The Federal Reserve announced that a real-time payment service will be entering the market by 2023 or 2024. The new service is called FedNow and set to reach every bank in every community within the United States. Four considerations were mentioned by Fed governor Lael Brainard that facilitate this service, they were, “equitable access to users, payments safety, increased competition for private-sector players, and a neutral platform for innovation.”
Prominent private-sector player, The Clearing House Payments Co. or (TCH), introduced its real-time payments service in 2017. Based in New York and owned by 25 banks, TCH has been working on recruiting more small and mid-sized institutions. So far, it has secured 16 institutions so far on RTP. The network also reaches 51% of this country’s demand-deposit accounts.
Steve Ledford, who’s the senior vice president of product and strategy for TCH, contends that RTP is already meeting a need the Fed claims to see in the market. He argues, “ We don’t think there’s a need for a public-sector option. I’m not sure the Fed necessarily has an advantage. This is not ACH. This is not wire transfer. This is a different animal.”
Ledford stated that the work on RTP demanded an investment of $1 billion. He also seems undeterred by the Fed’s decision. He states, “I’m rarely surprised by anything. You move on.”
The American Bankers Association has announced that this service will take some time to begin fully operating and encouraged bankers to look to TCH’s services in the meantime.
Despite the availability of TCH, merchants and smaller institutions prefer public sector options because they claim that the competition will drive prices down and keep the level of service high.
The Fed has the historic advantage of being linked, through its ACH connections, with just about every bank in the country. So they have a unique position. However, with the private sector, they have never achieved a 100% reach.
For now, TCH is gearing up for its new competitor, concentrating its efforts on improving its RTP service. One specific area that is being developed is biller-generated requests for payment. This will allow a payee to pay a bill immediately. They are also working on expanding on the use of the network.
According to Ledford, the Fed’s getting involved in this market could actually hinder faster payment adoption, saying,
“They [the Fed] will be coming to the market after there has been a lot of work done by ourselves and others, and they won’t be able to bring it to market immediately. They have to go through comments and then build out the network, and that will take a few years. If folks wait for the Fed to be in place it will delay the goals we all have to implement true nationwide faster payment. This will just slow down the movement to get to faster payments.”
Many have voiced favorable reasons as to why the Fed’s entering into Real-Time Payment would be a good thing. The competition alone could potentially bring prices down and increase the quality of service. Having another major player will diversify risk and provide secondary options.
The Fed who in the past has acted as an umpire, encouraging other private sector companies to develop faster payment systems, has a long road ahead. Many claim it will be difficult and a lot of work to bring FedNow into the market.