an effort to force the Fed to build and implement a real-time payment system and clarifies that the Fed already has the authority to build one (see Banking and Finance Law Daily, July 25, 2019).
Previously, the Fed launched its Faster Payments Task Force in 2015, with the goal of developing a plan to bring faster payments to the U.S. by 2020. In 2018, the Fed requested comments on potential services to be developed to support faster services (see Banking and Finance Law Daily, Oct. 4, 2018). The Fed noted that over 90 percent of commenters support the Fed operating a round-the-clock real time payment and settlement service.
Response. While Democratic legislators, community groups and advocates for small banks have all been pushing for a move like this from the Fed for some time, the FedNow Service will not come without critique from large banks and others within the banking industry.
The initiative has received support from Congress, including the Democratic leaders who have been vocal in asking the Fed to take action recently. The House Committee on Financial Services has been focusing on this issue and Chairwoman Maxine Waters (D-Calif) issued a press release to applaud the action of the Fed. The committee had been vocal in its criticism of the Fed for what it views as its failure to take action since 2015 when the Fed first began looking at the issue.
Garcia noted that the Payment Modernization Act would allow the Fed "to modernize their payments systems to help working families access their money on time" and is "pleased to see that the Fed is taking action and will initiate a real-time payments system for the millions of Americans living paycheck to paycheck. Competition between a real-time payments system run by big banks and the system announced today by our central bank will ensure that the greatest possible number of small businesses and consumers benefit from a fast, efficient system."
The American Bankers Association also expressed its support for the proposal. Rob Nichols, ABA President and CEO, stated that "ABA has been a strong advocate for real-time payments in the U.S., and we believe every bank in the country and their customers will benefit from a seamless and ubiquitous system. We hope today's decision by the Federal Reserve to create its own real-time payments network will speed that transition." Independent Community Bankers of America and Consumer Reports echoed the ABA’s support.
However, the initiative is not without some dissent. The Competitive Enterprise Institute (CEI), a libertarian think tank, issued a press release strongly against a public sector system, noting that there is no shortage of private sector interest in creating systems for faster payments. Calling the FedNow system a violation of U.S. law, CEI senior fellow John Berlau noted that it is the CEI’s belief that if the Fed becomes a payment processor it is in clear violation if the Monetary Control Act of 1980, which it described as barring the Fed from entering into payment processing unless the service is "one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity."
The Clearing House (TCH), the payments company that has been operating a real-time payment (RTP) system since 2017, also offered comments on the announcement of FedNow. While TCH is owned by 24 of the largest banks in the U.S., many smaller banks and credit unions have not signed up for its RTP system. In a press release dated Aug. 5, 2019, the organization noted that its real-time payment systems have been designed for and is available to, "every U.S. depository institution, regardless of size, on equitable terms (no discounts for volume or minimum volume requirements). "TCH indicated that its RTP network reaches over 51 percent of the demand deposit accounts in the U.S. and continues to grow in transaction volume. The statement by TCH continued, "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."
Companies: American Bankers Association; Competitive Enterprise Institute; Consumer Reports; Independent Community Bankers of America; The Clearing House
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