Everyone deserves the same ability to make and receive payments immediately and securely, and every financial institution deserves the same opportunity to offer that service to its community, the Federal Reserve governor overseeing the agency’s payments initiatives said Monday, unveiling the Fed’s round-the-clock payments services initiative.
Gov. Lael Brainard told an audience at the Federal Reserve Bank of Kansas City (in Kansas City, Mo.) that the FedNow Service, “a real-time payment and settlement service for the future,” would be an investment by the central bank to make real-time payments available to everyone.
“Today, whether you are relying on ACH, a debit card, or a check, it can take as much as a few days to get access to your funds,” Brainard said. “With a Federal Reserve real-time retail payment infrastructure, the funds would be available immediately – to pay utility bills or split the rent with roommates, or for small business owners to pay their suppliers. Immediate access to funds could be especially important for households on fixed incomes or living paycheck to paycheck, when waiting days for the funds to be available to pay a bill can mean overdraft fees or late fees that can compound.”
She added that obtaining immediate access to funds from a sale in order to pay for supplies can be a “game changer for small businesses,” potentially avoiding the need for costly short-term financing.
Brainard is the chair of the Fed’s committee on payments, clearing, and settlement (as well as chair of the Fed’s Payments System Policy Advisory Committee) and has been leading the central bank’s efforts in its “faster payments” initiative, aimed at studying a real-time payments system in the U.S.
Responding to some past criticisms of the Fed that it should leave the payments system to the private sector, Brainard said that, from the start of the Fed more than 100 years ago, the Federal Reserve Banks have provided payment and settlement services – “in healthy competition with private-sector providers” – to achieve public benefits ranging from resiliency to innovation to equal access.
“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,” she asserted. “The [Government] Accountability Office has concluded that the Federal Reserve’s provision of payment services has benefited the U.S. payment system and its users.”
The Fed governor acknowledged that the central bank does not have regulatory authority over the pricing set by a private-sector system. Nor, she said, can the Fed require a private-sector system to extend the service to banks of all sizes, particularly the last mile. She noted that the Fed’s role as an operator has long been seen as an effective approach to promote accessible, safe, and efficient payments in the United States.
“Through the FedNow Service, we will provide a foundation for the future – a modern payment infrastructure that allows innovation and competition to flourish and delivers faster payments safely and securely for all,” she said. “To ensure fast payments are available to everyone, FedNow will be accessible to all banks, no matter the size. Given our long-standing service connections with more than 10,000 banks across the country, the Federal Reserve is uniquely placed to deliver this outcome.”
Brainard indicated that the Fed’s decision to move forward over the next up to five years on the FedNow Service was based on other considerations, including risk to financial stability and other private entities – such as the social media giant Facebook – becoming involved in payments.
“Early adopters of fast payment services rely on a legacy infrastructure that was not designed to support faster payments,” she said. “For example, some services offer real-time funds availability to certain consumers, but they conduct interbank settlement on a deferred basis using legacy systems. This type of settlement entails a buildup of obligations—like IOUs between banks – that could present real risks to the financial system in times of stress.”
She noted that some companies (pointing to Facebook’s “Libra” digital currency project) want to establish a payments system that bypasses both banks and U.S. currency. “Facebook’s Libra project raises numerous concerns that will take time to assess and address,” she said.
She also noted that the Fed now already serves more than 10,000 banks, credit unions and other financial institutions across the country. “It turns out no single private-sector provider of any U.S. payment system has ever achieved nationwide reach on its own, whether it be checks, ACH, cards, or wire transfers,” she said.
Acting alone, she added, a single private-sector real-time gross settlement (RTGS) service will face stiff challenges setting up an accessible, nationwide infrastructure for faster payments. “In contrast, because of our experience with providing other services, the Federal Reserve already has invested in connections and customer service relationships with nearly every bank, small and large, across the country,” she said.
She also asserted a safety issue inherent to a nationwide service. “If the Federal Reserve does not establish the FedNow Service, there will be a single provider of real-time retail payment services,” she said. “We are mindful of the serious safety issues associated with a single point of failure, a risk that will rise as faster payments grow.’