The Federal Reserve announced on Monday that it is working on a real-time payments system. At a speech in Kansas City, Mo., Fed Governor Lael Brainard delivered the announcement that many in the payments industry have long awaited, revealing that the real-time payments system would be called FedNow.
“FedNow will permit banks of every size in every community across the country to provide real-time payments,” said Brainard. She did not give a specific date on when FedNow will be operational, but said it is expected to become available in 2023 or 2024.
During her speech, Brainard explained how the decision required a lot of thought and dialogue with all the relevant stakeholders, dating back to 2015. After much consideration, the Fed determined that FedNow would provide much needed competition in the real-time payments space.
Brainard reasoned that the private sector acting alone faced too many challenges in creating a nationwide real-time payments network accessible to banks of all sizes. Thus the Fed felt the need to provide an alternative, building on the Fed’s historical role of overseeing payment networks connecting banks across the country.
“The U.S. real-time retail payment infrastructure stands to gain from competition, including through higher service quality and lower prices over the long run,” said Brainard.
Safety was another reason the Fed cited for its FedNow service. “We are mindful of the serious safety issues associated with a single point of failure, a risk that will rise as faster payments grow,” she said.
According to Brainard, many in the industry had called on the Fed to create this service. She said that in response to a request for comments last fall, 90% of the comments called for the Fed to create a real-time payments service.
During her speech, Brainard highlighted how a real-time payments system could benefit the public. For those who live paycheck to paycheck, she argued, real-time payments would provide crucial, immediate access to funds. She also said that small businesses would benefit because they could receive funds instantly, negating the need for costly short-term financing.
Experts in the payments industry expressed how important this announcement was.
“As Esther George [president and chief executive of the Federal Reserve Bank of Kansas City] commented in today’s announcement call, this is as big as the introduction of Automated Clearinghouse (ACH) payments 40 years ago,” said Sarah Grotta, director of Debit and Alternative Products Advisory Service at Mercator Advisory Group.
“The payments industry has been waiting for months, possibly even years to hear if the Federal Reserve would play a direct role as an operator of a faster payments operator, similar to the role they play for ACH and wires,” said Grotta.
With its announcement, the Fed has ended the wait, but many questions remain.
It is not clear if the Fed’s real-time payments network will be interoperable with The Clearing House’s currently existing real-time payments (RTP) network. The Fed indicated that interoperability is a goal, but not necessarily an initial feature of FedNow.
“How will ubiquity be achieved if there are two systems?” asked Grotta, referring to The Clearing House RTP, which has been operating since 2017.
“Speed to market and ubiquity are critical to success as the Fed certainly understands, but how that is achieved is a bit of a mystery.”
