The U.S. Central Bank will embark on its biggest investment in payments since becoming an ACH operator more than forty years ago. FedNow will be an interbank real-time gross settlement service (RTGS) with integrated clearing. It will support 24/7 real-time transfers of up to $25,000 between any banks in the U.S. and will be available by 2023 or 2024.
In October 2018 the Federal Reserve asked the market for commentary on whether they should become a real-time payments operator, and about 90 percent of the 350 comments received were in favor of the Fed taking on this role. In response to this feedback, the Fed announced in early August they would create and operate a ubiquitous, real-time payments service, called FedNow, with a target launch in 2023 or 2024.
This marks a change in course from the Federal Reserve, who previously encouraged the private sector to expand real-time bank transfer capabilities but didn’t indicate any intention of supporting this directly. The private market started to fill this need in 2017 with The Clearing House Payments Co. (TCH), a consortium owned by 25 large banks.
Whereas TCH has built a network that reaches more than half of demand-deposit accounts in the United States, one of the goals of FedNow is to support all bank accountholders ubiquitously. Lael Brainard, a Fed Board of Governors member, said that FedNow will “reach every bank in every community in the country,” while announcing the new service at the Federal Reserve Bank of Kansas City.
The Fed seeks to support real-time bank settlements as it will help consumers and businesses that make or accept payments or transfers. The Fed determined their RTGS service is worth the investment as it will provide equitable access for users, competition with the private sector, a neutral platform for continuing innovation, and increase payments safety.
Arguing the need for increased payments safety, Brainard went on to say that “if the Fed doesn’t stand up a service, there will be a single provider, and there’s a safety issue in a single point of failure.”
Kenneth Montgomery, First Vice President of the Federal Reserve Bank of Boston, will lead development of FedNow while maintaining his role at the Boston Fed. Montgomery said in a statement that his team “is gathering industry input on desired features and functionality so we can solidify FedNow’s product design and further define the pathway to launch.” Comments about FedNow are being until November 7, 2019.
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