Tuesday, August 6, 2019
The Federal Reserve Board revealed Aug. 5, 2019, that it plans to develop FedNow, a real-time payments and settlement scheme. Addressing a town hall meeting at the Federal Reserve Bank of Kansas City, Mo., Federal Reserve Board Governor Lael Brainard called making and receiving payments a basic right for banks and individuals. “FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers,” she said.
Brainard noted that U.S. legacy infrastructure is ill-equipped to support faster payments. While some services appear to provide real-time funds to select recipients, transactions involve what she called “a buildup of obligations” that increase risk for financial institutions. A financial system based on IOUs between banks is ultimately not sustainable; FedNow would offer a safe and efficient real-time interbank clearing and settlement service to all banks, she added.
“We are seeing some companies looking to establish a payment system that bypasses our banks and our currency,” Brainard said. “Facebook's Libra project raises numerous concerns that will take time to assess and address. But one thing is clear: consumers and businesses across the country want and expect real-time payments, and the banks they trust should be able to provide this service securely—whatever their size.”
While the Fed plans to disseminate FedNow services across the U.S. banking and financial services infrastructure, the initiative is receiving mixed reviews from the private sector. In opposing FedNow, the National Taxpayers Union suggesting the program would pose a conflict of interest for the Federal Reserve. In a July 29, 2019, letter to Fed Chairman Jerome H. Powell, 20 union members expressed strong concerns against the Fed “competing with the private sector while concurrently regulating it.”
NTU members suggested the Fed could underprice its real-time payments services, giving the government an unfair advantage and potentially harming banks and consumers. They also pointed out that the private sector is generally “more efficient and effective at providing goods and services to customers than government.”
NTU members also mentioned several real-time payments innovations that have originated in the private sector, such as the RTP Network operated by The Clearing House; Zelle; Mastercard Send; and Visa Direct. The union urged the Fed to invest in private sector innovators to develop real-time payments, noting that such endeavors have been profitable and represent a significant return on investment, which the NUT estimates is nearly $1 billion. NTU members also questioned the need to spend hundreds of millions of dollars to built RTP when, according to the union, Zelle transaction volumes are increasing by 72 percent year-over-year, and TCH will achieve near-universal access by 2020.
Brainard thanked more than 350 respondents from nearly 800 organizations for submitting comments on the FedNow initiative. She noted that 90 percent were supportive. “Support came from a wide range of stakeholders, including individuals, merchants, fintech firms, and banks,” she said. Perceived benefits mentioned in comments included safety, given the Fed’s resilience, and competition fostered by decreased market concentration and a neutral environment for innovation.
FedNow has also passed muster with the General Accountability Office, Brainard pointed out. The program’s broad support reflects previous findings by the Faster Payments Task Force and U.S. Treasury Department that faster payments would improve access and foster innovation, she said. “In determining the path forward, we are building on the Federal Reserve's long history of operating payment systems as a core part of the nation's payment infrastructure,” Brainard said. “When you look across the current payment infrastructure, whether in check processing, automated clearinghouse (ACH) services, or funds transfers, you will see a Federal Reserve service operating alongside private-sector providers.”
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