Fed aiming to launch real-time payment and settlement service

In a speech at the Federal Reserve Bank of Kansas City on August 5, Federal Reserve Governor Lael Brainard outlined plans to launch a real-time payment and settlement service to support faster payments across the US.

The system – FedNow – “will provide a neutral foundation for innovation and competition in end-user faster payment services,” said Brainard. The central bank is requesting comment on the service, which once fully launched could help “yield economic benefits for individuals and businesses by providing them with more flexibility to manage their money and make time-sensitive payments,” said the Fed in a release.

On more than one occasion Brainard pointed to the fact the US payments ecosystem is behind other regions and countries.

“Today, the US retail payment infrastructure lags behind many other countries,” she said. “Europe, Mexico, and Australia have already implemented real-time interbank clearing and settlement capabilities. In contrast, here in the United States, the gap between the transaction capabilities in the digital economy and the underlying payment and settlement capabilities continues to grow.

Brainard went on to acknowledge that, while fintech providers and banks currently offer the faster payments capabilities, a robust infrastructure is required, while suggesting a modern interbank clearing and settlement ecosystem was required in order to alleviate systematic risks.

“Early adopters of fast payment services rely on a legacy infrastructure that was not designed to support faster payments. 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. These are not resilient long-term solutions for our dynamic economy and the banks that support it,” she said.

Brainard also acknowledged Facebook’s Libra project, which “raises numerous concerns that will take time to assess and address.”

Underlying her speech was the idea of inclusion and supporting a payments ecosystem that would serve “more than 10,000 banks of varying sizes and missions that are in communities all around the country”.

In November the Fed requested public comment on interbank settlement of faster payments. It received more than 350 comments on such a service, 90 percent of which called for the central bank to operate a real-time service for faster payments.

“Acting alone, a single private-sector RTGS service will face significant challenges in establishing an accessible infrastructure for faster payments with nationwide reach. 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.”

Last week Fed chairman Jerome Powell told the Federal Open Market Committee press conference a decision on a real-time gross settlement system was in the offing.

The central bank expects FedNow to be available in 2023 or 2024.

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