The Federal Reserve has kickstarted efforts to develop a new, round-the-clock real-time payment and settlement service. The envisioned “FedNow Service” would support faster payments in the United States, a Holy Grail for many banks and FinTech firms.
The Fed sees the offering as helping both individuals and businesses by eliminating the need for short-term credit to cover any gap in settlement. Faster payment settlements could help alleviate liquidity management issues for banks in particular, because settlement through the Federal Reserve does not involve liquidity or credit risk with respect to it as the settlement institution.
“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,” Federal Reserve Board Governor Lael Brainard said in a statement. “FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers.”
“Widely available faster payments would be the foundation for the next generation of payment services, catalyzing innovations that generate new economic activity,” a Fed release added. It anticipates the FedNow Service will be available in 2023 or 2024.
Not everyone may benefit equally from the always-on offering.
“The Board’s intention to operate a RTGS (real-time gross settlement) service is a win for community banks and FinTech companies, although it may threaten those FinTechs with business models centered around providing real time payments,” writes Jeffrey Alberts, a partner with law firm Pryor Cashman, in a blog. “This also may have an impact on certain cryptocurrencies and companies providing cryptocurrency services, to the extent those services compete with FedNow. While cryptocurrencies are not widely used for payments at present, providing fast and efficient payments historically has been one of the most often cited use cases for [them].”
Funds associated with a payment made using the FedNow Service would be transferred between the sender’s bank and the receiver’s bank upon final settlement. After considering Financial Accounting Standards Board principles, the Fed Board says a seven-day accounting regime is likely the most appropriate for the FedNow Service.