Thursday, February 3, 2022
Initially, at least, only credit transfers, where payments are initiated by the sender (also known as credit-push transactions), will be supported by FedNow. The Fed said debits, where receivers seek to pull funds from sender accounts, are inherently more prone to fraud and thus not suitable for the initial implementation of FedNow.
Plans are to first pilot the service prior to making FedNow available to all FIs. Once up and running—in 2023 or 2024—financial institutions (FIs) large and small (and their approved service providers) will be able to use FedNow to support innovative instant payment services to consumers and businesses, the Fed said.
But there will be some caveats: a maximum value of $500,000 has been set for FedNow transactions. The Fed said it “will evaluate the credit transfer limit on an ongoing basis.”
The Fed has historically functioned as a gatekeeper to the nation’s payment system, providing clearing and settlement of payments (checks, ACH and wire transfers) between federally regulated FIs. A 1980s law requires that these services be provided at cost—the Fed is precluded from turning a profit on payment services.
The preliminary pricing scheme FedNow most closely mirrors ACH pricing. Assessments include:
FedNow will operate in direct competition with RTP, a real-time payment system developed and operated by TCH, a consortium of banks that has long competed with the Fed in the payments space.
“TCH is pleased to see that FedNow’s pricing essentially validates the RTP network pricing model, as it matches RTP almost identically,” said Steve Ledford, senior vice president for products and strategy at TCH. “The RTP network has a single price for all participants regardless of size, with no volume discounts, no volume commitments, no monthly fees and no monthly minimums.”
At present, RTP counts 191 participating FIs, and over 20 third-party service processors (for example, FIS and Jack Henry). Also connected to the network are 11 funding agents, which provide funding management primarily for smaller FIs.
Jack Baldwin, chairman of payments software applications provider BHMI, suggested the similarity in pricing could hamper competition. “From a pricing perspective, there doesn’t seem to be much incentive for financial institutions to choose FedNow over RTP,” he said.
The Fed has said it intends to only charge enough for FedNow services to cover costs, not to turn a profit, he noted. “But RTP makes the same claim, so the long-term pricing advantage offered by either network boils down to who can operate more efficiently, thereby keeping costs low,” Baldwin said. “Right now, RTP has the advantage of scale, but that advantage will surely shrink and possibly disappear after FedNow launches and builds its clientele base.”
FedNow does have one perceived advantage over RTP, Baldwin added. “The case for FIs to sign up with FedNow is the perception that the Fed can be trusted to be an honest broker, not favoring any special constituency with more favorable pricing or service,” he said.
Word of the planned pricing scheme came just weeks after the Independent Community Bankers Association urged the Fed to be more forthcoming about FedNow particulars. “To ensure community banks are well-positioned to deploy the FedNow service and remain at the payments forefront, ICBA urges the Fed to accelerate the flow of FedNow information, implement a fair and equitable pricing model, prioritize service enhancements, and continue allowing only fully chartered and regulated institutions to access the service,” said ICBA President Rebecca Rainey.
Demand for real-time (instant) payments is strong among consumers and businesses alike. According to a report released last year by ACI Worldwide, there were 70.3 billion real-time payment transactions in 2020, a 41 percent increase over the year prior to the Covid-19 pandemic. And the pandemic has only accelerated the trend.
“Businesses appetite for faster payments has clearly accelerated due to growing acceptance of digital commerce during the pandemic,” said Shonda Clay, chief of customer and industry engagement for the Fed Banks. “Businesses are calling for consumer-to-business and business-to-business payments that facilitate quicker access to funds, the ability to post payments immediately and automatically, and timely notification of payments.” A Fed survey of 2,000 businesses, conducted in late 2020, revealed that nine in 10 expected to be able to use instant payments over the next three years. Payroll was the top use case chosen, followed by major supplier payments and recurring bill payments. Nearly two-thirds of businesses surveyed said access to faster payments would factor into future decisions to switch FIs.
Research conducted by Pyments.com suggests 30 percent of consumers would consider access to real-time payments a key factor in their FI selection process. Not surprisingly, demand is even higher among younger adults: 38 percent of Gen Z consumers said they are “very” or “extremely” likely to switch FIs for real-time payments services.
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