[Federal Register Volume 84, Number 154 (Friday, August 9, 2019)]
[Notices]
[Pages 39297-39322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17027]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1670]
Federal Reserve Actions To Support Interbank Settlement of Faster
Payments
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice and request for comment.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
has determined that the Federal Reserve Banks (Reserve Banks) should
develop a new interbank 24x7x365 real-time gross settlement service
with integrated clearing functionality to support faster payments in
the United States. The new service would support depository
institutions' provision of end-to-end faster payment services and would
provide infrastructure to promote ubiquitous, safe, and efficient
faster payments in the United States. In addition, the Federal Reserve
intends to explore expanded hours for the Fedwire[supreg] Funds Service
and the National Settlement Service, up to 24x7x365, to support a wide
range of payment activities, including liquidity management in private-
sector real-time gross settlement services for faster payments. Subject
to the outcome of additional analysis of relevant operational, risk,
and policy considerations, the Board will seek public comment
separately on plans to expand hours for the Fedwire Funds Service and
the National Settlement Service.
DATES: Comments on the proposed actions must be received on or before
November 7, 2019.
ADDRESSES: You may submit comments, identified by Docket No. OP-1670,
by any of the following methods:
Agency website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Ann Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments will be made available on the Board's website
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons or to remove
personally identifiable information at the commenter's request.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments may also be viewed electronically
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006,
between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Kirstin Wells, Principal Economist
(202-452-2962), Mark Manuszak, Assistant Director and Chief (202-721-
4509), Susan V. Foley, Senior Associate Director (202-452-3596),
Division of Reserve Bank Operations and Payment
[[Page 39298]]
Systems; or Gavin Smith, Senior Counsel, Legal Division (202 452-3474),
Board of Governors of the Federal Reserve System. For users of
Telecommunications Device for the Deaf (TDD), contact (202-263-4869.)
SUPPLEMENTARY INFORMATION:
I. Introduction
The U.S. payment system faces a critical juncture in its evolution.
Advances in technology have created an opportunity for significant
improvements to the way individuals and businesses make payments in
today's economy. Smartphones, high-speed computing and cloud
capabilities, extensive communication networks, and other innovations
allow individuals and businesses to send and receive messages, post and
consume content online, search for and obtain information, and conduct
myriad other activities almost immediately and at any time. Similarly,
today's technology presents a pivotal opportunity for the Federal
Reserve and the payment industry to modernize the nation's payment
system to establish a safe and efficient foundation for the future.
A. Background
Services to conduct ``faster payments'' have begun to emerge to
address shortcomings of traditional payment methods. Faster payments
allow individuals and businesses to send and receive payments within
seconds at any time of the day, on any day of the year, such that the
receiver can use the funds almost instantly.\1\ Faster payment services
are growing in popularity, but typically require users to all
participate in the same specific service to exchange payments. However,
there is broad consensus within the U.S. payment community that, just
as immediate services available around the clock have become standard
for other everyday activities, faster payment services have the
potential to become widely used, resulting in a significant and
positive impact on the U.S. economy.
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\1\ Consistent with the concept of a faster payment in this
notice, and reflecting improvements to retail payment systems around
the world, the Committee on Payments and Market Infrastructures
(CPMI) has defined a ``fast payment'' as ``a payment in which the
transmission of the payment message and the availability of `final'
funds to the payee occur in real time or near-real time on as near
to a 24-hour and seven-day (24/7) basis as possible.'' Final funds
are funds received such that the receiver has unconditional and
irrevocable access to them, meaning that the receiver can use the
funds without the risk that they will be recalled. See Committee on
Payments and Market Infrastructures, Bank for International
Settlements, ``Fast payments--Enhancing the speed and availability
of retail payments,'' (November 2016). Available at https://www.bis.org/cpmi/publ/d154.pdf.
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Faster payments can yield real economic benefits beyond speed and
convenience. Through faster payments, individuals and businesses can
have more flexibility to manage their money and can make time-sensitive
payments whenever needed. For a small business, the ability to receive
payments immediately may result in better cash flow management. More
broadly, faster payments may provide businesses with considerable
opportunity to improve efficiency and reduce costs of payments relative
to paper checks and other existing payment methods. For individuals,
the ability to both send and receive payments more quickly may help
alleviate mismatches between the time that incoming funds are received
and the time that spending needs to occur. This improved ability to
manage their money can enable some individuals to avoid high-cost
borrowing and penalties, such as overdraft or late fees.
In light of these potential benefits, an appropriate foundation is
essential to support the development of faster payment services that
are safe, efficient, and broadly accessible to the public. This
foundation involves creating an infrastructure that connects banks
across the country, paving the way for innovative faster payment
services.\2\ This infrastructure would allow individuals and businesses
to exchange funds in their accounts almost instantly to make payments
for goods, services, or other purposes. A key function of this
infrastructure is the movement of information and funds between banks,
also known as interbank clearing and settlement.\3\
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\2\ Throughout this notice, the term ``bank'' will be used to
refer to any type of depository institution. Depository institutions
include commercial banks, savings banks, savings and loan
associations, and credit unions.
\3\ Three types of services are typically required to complete a
payment between two individual or business bank accounts: End-user
services, clearing services, and interbank settlement services. End-
user services support the exchange of information between a bank and
its customer (that is, an individual or business). Clearing services
directly or indirectly support the exchange of payment information
between banks. Interbank settlement services discharge financial
obligations between and among banks arising from payments by
adjusting balances in settlement accounts. Depending on the
arrangement, some or all of these levels can be provided by distinct
entities or integrated in a single entity.
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Since its founding, the Federal Reserve has played a key
operational role in the nation's payment system by providing such
infrastructure.\4\ The importance of this role has been broadly
recognized, with independent reviewers concluding that the payment
system and its users have benefited over the long run from the Federal
Reserve's operational involvement.\5\ This key role, given by Congress,
stems from the Federal Reserve's unique ability, as the nation's
central bank, to provide interbank settlement without introducing
liquidity or credit risks.\6\ In fulfilling this role, the Reserve
Banks operate services, including check, automated clearinghouse (ACH),
and funds transfer services, that provide core infrastructure for
financial transactions.\7\ Throughout its history, the Federal Reserve
has provided these services alongside, and in support of, similar
services offered by the private sector.
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\4\ Additional information about the Federal Reserve's role in
the payment system is available in ``The Federal Reserve System
Purposes & Functions: 6. Fostering Payment and Settlement System
Safety and Efficiency,'' (October 2016). Available at https://www.federalreserve.gov/aboutthefed/pf.htm.
\5\ See e.g., U.S. Gov't Accountability Off., GAO-16-614,
``Federal Reserve's Competition with Other Providers Benefits
Customers, but Additional Reviews Could Increase Assurance of Cost
Accuracy'' (2016). Available at https://www.gao.gov/products/GAO-16-614.
\6\ In particular, settlement through the Federal Reserve does
not involve liquidity or credit risk with respect to the Federal
Reserve as the settlement institution. See Committee on Payment and
Settlement Systems, Bank for International Settlements, ``The Role
of Central Bank Money in Payment Systems'' (August 2003). Available
at https://www.bis.org/cpmi/publ/d55.pdf.
\7\ As authorized by the Federal Reserve Act, these payment and
settlement services involve transferring funds between and among
accounts held at the Reserve Banks. Specific services offered by the
Reserve Banks include the Fedwire Funds Service, the National
Settlement Service, and FedACH[supreg] services. Throughout this
notice, these services operated by the Reserve Banks will generally
be referred to as Federal Reserve services.
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In the past, the Federal Reserve's provision of payment and
settlement services has helped to advance fundamental improvements in
the nation's payment system.\8\ The potential exists today to achieve
once again such improvements through upgrades to the payment
capabilities of both the Federal Reserve and the private sector. In
terms of current Federal Reserve services supporting the U.S. payment
system, those services have served the nation's economy well but were
not designed to support 24x7x365 real-time retail payments.\9\ Advances
in technology
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provide the ability to develop Federal Reserve services with the
operating hours, processing capacity, and overall functionality needed
to support 24x7x365 real-time capabilities for the payment system.
Similar considerations have led central banks in various countries to
develop improved infrastructure to support faster payments.\10\
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\8\ Improvements achieved through these operational roles
include facilitating efficient nationwide clearing of checks,
supporting the development of the ACH system, encouraging the
nation's transition to a virtually all-electronic check-processing
environment, and establishing a real-time interbank funds transfer
system for wholesale payments.
\9\ Retail payments typically involve lower-value transfers,
such as those among individuals or between an individual and a
business, that yield a large number of payments. See Committee on
Payments and Market Infrastructures, Bank for International
Settlements, ``A Glossary of Terms Used in Payments and Settlement
Systems,'' (October 2016). Available at https://www.bis.org/cpmi/publ/d00b.htm.
\10\ For a discussion of global developments related to faster
payments, see ``Fast payments--Enhancing the speed and availability
of retail payments,'' supra note 1.
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The Board views support for faster payments as requiring
modernization of, and upgrades to, Federal Reserve services alongside
broader modernization of the payment industry as a whole. Beginning in
2013, the Federal Reserve launched the Strategies for Improving the
U.S. Payment System (SIPS) initiative, a collaborative effort with
stakeholders to foster improvements to the nation's payment system. As
part of the SIPS initiative, the Federal Reserve convened the Faster
Payments Task Force (FPTF), comprising a wide range of industry
stakeholders, to identify and evaluate alternative approaches for
implementing safe and ubiquitous faster payment capabilities in the
United States.
The FPTF published in 2017 a set of consensus recommendations
focused on actions to support improvements to the nation's payment
system.\11\ These recommendations were intended to help achieve the
FPTF's vision of ubiquitous faster payment capabilities in the United
States that would allow any end user (that is, an individual or
business) to safely, efficiently, and seamlessly send a faster payment
to any other end user, no matter which banks or payment services they
use. Among the FPTF's consensus recommendations were requests for the
Federal Reserve (i) to develop a 24x7x365 settlement service to support
faster payments and (ii) to explore and assess the need for other
Federal Reserve operational role(s) in faster payments. The U.S.
Treasury subsequently recommended that ``the Federal Reserve move
quickly to facilitate a faster retail payments system, such as through
the development of a real-time settlement service, that would also
allow for more efficient and ubiquitous access to innovative payment
capabilities.''\12\
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\11\ See Faster Payments Task Force, ``Final Report Part Two: A
Call to Action,'' (July 2017). Available at https://fedpaymentsimprovement.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf.
\12\ The U.S. Treasury also noted that ``[i]n particular,
smaller financial institutions, like community banks and credit
unions, should also have the ability to access the most-innovative
technologies and payment services. While Treasury believes that a
payment system led by the private sector has the potential to be at
the forefront of innovation and allow for the most advanced payments
system in the world, back-end Federal Reserve payment services must
also be appropriately enhanced to enable innovations.'' U.S.
Treasury, ``A Financial System That Creates Economic Opportunity:
Nonbank Financials, Fintech, and Innovation,'' (July 2018) at 156.
Available at https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities-Nonbank-Financi.pdf.
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Following publication of the FPTF's final report, the Federal
Reserve began to pursue the FPTF's recommendations in considering
settlement and broader operational support to facilitate the
advancement of faster payments in the United States.\13\ In addition,
the Board approved in 2017 final guidelines for evaluating requests for
joint accounts at the Reserve Banks intended to facilitate settlement
between and among banks participating in private-sector payment systems
for faster payments.\14\ The impetus for allowing broader use of joint
accounts was to facilitate private-sector developments in faster
payments. In an arrangement using a joint account, real-time settlement
occurs on an internal ledger maintained by a private-sector operator,
supported by funds that are held in an account at a Reserve Bank for
the joint benefit of the service's participants. To support settlement
through such a service, each participant bank ensures sufficient
funding in the joint account to cover its payment obligations on a
24x7x365 basis. Without the Federal Reserve's actions related to joint
accounts, other providers alone would be unable to provide real-time
interbank settlement services for faster payments supported by a joint
account at a Reserve Bank.
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\13\ See The Federal Reserve System, ``Federal Reserve Next
Steps in the Payments Improvement Journey,'' (September 6, 2017).
Available at https://fedpaymentsimprovement.org/wp-content/uploads/next-step-payments-journey.pdf.
\14\ Board of Governors of the Federal Reserve System,
``Guidelines for Evaluating Joint Account Requests,'' (Issued 2017).
Available at https://www.federalreserve.gov/paymentsystems/joint_requests.htm. In 2016, Federal Reserve staff received a
request from a private-sector service provider to open a new joint
account for that organization's proposed faster payment system. The
use of a joint account at a Reserve Bank to support settlement
mitigates certain risks by reproducing, as closely as possible, the
risk-free nature of settlement in central bank money.
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B. 2018 Federal Register Notice on Potential Federal Reserve Actions
In November 2018, the Board published a Federal Register notice
(2018 Notice) seeking public comment on potential actions that the
Federal Reserve could take to advance the development of faster
payments and support the modernization of payment services in the
United States.\15\ In considering the goal of ubiquitous, safe, and
efficient faster payments, the Board proposed that a real-time gross
settlement (RTGS) infrastructure would provide the safest and most
efficient method for interbank settlement of faster payments and,
therefore, would be the most appropriate strategic foundation for
faster payments in the United States.\16\ Further, the Board expressed
the view that the private sector alone may face significant challenges
in providing equitable access to an RTGS infrastructure with nationwide
reach, which in turn would jeopardize the development of ubiquitous,
safe, and efficient end-user faster payment services.\17\
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\15\ ``Potential Federal Reserve Actions To Support Interbank
Settlement of Faster Payments, Request for Comments,'' 83 FR 57351
(Nov. 15, 2018). Available at https://www.federalregister.gov/d/2018-24667. The comment period ended on December 14, 2018.
\16\ RTGS involves interbank settlement occurring in real time
on a payment-by-payment basis. As described in the 2018 Notice, RTGS
for faster payments implies that settlement occurs prior to the
provision of final funds to the receiver with settlement of
individual payments possible at any time, on any day. In the 2018
Notice, the Board noted that certain end-user services currently
rely on deferred interbank settlement to complete a payment. In
deferred settlement arrangements, interbank settlement information
is collected, stored, and sometimes netted before interbank
settlement occurs. Because faster payments involve the immediate
provision of final funds to the receiver, deferred interbank
settlement of faster payments inherently involves interbank
settlement risk. Although faster payment systems that rely on
deferred settlement can incorporate certain measures to mitigate
this risk, those measures may be complex and costly to implement. By
contrast, RTGS structurally removes interbank settlement risk
because the receiver only receives final funds after interbank
settlement has occurred.
\17\ Throughout this notice, the terms ``nationwide reach'' and
``nationwide scope'' will be used to refer to a payment service or
infrastructure that is accessible to virtually all banks nationwide.
In this context, the term ``nationwide'' reflects various dimensions
of accessibility, including geography and institution size and type.
At present, one RTGS service for faster payments, operated since
November 2017 by a private-sector entity, exists in the United
States. Section III presents a full analysis of the landscape of
RTGS services for faster payments in the United States.
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The Board specifically discussed two potential services that could
be developed by the Reserve Banks: (i) An interbank 24x7x365 RTGS
service with integrated clearing functionality to support faster
payments and (ii) a liquidity management tool that would enable
transfers between accounts held at the Reserve Banks on a 24x7x365
basis to support services for real-time interbank settlement of faster
payments.
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The Board explained that a Federal Reserve RTGS service for faster
payments, alongside private-sector RTGS services, would provide the
infrastructure needed to achieve ubiquitous, safe, and efficient faster
payments in the United States. Other parties, such as banks, payment
processors, and providers of payment services, could develop end-user
and auxiliary services that build upon the core functionality of an
interbank settlement service provided by the Federal Reserve. The Board
further explained that a liquidity management tool, in turn, could help
alleviate liquidity management issues for banks engaged in RTGS-based
faster payments. In particular, such a tool would enable movement of
funds between accounts at the Reserve Banks during hours when
traditional payment and settlement services are currently not open to
allow liquidity to be moved, when needed, to an account or accounts
used to support real-time settlement of faster payments. The 2018
Notice proposed that the tool could be provided by expanding operating
hours of current Federal Reserve services or through a new service.
In the 2018 Notice, the Board requested comment on the
appropriateness of real-time gross settlement as the strategic
foundation for faster payments in the United States and the public
benefits, implications, and challenges of the Federal Reserve taking
either, both, or neither of the potential actions. The Board also
sought feedback on other specific topics to inform these potential
actions, such as potential demand for faster payment services and
adjustments that the payment industry would need to make in a 24x7x365
real-time settlement environment.
C. Planned Actions
1. The FedNow\SM\ Service
After considering the comments received in response to the 2018
Notice and analyzing the implications of the potential actions, the
Board has determined that the Reserve Banks should develop a new
interbank 24x7x365 real-time gross settlement service with integrated
clearing functionality, called the FedNow Service, to support faster
payments. The Board's determination is based on the public benefits
that the service would provide and the Board's assessment that such a
service would meet the requirements of the Depository Institutions
Deregulation and Monetary Control Act of 1980 (MCA), as well as the
Board's criteria for new or enhanced Federal Reserve payment
services.\18\
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\18\ ``Depository Institutions Deregulation and Monetary Control
Act of 1980,'' Public Law 96-221 (Mar. 31, 1980), available at
https://fraser.stlouisfed.org/title/1032; Board of Governors of the
Federal Reserve System, ``The Federal Reserve in the Payments
System,'' (Issued 1984; revised 1990). Available at https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
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The planned service would conduct real-time, payment-by-payment,
final settlement of interbank obligations through debits and credits to
banks' balances in accounts at the Reserve Banks. The service would
incorporate clearing functionality, allowing banks, in the process of
settling each payment, to exchange information needed to make debits
and credits to the accounts of their customers. The service's
functionality would support banks' (or their agents') provision of end-
to-end faster payments to their customers.
The Federal Reserve's provision of the FedNow Service would provide
core infrastructure to promote ubiquitous, safe, and efficient faster
payments in the United States. Historical experience with the
development of other payment systems in the United States indicates
that other providers alone will face significant challenges
establishing such infrastructure, in part because of the complexity of
the nation's banking system.\19\ A landscape where the Federal Reserve
operates a 24x7x365 RTGS service alongside private-sector services,
which aligns with most payment systems in the United States, is most
likely to create an RTGS infrastructure with nationwide reach for
faster payment services.
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\19\ The United States has more than 10,000 depository
institutions that vary greatly in terms of size, level of technical
capabilities, operational practices, and customers and communities
served.
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Significantly, the Board expects that the recently established
private-sector RTGS service is likely to remain the sole private-sector
provider of RTGS services for faster payments in the United States.
Such an outcome would have significant implications for the Board's
policy objectives regarding the accessibility, safety, and efficiency
of the nation's payment system.
Based on its analysis and comments received in response to the 2018
Notice, the Board expects that a single private-sector provider of such
services is unlikely to connect to the thousands of small and midsize
banks necessary to yield nationwide reach, even in the long term. No
traditional payment system, including checks, ACH, funds transfers, or
payment cards, has ever achieved nationwide reach through a single
private-sector provider. The Federal Reserve, however, has long-
standing relationships with, and has built a nationwide infrastructure
to provide service to, more than 10,000 depository institutions (or
their agents) across the country, which would provide a key channel to
reach thousands of smaller institutions in the United States that might
otherwise not have access to an RTGS infrastructure for faster
payments.
Additionally, a single provider of RTGS services for faster
payments without competition is likely to create undesirable outcomes
for pricing, innovation, service quality, and reach. Conversely,
provision of the FedNow Service alongside private-sector RTGS service
would give banks the option of choosing a service or connecting to more
than one service, a choice they have today for all existing payment
services. Indeed, Federal Reserve and private-sector payment services
operating alongside one another would be consistent with the structure
of other existing payment systems. The presence of multiple RTGS
services for faster payments could yield efficiency benefits such as
lower prices, higher service quality, and increased innovation.
A market outcome with a single RTGS service for faster payments
would also create a single point of failure. An additional RTGS service
for faster payments would promote resiliency through redundancy, a
common solution in many retail payment systems. Serving an operational
role in the payment system also allows the Federal Reserve to provide
stability and support to the banking system and the broader economy in
normal times and in times of stress.
Finally, the Federal Reserve does not have plenary regulatory or
supervisory authority over the U.S. payment system and instead has
traditionally influenced retail payment markets through its role as an
operator.\20\ Therefore, as has been the case with other retail payment
systems, the Federal Reserve's operational role as a provider of
interbank settlement is the most effective approach to improve the
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prospects of ubiquitous, safe, and efficient faster payments in the
United States. Serving such an operational role would be consistent
with the Federal Reserve's historical role as a provider of payment
services alongside the private sector.
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\20\ To the extent that the current private-sector RTGS service
for faster payments could be considered subject to the Bank Service
Company Act (BSCA) by providing services to federally supervised
depository institutions, the Board and other federal banking
agencies would have authority to examine the performance of those
services as if the depository institution were performing the
service itself on its own premises. 12 U.S.C. 1867. The BSCA,
however, does not grant enforcement authority to the Board or other
federal banking agencies over the third party service providers. In
addition, that authority does not appear applicable to public
benefit, competitive equity, effectiveness, or scope--key criteria
that the Board considers with regard to Federal Reserve payment
services.
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Recognizing that time-to-market is an important consideration for
industry participants related to faster payment services, the Federal
Reserve is committed to launching the FedNow Service as soon as
practicably possible. Pending engagement with the industry, the Board
anticipates the FedNow Service will be available in 2023 or 2024.
However, the Board believes that achievement of true nationwide reach,
as opposed to initial availability of a service, is a critical measure
of success for faster payments. The Board expects that it will take
longer for any service, including the FedNow Service or a private-
sector service, to achieve nationwide reach regardless of when the
service is initially available. The Federal Reserve will engage quickly
with industry participants to gather input for finalizing the initial
design and features of the service. Once specific design and features
of the FedNow Service have been finalized, the Board will publish a
final service description in a subsequent Federal Register notice, with
additional information provided through existing Reserve Bank
communication channels.
2. Expanded Operating Hours for Current Services
The Board has further determined that the Federal Reserve should
explore the expansion of hours for the Fedwire Funds Service and the
National Settlement Service (NSS), up to 24x7x365, subject to
additional analysis of relevant operational, risk, and policy
considerations. The Board believes that expanded hours for the Fedwire
Funds Service and NSS would be the most effective way to provide the
liquidity management functionality described in the 2018 Notice and
could provide additional benefits to financial markets broadly, beyond
support for faster payments. Subject to the outcome of analyzing the
relevant operational, risk, and policy considerations, the Board will
seek public comment separately on plans to expand hours for the Fedwire
Funds Service and NSS.
D. Organization of This Notice
This notice is organized in two parts. Part One contains a high-
level discussion of the comments received by the Board in response to
the 2018 Notice (Section II), an assessment of the planned FedNow
Service pursuant to the requirements of the MCA and the Board's
criteria for new services and major service enhancements (Section III),
and a discussion of potential benefits of expanded service hours for
the Fedwire Funds Service and NSS (Section IV).
Part Two contains a service description of the planned FedNow
Service, outlining the proposed features and functionality (Section V)
and the Board's initial competitive impact analysis of the service
(Section VI). The Board is seeking public comment on all aspects of
this service.
Part One
II. Summary of Comments
The Board received 405 comment letters in response to the 2018
Notice.\21\ Several comment letters were signed by multiple parties,
bringing the total number of entities responding to the 2018 Notice to
812.\22\ Comments were submitted by a wide variety of stakeholders in
the U.S. payment system corresponding to the following segments: small
and midsize banks, large banks, individuals, consumer organizations,
merchants, service providers, private-sector operators, fintech
companies, trade organizations, and other interested parties.\23\
Overall, banks were the largest group of respondents, with small and
midsize banks comprising approximately 60 percent of the total
comments--the largest individual segment--and representing institutions
from 34 states. Trade organizations submitted letters representing
several commenter segments, including small and midsize banks, large
banks, merchants, fintech companies, and service providers. Trade
organization comments often aligned with those submitted individually
by their members. However, some trade organization comments presented
varied opinions based on disparate views within their membership, such
as contrasting views among banks of different sizes.
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\21\ The Board also received over 150 additional comment letters
that suggested the Board should select a specific service or
business as the provider of Federal Reserve services. The Board
considered these comments to be outside the scope of its request for
comment.
\22\ Many of the comment letters signed by multiple parties
represented small and midsize banks. The Board considered comment
letters signed by multiple parties as a single response for the
purposes of this notice, but the additional signatures are
noteworthy in evaluating the commenters' perspectives and overall
industry engagement on the Board's request for comment.
\23\ ``Banks'' include any type of depository institution, such
as commercial banks, savings banks, savings and loan associations,
and credit unions. ``Service providers'' are entities, such as core
payment processors, that provide payment services, processing, or
operational and technical support to financial institutions.
``Private-sector operators'' are entities that operate payment
systems, such as the operator of the current private-sector RTGS
service for faster payments and payment card networks. ``Other
interested parties'' include payment standards organizations, a
congressional member organization, research and academic groups, and
a foreign central bank. For the purposes of this notice, a ``small
bank'' is defined as having assets of less than $10 billion and a
``large bank'' is defined as having assets of more than $50 billion,
while a ``midsize bank'' is defined as having assets between $10
billion and $50 billion.
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The following subsections provide a summary of general themes from
comments received in response to the 2018 Notice. A detailed discussion
of specific themes raised by the commenters can be found in Sections
III, IV, and V.\24\
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\24\ In addition to addressing the potential actions raised by
the Board, commenters addressed a number of other topics, for
example, encouraging the Federal Reserve to review the applicability
of existing regulations to faster payments and to continue serving
as a leader for industry collaboration.
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A. Faster Payments
Commenters provided feedback on topics broadly related to faster
payments, in addition to the specific questions posed by the Board. A
number of commenters noted that faster payments are likely to become a
significant part of the nation's payment system in the future. Some
commenters argued that the United States is lagging behind other
nations with respect to payment innovation, noting that several
countries have already implemented faster payment services. Other
commenters, particularly small and midsize banks, noted that customer
expectations are shifting towards the real-time capabilities of faster
payments and that the ability to implement faster payment services for
customers will affect the long-term viability of small and midsize
banks. Several commenters also argued that widespread adoption of
faster payments could improve financial inclusion, in addition to
helping reduce fees that lower income households often face, such as
overdraft and late fees.
Approximately 90 commenters, from most commenter segments,
addressed topics related to demand for faster payments in the United
States, often focusing on whether demand would be sufficient to support
the Federal Reserve's development of a 24x7x365 RTGS service.\25\ More
than 70 of these commenters identified potential sources for such
demand, with most expecting the greatest initial demand to come from
low-dollar person-to-person payments
[[Page 39302]]
or consumer-to-business payments. Some of these commenters also noted
the possibility of demand related to business payments, such as
payroll, vendor payments, or benefit disbursement, with some noting
that demand could vary across businesses of different sizes or types.
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\25\ These commenters included small and midsize banks, large
banks, individuals, consumer organizations, merchants, service
providers, fintech companies, trade organizations, and other
interested parties.
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B. Real-Time Gross Settlement of Interbank Obligations
Nearly 150 commenters addressed whether RTGS is the appropriate
strategic foundation for interbank settlement of faster payments.\26\
Of these, approximately 140 commenters from all segments agreed that
RTGS is the appropriate strategic foundation for interbank settlement
of faster payments. Approximately 10 commenters, from a number of
segments, did not support RTGS as the strategic foundation for
interbank settlement of faster payments.\27\
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\26\ Some commenters addressed RTGS as the appropriate strategic
foundation for interbank settlement of faster payments without
taking a position, typically citing a lack of consensus among their
membership.
\27\ These commenters were from the following segments: small
and midsize banks, large banks, individuals, service providers,
private-sector operators, and trade organizations.
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Of those commenters supporting RTGS as the appropriate strategic
foundation, many echoed the considerations outlined in the 2018 Notice.
Most notably, many of these commenters stated that, by matching the
speed of settlement with the speed of payment, RTGS better mitigates
interbank settlement risk compared with other settlement arrangements.
A number of commenters further stated that the use of RTGS for
interbank settlement of faster payments is consistent with industry
expectations and aligns with the FPTF's criteria for an effective
faster payment solution.\28\ Some commenters also noted that RTGS is
the approach taken by other countries for interbank settlement of
faster payments.
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\28\ In order to evaluate possible faster payment services, the
FPTF developed a set of effectiveness criteria that addressed
various features of a faster payment service. With respect to
interbank settlement, the FPTF considered a faster payment service
to be ``very effective'' if, among other things, interbank
settlement occurs within 30 minutes of the completion of a faster
payment for end users. See Faster Payments Task Force, ``Faster
Payments Effectiveness Criteria,'' (January 26, 2016). Available at
https://fedpaymentsimprovement.org/wp-content/uploads/fptf-payment-criteria.pdf.
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Commenters not supporting RTGS as the appropriate strategic
foundation for faster payments argued that deferred settlement can
similarly serve as an appropriate foundation for such payments. These
commenters stated that, compared with an RTGS arrangement for faster
payments, a deferred settlement arrangement has lower costs, is less
complex for participating banks, and requires less liquidity.
A few commenters, although supportive of RTGS as the appropriate
strategic foundation for faster payments, expressed concern about the
need for increased liquidity to conduct immediate settlement and avoid
payments failing because of insufficient liquidity. Some commenters
also stressed the importance of resiliency to mitigate RTGS service
disruptions.
C. Federal Reserve RTGS Service and Liquidity Management Tool
More than 350 commenters addressed whether the Federal Reserve
should develop an RTGS service for faster payments.\29\ Approximately
320 commenters, from all segments, supported the Federal Reserve
developing an RTGS service for faster payments. Approximately 30
commenters, mostly comprising large banks and private-sector operators,
including many that have been involved in the recent development of a
private-sector RTGS service for faster payments, were not supportive of
the Federal Reserve's development of such a service.
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\29\ Approximately 50 additional commenters raised issues
related to the Federal Reserve's development of an RTGS service for
faster payments but did not take a position on whether the Federal
Reserve should offer such a service. Many of these commenters cited
a lack of consensus among their membership, while others advocated
for enhancement of current Federal Reserve payment services but did
not take a position on the provision of an RTGS service for faster
payments.
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Commenters that supported the Federal Reserve's provision of an
RTGS service for faster payments pointed to a number of factors
underlying their support. Many commenters argued that the Federal
Reserve would provide equitable access to banks of all sizes and
facilitate nationwide reach for faster payments. Many commenters also
discussed the importance of safety for faster payments, stating that
the Federal Reserve is a trusted entity with a record of stability
during periods of crisis and that a Federal Reserve RTGS service for
faster payments could enhance resiliency and reduce risks in the
payment system. Some commenters discussed the potential efficiency
benefits of such a service, including increased competition, decreased
market concentration, lower costs, and greater innovation.
Commenters not supportive of the Federal Reserve developing an RTGS
service for faster payments argued that such a service was unnecessary
given actions taken by the private sector, including the recent
development of a private-sector RTGS service for faster payments.
Several of these commenters specifically questioned whether the Federal
Reserve could meet the Board's criteria for the provision of new
services.\30\ Other commenters argued that the Federal Reserve's
decision to consider an RTGS service for faster payments is slowing the
adoption of faster payments. These commenters argued that some industry
participants may decide not to offer faster payments until after a
final decision from the Federal Reserve or may further wait until after
implementation of a Federal Reserve service, in the event of such a
decision.
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\30\ See ``The Federal Reserve in the Payments System,'' supra
note 18. The Board's criteria for new services and related comments
are discussed in Section III.
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Approximately 230 commenters addressed whether the Federal Reserve
should develop a liquidity management tool.\31\ Approximately 225
commenters, from all segments, supported the Federal Reserve developing
such a tool. Fewer than 5 commenters were not supportive of the Federal
Reserve developing a liquidity management tool.\32\
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\31\ At least one additional commenter raised issues related to
a liquidity management tool but did not express a view about whether
the Federal Reserve should offer such a tool.
\32\ These commenters were from the following segments: private-
sector operators, fintech companies, and other interested parties.
---------------------------------------------------------------------------
Commenters that supported development of a liquidity management
tool discussed the importance of liquidity management in RTGS services
for faster payments. Several commenters indicated that such a tool
could help with managing liquidity in the recently introduced private-
sector RTGS service. Commenters that did not support the Federal
Reserve developing a liquidity management tool indicated that the
private sector could develop methods on its own to manage liquidity for
faster payments.
III. Assessment of the FedNow Service
In 1984, the Board established criteria for the consideration of
new or enhanced Federal Reserve payment services in its policy ``The
Federal Reserve in the Payments System.'' \33\ The policy incorporates
the cost recovery requirements of the MCA and the MCA's objective of
achieving an adequate level of service nationwide. In expressing the
Board's overall
[[Page 39303]]
expectations for the Federal Reserve's provision of payment services,
the policy takes into account longstanding public policy objectives to
promote the safety and efficiency of the payment system and to ensure
the provision of payment services to banks nationwide on an equitable
basis, and the importance of achieving these objectives in an
atmosphere of competitive fairness.
---------------------------------------------------------------------------
\33\ See ``The Federal Reserve in the Payments System,'' supra
note 18. As stated in the policy, the Board, in its sole discretion,
determines when the process outlined in the policy is applicable and
makes all decisions related to the process.
---------------------------------------------------------------------------
The policy specifically addresses the introduction of new services
or major service enhancements in light of the Board's overall
expectations and requires all of the following criteria to be met:
The service should be one that other providers alone
cannot be expected to provide with reasonable effectiveness, scope, and
equity. For example, it may be necessary for the Federal Reserve to
provide a payment service to ensure that an adequate level of service
is provided nationwide or to avoid undue delay in the development and
implementation of the service. (Other Providers Criterion)
The Federal Reserve must expect that its providing the
service will yield a clear public benefit, including, for example,
promoting the integrity of the payments system, improving the
effectiveness of financial markets, reducing the risk associated with
payments and securities-transfer services, or improving the efficiency
of the payments system. (Public Benefits Criterion)
The Federal Reserve must expect to achieve full recovery
of costs over the long run. (Cost Recovery Criterion)
The following sections provide a detailed assessment of the FedNow
Service under these three criteria. The assessment uses a similar set
of measures to evaluate each criterion. In particular, the Other
Providers Criterion and the Public Benefits Criterion both consider
measures related to the Federal Reserve's broader objectives of
promoting the accessibility, safety, and efficiency of the nation's
payment system. However, the Board's policy requires considering
whether public policy goals would be achieved according to these
measures in two different situations: one where a service may be
provided by other providers alone (Other Providers Criterion), and a
second where the Federal Reserve develops a new service or major
service enhancement (Public Benefits Criterion).
In the assessment that follows, the Board applies the common set of
measures first in evaluating the Other Providers Criterion and then
again in evaluating the Public Benefits Criterion. Such an approach
creates overlap and some repetition in the analysis of each criterion.
The Board believes that this approach is necessary to ensure a
comprehensive assessment. Specifically, this approach allows a more
systematic assessment of whether, relative to other providers, the
Federal Reserve's provision of a service can be expected to advance
desirable outcomes in the payment system that are consistent with
public policy goals and might otherwise not be achieved by other
providers alone.
The Board's policy also requires a forward-looking evaluation of
the probable or likely future state of the payment system over the long
run, with or without Federal Reserve action.\34\ Therefore, when
assessing new services or major service enhancements, the Board focuses
on expected long-term outcomes and does not require a determination
that each of the criteria is satisfied at present or will be with
certainty in the future. Requiring such certainty would prevent the
Federal Reserve from acting until after negative consequences occur,
making any detrimental effects more difficult, if not impossible, to
remedy. For example, as noted in the Board's policy, it may be
necessary for the Federal Reserve to provide a payment service to avoid
an undue delay in the development and implementation of the service.
Waiting until undue delay had already occurred, however, would render
ineffective the Federal Reserve's objective of providing such a service
to facilitate its timely development and implementation.
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\34\ The Board's focus on expected long-term outcomes predates
both the MCA and the Board's policy for assessing new services or
major service enhancements. For example, the Federal Reserve
undertook efforts to pilot ACH services in the late 1960's because
of the expected long-term potential of those services for improving
the payment system. These services were fully operational in the
early 1970s and were intended, in part, to address growing paper
check volumes, which the Board expected would eventually exceed 50
billion items 15 years later, in the mid-1980s.
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A. Other Providers Criterion: The service should be one that other
providers alone cannot be expected to provide with reasonable
effectiveness, scope, and equity. For example, it may be necessary for
the Federal Reserve to provide a payment service to ensure that an
adequate level of service is provided nationwide or to avoid undue
delay in the development and implementation of the service.
The Board's Other Providers Criterion balances the important role
that the private sector plays in providing payment services to the
public with the Federal Reserve's overall mission to promote the
accessibility, safety, and efficiency of the nation's payment system.
Therefore, the Board first considers whether the payment services that
other providers alone can be expected to offer sufficiently advance the
Federal Reserve's overall objectives in the payment system absent any
Federal Reserve action.\35\ In the context of the FedNow Service, the
Board's assessment of this criterion involves consideration of whether
other providers alone can be expected to offer RTGS services for faster
payments that advance the Federal Reserve's objectives according to the
measures outlined below.
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\35\ As noted previously, the Federal Reserve has already taken
actions to support the ability of other providers to offer RTGS
services for faster payments. In particular, the Board approved in
2017 guidelines for evaluating requests for joint accounts at the
Reserve Banks intended to facilitate settlement between and among
banks participating in private-sector payment systems for faster
payments. One such account has been provided to a private-sector
operator. Without these actions, other providers alone would be
unable to provide RTGS services for faster payments, supported by a
joint account at a Reserve Bank, that reproduce, as closely as
possible, the risk-free nature of settlement in central bank money.
---------------------------------------------------------------------------
1. Relevant Measures
The Board's policy for assessing new services or major service
enhancements considers three measures to evaluate expected outcomes
under the Other Providers Criterion: Scope, equity, and effectiveness.
a. Scope and Equity
The measures of scope and equity in the Board's Other Providers
Criterion reflect the Federal Reserve's objective of ensuring the
adequate provision of payment services nationwide on an equitable
basis. Taken together, these measures reflect the Federal Reserve's
broader mission of promoting accessibility in the nation's payment
system, as also considered in the Public Benefits Criterion.
The measure of scope takes into account the Federal Reserve's
policy goal, and an objective of the MCA, to achieve an adequate level
of payment services nationwide. Providing payment services that are
accessible to virtually all U.S. banks benefits all payment system
participants by facilitating ubiquitous payment services and allowing
the full realization of network effects.\36\ Therefore, the Other
Providers Criterion includes consideration of whether other providers
alone can be expected to provide a service that is accessible to banks
nationwide and on
[[Page 39304]]
terms that are equitable and facilitate broad participation.
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\36\ When network effects are present, the value of a service to
each user increases as the total number of users grows.
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The measure of equity reflects the Federal Reserve's objective to
ensure the provision of payment services to banks on an equitable
basis. The availability of payment services to banks on an equitable
basis promotes competition and a level playing field in the payment
industry overall. Equity comprises a number of elements, including
whether a service is broadly accessible to banks on reasonable terms
and in comparable quality, whether a service is provided in a
transparent manner, and whether a service has adequate measures in
place to take into account the interests and needs of virtually all
industry stakeholders. Moreover, equity considerations can affect
banks' decisions to join a payment service, which can feed back into
the measure of scope.
b. Effectiveness
The measure of effectiveness addresses the extent to which other
providers alone can be expected to advance desirable outcomes in the
U.S. payment system. In the context of the Other Providers Criterion,
effectiveness can be viewed through the elements of safety and
efficiency, key objectives that the Federal Reserve seeks to promote in
the U.S. payment system.
The element of safety reflects the Federal Reserve's objective to
promote the safe functioning of the U.S. payment system.\37\ The safety
of a payment system depends on many factors, including the security of
individual transactions, the general resiliency of end-user services,
and resiliency mechanisms for addressing specific events, such as bank
failures, operational outages, or natural disasters and other systemic
events. A safe payment system is crucial to economic growth and
financial stability because the effective operation of markets for
virtually every good and service is dependent on the smooth functioning
of the nation's banking and payment systems.
---------------------------------------------------------------------------
\37\ The element of safety may be referred to as integrity in
other contexts.
---------------------------------------------------------------------------
The element of efficiency reflects the Federal Reserve's objective
to promote the efficient functioning of the U.S. payment system.\38\
Efficiency encompasses a number of factors, including whether a service
is provided in a cost-efficient manner, whether it results in
efficiency gains brought about by competition and innovation, and
whether it achieves sufficient scope to realize the efficiency benefits
of network effects. An efficient payment system facilitates and
encourages economic activity, whereas an inefficient payment system can
result in frictions and costs that could hinder economic activity and
dampen growth.
---------------------------------------------------------------------------
\38\ Improvements in the efficiency of the payment system were a
central motivation when Congress originally established an
operational role in the payment system for the Federal Reserve.
Congress's decision to make the Federal Reserve an active
participant in the payment system when it passed the Federal Reserve
Act in 1913 was, in part, a response to inefficiencies that resulted
from the circuitous routing of checks in the early 1900s to avoid
presentment fees.
---------------------------------------------------------------------------
2. Public Comments
a. Scope and Equity
More than 200 commenters expressed views on whether other providers
alone will provide RTGS services for faster payments with reasonable
scope and equity.\39\ Approximately 175 commenters, representing a wide
variety of distinct interests, raised concerns that other providers
alone will not be able to implement services that can achieve
nationwide scope or to provide broadly accessible RTGS services for
faster payments on an equitable basis.\40\ In contrast, approximately
30 commenters, mostly comprising large banks and private-sector
operators, expressed views indicating that the private sector can
provide RTGS services for faster payments built for banks of all sizes
in the United States with reasonable scope and equity.
---------------------------------------------------------------------------
\39\ Approximately 35 additional commenters raised issues
related to scope and equity but did not express a view about whether
the other providers alone will be able to achieve nationwide scope
or provide services with reasonable equity.
\40\ These commenters included small and midsize banks,
individuals, consumer organizations, merchants, fintech companies,
service providers, and trade organizations.
---------------------------------------------------------------------------
Many commenters focused on the private-sector RTGS service for
faster payments, established in November 2017 and owned by the largest
banks in the United States. Commenters that expressed a critical view
of this service argued that a private-sector operator without the
experience or infrastructure necessary for working with the majority of
banks in the United States would face substantial challenges in
establishing new connections and relationships with such banks. Some of
these commenters argued that the process of doing so could take many
years, with a few commenters suggesting it could take at least a decade
or more, and others questioning whether such connections and
relationships would ever be possible. These commenters frequently
argued that a private-sector service, particularly one provided by an
operator that they believe has been historically focused on serving
large banks, will not adequately account for the unique challenges
facing smaller banks and may struggle to scale its services to allow
access for the nation's more than 10,000 banks. Some commenters also
expressed doubt that use of service providers, acting as agents for
banks that do not wish to connect to the service directly, will allow
private-sector services to achieve nationwide reach.
Some commenters also indicated that perceived equity concerns may
further affect the ability of private-sector RTGS services to achieve
reasonable scope. In particular, as described later, approximately 100
commenters, mostly from small and midsize banks and trade
organizations, raised equity concerns related to private-sector RTGS
services, indicating they may avoid joining such services in light of
those concerns.
Other commenters, comprising private-sector operators and large
banks, argued that the existing private-sector RTGS service for faster
payments was on course to reach almost half of U.S. deposit accounts by
the end of 2018. These commenters further stated that the service has a
credible plan for reaching near ubiquity at the end of 2020 by, among
other things, using service providers to facilitate participation of
small and midsize banks. These commenters also argued that the service
should have time to demonstrate its ability to achieve nationwide
scope. These commenters further argued that, by publicly announcing the
possibility of developing an RTGS service for faster payments, the
Federal Reserve has stalled progress that the service could otherwise
make towards achieving ubiquity.
Finally, some commenters expressed the view that, if a single
private-sector operator were the only provider of a nationwide RTGS
service in the United States, this outcome could adversely affect the
environment for private-sector innovation and the development of new
use cases. These commenters argued that an RTGS operator with a
dominant market position would have substantial impact on the emergence
of potentially innovative uses of faster payments through its policies
and prices, such that it could limit uses of faster payments that were
not in its business interest or the interest of its owners. In
contrast, other commenters argued that the existing private-sector RTGS
service for faster payments has the ability to support a wide variety
of use cases and can serve as a platform for innovation in end-user
payment services.
With respect to equity, many small and midsize banks, as well as
commenters that would be end users of
[[Page 39305]]
faster payment services settled via RTGS, such as individuals and
merchants, expressed concern that the private-sector RTGS service is
unlikely to be delivered in an equitable manner. Small and midsize
banks in particular argued that it is likely that smaller banks, which
are not owners of the private-sector service, will be unable to gain
access to the service on reasonable terms and in a transparent manner
over the long run. Some commenters noted the stated commitment of the
service's operator to address equity concerns through its pricing and
access policies but questioned whether it will maintain these
commitments in the future, arguing that doing so may not be in the
long-term business interest of the operator's owner banks. In
particular, commenters questioned whether the operator would maintain a
uniform pricing structure, especially if it achieves a dominant market
position.
Several small and midsize banks expressed further concerns,
unrelated to pricing, that an RTGS service for faster payments
established by competitors with a business profile different than their
own will not provide them with equitable service. Many smaller banks
argued that the service's operator will not understand their business
needs and will be unlikely to take into account their interests,
particularly if they are excluded from its governance processes. For
example, some commenters argued that non-owner banks have no meaningful
role in the service's rulemaking or pricing decisions compared with the
service's owner banks. In addition, several commenters expressed
concerns that joining the service could grant their competitors a
competitive advantage by allowing them access to detailed information
about their payment operations and customer base.
Other commenters, mostly private-sector operators and large banks,
argued that the operator of the private-sector RTGS service for faster
payments has demonstrated its willingness to accommodate the interests
and needs of a wide variety of prospective participants and has taken
concrete steps to facilitate near-universal access on equitable terms.
In particular, these commenters emphasized that the service's pricing
terms, including a uniform pricing structure without minimum volume
requirements or volume discounts common in other payment systems, do
not favor any particular type of bank and demonstrate the equitable and
impartial provision of the service. These commenters also argued that
the service's use of service providers facilitates access for banks of
all sizes and promotes equitable access to the service. Several of
these commenters also stated that the service operates in a transparent
manner, for example, by making its rules publicly available. Finally,
these commenters noted that the service's operator plans to incorporate
input from small and midsize banks, as well as other stakeholders,
through advisory panels and other types of engagement, and argued that
such measures should be sufficient to assure non-owner banks that they
will receive access to the service on an equitable basis, today and in
the future.\41\
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\41\ As discussed in detail later, the service's operator
announced changes in early 2019 intended to reinforce its intention
to be inclusive and equitable.
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b. Effectiveness
Overall, more than 200 commenters raised issues related to the
safety and efficiency of settlement arrangements for faster payments.
Approximately 180 commenters, representing a wide variety of distinct
interests, raised topics that indicate safety or efficiency concerns
may result from other providers alone providing settlement arrangements
for faster payments.\42\ In contrast, around 30 commenters, comprising
large banks, trade organizations, and private-sector operators,
indicated that the provision of such services by other providers alone
would promote a safe and efficient payment system.
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\42\ These commenters included small and midsize banks,
individuals, consumer organizations, merchants, fintech companies,
service providers, trade organizations, and other interested
parties.
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Whether RTGS services for faster payments offered by other
providers alone will be reasonably effective in promoting the
efficiency of the U.S. payment system depends in large part on whether
such services achieve nationwide reach. As discussed in the context of
scope, many commenters expressed concerns about the ability of private-
sector RTGS services for faster payments to achieve nationwide reach,
which commenters suggested would prevent an RTGS infrastructure from
fully realizing potential efficiency benefits.\43\
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\43\ Such benefits would stem primarily from the full
realization of network effects with virtually all banks
participating in the RTGS infrastructure for faster payments.
---------------------------------------------------------------------------
Many commenters also addressed potential efficiency concerns if an
RTGS infrastructure for faster payments attains nationwide reach but is
provided by a single dominant private-sector operator. In particular,
approximately 120 commenters, representing a wide variety of distinct
interests, noted various ways in which a dominant private-sector RTGS
operator could use its market power to harm efficiency.\44\ Many
commenters noted that payment markets with either limited competition
or a dominant private-sector operator often exhibit monopolistic
pricing. Other commenters expressed concerns that, in the long term,
evolution of such a service could be driven primarily by the desire of
the dominant operator to retain its position in the market and
forestall entry of other potential providers, to the detriment of
competition and efficiency gains that might result from competition.
Some commenters, particularly individuals and merchants, specifically
pointed to issues with payment cards as examples of challenges that the
market may face with a dominant operator. For example, these commenters
raised concerns about high prices and impediments to competition and
innovation that they believe occur in the payment card market.
---------------------------------------------------------------------------
\44\ These commenters included small and midsize banks,
individuals, consumer organizations, merchants, fintech companies,
service providers, and trade organizations.
---------------------------------------------------------------------------
Approximately 30 commenters, mostly large banks and private-sector
operators, argued that a single provider of RTGS services for faster
payments would be able to serve the market adequately and that the
presence of multiple RTGS services could lead to market inefficiencies
such as fragmentation and increased connection costs. As discussed in
the context of scope, these commenters argued that the private-sector
RTGS service for faster payments is on course to achieve nationwide
reach, which would allow it to realize efficiency gains through
participants' ability to exchange payments with a wide range of
counterparties. A few of these commenters argued that, should the
service achieve nationwide reach, additional entrants would not be able
to generate incremental benefits to justify their setup and operational
costs from an efficiency perspective. Many of these commenters further
expressed concerns that should multiple RTGS services for faster
payments enter the market, but not be able to interoperate, banks would
either need to incur high costs of connecting to multiple RTGS services
or would need to choose to connect to just one of multiple RTGS
services, resulting in an inefficient, fragmented faster payment
market. These commenters argued that, as a result, a single provider is
the most efficient way to provide RTGS services for faster payments.
With respect to innovation in a market with a single dominant
private-
[[Page 39306]]
sector RTGS service for faster payments, some commenters argued that a
lack of competition would curtail innovation in the nascent market for
faster payments, resulting in higher costs and an inferior product.
These commenters expressed the view that the provider would innovate to
meet the needs of a narrow group of banks at the expense of smaller
banks or certain end users. In contrast, other commenters expressed the
view that the private sector is best positioned to foster innovation in
faster payments, arguing that the private sector can quickly respond to
market demand, in contrast to public-sector entities that need to
follow a formal process to propose and implement certain types of
operational changes. These commenters pointed to the clearing
capabilities of the private-sector RTGS service for faster payments and
its ability to support a variety of payment types, such as business-to-
business or consumer-to-business payments, arguing that the service is
a platform for innovation.
Many commenters expressed safety and resiliency concerns about the
potential outcome of a nationwide RTGS infrastructure for faster
payments being provided by just one private-sector operator,
particularly as the prominence of faster payments grows over the long
term. Many commenters specifically expressed concerns about the market
being served by a single private-sector provider in the event of a
systemic event or natural disaster. Several commenters argued that such
an operator would be ineffective at providing resiliency and stability
to the faster payment ecosystem in times of crisis, particularly if the
operator did not have previous experience managing disruptions that may
occur across a wide range of banks or geographic areas. Some commenters
expressed concern that a single private-sector operator would serve as
a single point of failure in the faster payment market. Finally, some
commenters expressed concerns that, if private-sector RTGS services for
faster payments are unable to achieve nationwide reach, some banks may
be unable to offer faster payment services to their customers
altogether. The commenters further expressed concern that such a result
would lead customers to adopt services provided outside of the banking
industry, involving institutions that the commenters viewed as
insufficiently regulated and potentially unsafe.
A few commenters, mostly from large banks and private-sector
operators, noted that the operator of the private-sector RTGS service
provides other payment services that have proven to be resilient in
times of stress, including the financial crisis and natural disasters.
These commenters stated that the operator has similarly designed its
RTGS service for faster payments to be highly resilient.
3. Board Analysis
The Board finds that substantial uncertainty exists about the long-
term success of RTGS services for faster payments, despite actions
already taken by the private sector. As articulated in the 2018 Notice,
the Board continues to believe that RTGS is the appropriate strategic
foundation for interbank settlement of faster payments. However,
certain challenges may prevent other providers alone from implementing
a nationwide RTGS infrastructure for faster payments that provides a
basis for ubiquitous, safe, and efficient faster payments in the United
States.
The magnitude of the task involved in achieving any large-scale
improvement in the U.S. payment system, such as establishing a new
foundational infrastructure for faster payments, is significant. The
banking industry plays a key role in the U.S. payment system, which
necessitates the industry's involvement in payment system
improvements.\45\ However, the United States has a highly complex
banking system with more than 10,000 depository institutions, including
commercial banks, savings banks, savings and loan associations, and
credit unions.\46\ As a result, the U.S. banking system (and, by
extension, the payment ecosystem) is extremely diverse, with a wide
variety of market participants and stakeholders that have heterogeneous
circumstances, interests, and needs.
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\45\ In the United States, deposits in accounts with banks
comprise the monetary asset that is most widely held by the public
to conduct payments. As of June 2019, the value of transferable
deposits held by the public, including demand deposits and other
checkable deposits, was $2.17 trillion, while the value of currency
in circulation outside banks was $1.66 trillion. See Board of
Governors of the Federal Reserve System, ``Money Stock and Debt
Measures--H.6 Release, Table 5,'' (July 11, 2019). Available at
https://www.federalreserve.gov/releases/h6/current/default.htm.
\46\ As noted previously, these institutions vary greatly in
terms of size, level of technical sophistication, and operational
practices, as well as the customers and communities served.
Institutions also vary with respect to the connections and
relationships that they have with payment operators, service
providers, and other intermediaries, such as bankers' banks and
corporate credit unions.
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This diversity inherently creates significant coordination
challenges that, along with the high fixed costs necessary to develop
RTGS services for faster payments, are likely to limit the number and
type of entrants in the market.\47\ Indeed, only one private-sector
RTGS service for faster payments has been established in the nearly six
years since the Federal Reserve launched the SIPS initiative and
articulated the goal of a ubiquitous, safe, and efficient faster
payment system.\48\ Comments received by the Board support the
expectation that this service is likely to remain the sole private-
sector provider of RTGS services for faster payments in the United
States.
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\47\ Specifically, with respect to coordination challenges, the
diverse nature of the nation's banking system results in disparate
operational and use-case needs, which can be difficult to
accommodate. These disparate views and the large number of parties
holding them make coordination challenging for any single entity
attempting to establish a service that represents the interests and
needs of diverse institutions. As a result, new services are likely
to be developed by small groups of institutions with closely aligned
interests, which may make such services less attractive to other
types of institutions. Coordination between numerous institutions is
also necessary to obtain funding because of the high fixed costs
typically involved in the development of a new payment service. Such
coordination is especially challenging when numerous institutions
with limited resources try to assemble sufficient funds to develop
their own services. As a result, new services are likely to be
developed by small groups of institutions with significant
resources.
\48\ Faster payment services were established even earlier in
some jurisdictions internationally. For example, the Faster Payment
Service in the United Kingdom began operating in 2008, nearly 10
years before the U.S. payment industry began attempting to establish
broadly accessible faster payment services. See ``Fast payments--
Enhancing the speed and availability of retail payments,'' supra
note 1.
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Given this likely outcome, and in light of the comments received,
historical context, and economic analysis, the Board does not expect
that other providers alone will provide an RTGS infrastructure for
faster payments with reasonable effectiveness, scope, and equity. Two
issues in particular present significant obstacles: Achieving
nationwide scope on an equitable basis, and efficiency and safety
issues likely to arise in a single-provider market.
a. Scope and Equity
Achieving nationwide scope has been a recurring challenge for the
U.S. payment system, and, to date, no single private-sector payment
service provider of traditional payment services, such as check, ACH,
funds transfer, or payment card services, has done so alone. Although
the importance of network effects may give operators an incentive to
pursue broad reach for new payment services, the cost and difficulty of
reaching virtually all banks in an environment as complex as the U.S.
banking industry means that many operators are unlikely to invest the
resources and effort necessary to achieve true nationwide scope.
Extending access to a few thousand
[[Page 39307]]
banks, let alone the more than 10,000 diverse depository institutions
necessary to achieve true nationwide scope, is especially costly and
time-consuming for operators with limited relationships with and
connections to these institutions. For this reason, private-sector
operators have historically tended to concentrate on providing payment
services to a subset of institutions, and existing payment systems,
such as those for checks, ACH payments, funds transfers, and payment
cards, all achieved nationwide reach with multiple providers of payment
and settlement services.
A single operator of a new service aiming to achieve nationwide
reach is likely to find that establishing costly new connections and
providing adequate support to the significant number of smaller banks
in the U.S. market is much harder than doing so for the few hundred
largest banks or even a few thousand institutions. The benefit to a
private-sector operator of ensuring access to the ``long tail'' of
small banks in the United States is unlikely to outweigh the cost that
it would incur to reach them. Given the small number of deposit
accounts that each additional small bank would bring to the service,
the diminishing returns generated by onboarding and supporting these
banks are unlikely to offset the cost of doing so. Ultimately, the
cost-benefit calculation of a single private-sector operator could lead
it to forgo pursuing true nationwide scope, particularly if
establishing new relationships with and connections to the large number
of small banks proves more challenging or costly than anticipated.
The recently established private-sector RTGS service endeavors to
achieve nationwide reach by extending access to banks of all sizes.
Although the service can attain substantial reach across deposit
accounts simply through connections with all of its large owner banks,
measuring reach in terms of deposit accounts does not accurately
reflect true reach across the nation's substantial number of smaller
banks. Attaining such reach across deposit accounts through a small
number of large banks would still leave the vast majority of the
nation's 10,000 banks without access to the service. In fact, by the
middle of 2019, banks that had joined the service represented less than
one percent of the institutions in U.S. banking system.
For a number of reasons, it is unlikely that the private-sector
RTGS service for faster payments alone will reach the thousands of
small banks necessary to yield nationwide scope, even in the long term.
Given its traditional focus on providing services primarily to a small
number of large banks in the United States, the operator of the
private-sector RTGS service would need to develop significant expertise
to handle the large number and substantial diversity of U.S. banks. It
would further need to expand and adapt its logistical support,
currently geared towards its existing bank customers, for smaller and
more diverse banks. Although the service plans to use service providers
to extend reach to small and midsize banks, many commenters expressed
concerns that building such connections to the service will
nevertheless take many years. This problem may be exacerbated by the
fact that many small and midsize banks do not currently have
relationships with the service providers that work with the private-
sector RTGS service or any relevant service provider.
The challenge of achieving nationwide scope for an RTGS
infrastructure is likely to be further exacerbated by concerns of
numerous commenters, representing large segments of the U.S. payment
market, about whether access extended by the private-sector RTGS
service for faster payments will be equitable. The operator of the
service has looked to address these concerns by taking concrete steps
to assure market participants of equitable treatment, now and in the
future. In particular, it has publicly stated its commitment to a
transparent and uniform pricing regime. In addition, the private-sector
operator has taken measures to incorporate perspectives from non-owner
stakeholders in its governance processes, including recent measures
that involved adding seats for community banks and credit unions to the
service's business committee and announcing business principles
intended to guide the operation and maintenance of the service.\49\
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\49\ On March 28, 2019, the service's operator announced that it
had added four seats for community banks and credit unions to the
service's business committee in an effort to expand the type and
number of banks providing input to the service. At the same time,
the service's operator also announced a set of business principles
intended to guide the operation and maintenance of the service as
long as the service remains the nation's sole provider of faster
real-time interbank clearing and settlement.
The principles include, for example, making rules publicly
available, periodically soliciting input on rules, disclosing major
decisions to relevant stakeholders, maintaining flat fees that do
not include volume discounts, and making the service available to
all institutions that meet the service's eligibility requirements.
Available at https://www.theclearinghouse.org/payment-systems/articles/2019/03/-/media/080a875636784eec87bfc13ddf0ef6a4.ashx.
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Despite these steps, equity concerns may persist for a number of
reasons. First, although the operator has stated its commitment to
equitable pricing, nonprice measures can be equally important in
determining whether services are provided equitably. For instance, an
RTGS service for faster payments designed with a focus on large,
technologically sophisticated banks may not be easily adopted by
smaller banks, regardless of pricing structure.\50\ Second, a service
owned by a small group of institutions with closely aligned interests
will confront persistent concerns from other market participants that
the service will not equitably represent the interests and needs of the
broader payment industry. In particular, potential participants in the
service may have concerns, as expressed by commenters, that its
operator will have incentives to take actions that favor its owner
banks at the expense of non-owner banks.\51\
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\50\ Examples of RTGS design features that could disadvantage
smaller, less sophisticated banks with standard operating hours
include the need to prefund separate settlement accounts on a
24x7x365 basis, as well as reliance on 24x7x365 computer-to-computer
connections that are commonly used by larger banks with significant
payment volume.
\51\ Such a possibility could reflect what is known as
``vertical foreclosure.'' Under vertical foreclosure, the operator
of an RTGS service for faster payments, as the provider of a key
input into banks' provision of payment services to their customers,
may have an incentive to limit access to non-owner banks in order to
allow its owner banks to attract customers and gain market share.
Although such an operator has countervailing incentives,
particularly early on, to allow broad access to the service in order
to increase its value through network size, a more established
service may be more likely to limit equitable access to non-owner
banks, especially if the service does not face direct competition
from other service providers.
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Concerns about future treatment may be particularly pronounced if
it is perceived that the operator could alter its current commitments
to equitable access in response to changing market conditions, such as
the operator achieving a dominant position in the market for RTGS
services for faster payments or, alternatively, facing the increased
prospect of competition from other parties. These concerns may be
especially persistent if such commitments can be changed unilaterally
and are not subject to a public and transparent process whereby all
interested parties have the opportunity to provide input.
Ultimately, these concerns about the ability to access the private-
sector RTGS service for faster payments on an equitable basis over the
long run are likely to cause significant uncertainty among small and
midsize banks about the value of connecting to the service. This
uncertainty may cause small and midsize banks to choose not to join the
[[Page 39308]]
service and to consider instead alternative non-RTGS-based arrangements
for faster payments. The result would only further complicate the
challenges that the private-sector RTGS service will face in achieving
nationwide reach.
b. Effectiveness
Economic analysis, historical context, and the comments received
all identify market structure, the number of providers in the market,
and the nature of competition between those providers as key drivers of
effectiveness, as viewed through the lens of safety and efficiency.
Competition generates incentives for firms to offer products that
broadly appeal to customers, at prices close to the cost of making
those products, and to continually innovate and improve their products
in the hope of attracting customers from their competitors. Compared
with firms facing competition, a monopoly firm can charge higher
prices, causing customers to pay more than the actual cost and to buy
less than is socially desirable. Without competitors, a monopoly firm
can also limit supply to certain segments of the market. Finally,
customers who can only buy a product from one firm may have no choice
but to accept products, even if they are lower quality. Economic theory
and real-world experience both demonstrate that, although setting up
and operating additional firms is often costly, the resulting
competition leads to societal efficiency gains that outweigh such
costs, generating outcomes that are better for the public than if a
single firm serves a market.\52\
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\52\ For example, in its 2016 report, the GAO found that
competition by the Federal Reserve in payment markets has generally
had a positive impact, with benefits that include lowered cost of
processing payments for end users. See ``Federal Reserve's
Competition with Other Providers Benefits Customers, but Additional
Reviews Could Increase Assurance of Cost Accuracy,'' supra note 5.
From an economic perspective, an exception to the efficiency-
through-competition argument is a ``natural monopoly.'' In this
situation, the cost of setting up and operating a firm is so high
that it can be more efficient for a single firm to supply the whole
market, although achieving efficiency usually requires that the
natural monopolist be regulated. With respect to such regulation of
payment systems, as described previously, the Federal Reserve does
not have plenary regulatory or supervisory authority over the U.S.
payment system.
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These considerations are important in the context of the market for
RTGS services for faster payments, which is likely to involve a single
private-sector provider, for reasons discussed previously. Although a
single-provider market structure avoids duplicating the substantial
development and operating costs of additional RTGS services, it is
likely to have a detrimental effect on the efficiency and safety of the
faster payment market. As described earlier, a likely market outcome is
that only a portion of banks in the United States would actually
connect to the sole private-sector RTGS service. In such a scenario,
the remaining, likely smaller, banks would either not join any faster
payment services or would explore alternative arrangements, such as
services based on a deferred settlement model.\53\ The resulting
fragmentation of the end-user faster payment market between those end
users with access to RTGS-based faster payment services, those with
access to faster payment services based on deferred settlement, and
those without any access to faster payment services through their banks
could prevent end users and the U.S. payment industry as a whole from
realizing fully the benefits associated with nationwide RTGS-based
faster payments.
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\53\ The widespread availability of traditional payment systems,
which can enable deferred settlement for faster payments, may make
faster payment services based on deferred settlement an appealing
alternative to RTGS-based services. A number of commenters, mostly
small banks, voiced concerns that if they were unable to meet
customer demand for faster payment services, they would be placed at
a significant competitive disadvantage, which could eventually
jeopardize their continued operation. Should such banks expect that
they would not be able to gain equitable access to private-sector
RTGS services, they could instead adopt faster payment services
based on deferred settlement in an effort to remain competitive,
undermining an RTGS infrastructure's ability to reach nationwide
scope and potentially increasing risk in the payment system.
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Furthermore, a single provider of RTGS services for faster payments
may not advance other desirable outcomes in the U.S. payment system
with respect to competition, innovation, and efficiency. As described
earlier, a single service provider without competition can yield
undesirable outcomes for faster payments, such as lower service quality
or higher prices, which may result in reduced adoption rates of RTGS
services for faster payments by banks. Such undesirable outcomes could
limit adoption of faster payments by end users, which could in turn
curtail efficiency benefits to the broader economy.
Notably, a single provider of RTGS services for faster payments may
not provide a neutral foundation for innovative, competitive end-user
faster payment services. Instead, a single provider may focus on
specific use cases that do not promote the potential for faster
payments to be used in a wide variety of ways. For example, an RTGS
service could eschew innovation in use cases that undermine its owners'
existing interests and profits from traditional payment methods.
Moreover, the RTGS service's owners could favor their end-user products
at the expense of other competing products by inhibiting the ability of
competing products to use the RTGS service. Such limitations on access
to the RTGS service could further reduce potential competition and
innovation for end-user services.
With respect to payment system safety, a market outcome with a
single RTGS service for faster payments would make it difficult and
costly for faster payment services to achieve resiliency through
redundancy. Such redundant connections have been a common solution in
many retail payment markets, suggesting that many banks find the
resiliency benefits outweigh the cost of connecting to multiple
services. For example, a number of banks connect to two ACH services in
pursuit of resiliency, despite the fact that achieving nationwide reach
requires connecting to just a single ACH service. In a market without
redundancy, a sole provider may serve as a single point of failure for
RTGS-based faster payments.
There exist alternative retail payment methods with nationwide
reach, such as the ACH or payment card systems. However, those payment
methods differ from RTGS-based faster payments in important ways, such
as speed, message types, and technology. As a result, substitution
between those payment methods and RTGS-based faster payments could
create significant operational, technical, cost, and timing challenges
for banks seeking to use such substitutes as a backup for faster
payments. These challenges may make such alternative payment methods
inadequate for resiliency purposes related to faster payments.
All of the challenges described above regarding scope, equity, and
effectiveness are likely to pose significant obstacles to other
providers that might attempt to implement an RTGS infrastructure that
would provide the foundation for ubiquitous, safe, and efficient faster
payments in the United States. Therefore, the Board believes that, on
balance, other providers alone cannot be expected to provide the
service with reasonable effectiveness, scope, and equity.
Furthermore, as described previously, the Federal Reserve does not
have plenary regulatory or supervisory authority over the U.S. payment
system and instead has traditionally influenced retail payment markets
through its role as an operator. As a result, the Federal Reserve
having an operational role in the settlement of faster payments would
[[Page 39309]]
be the most effective approach to address the challenges faced by other
providers alone and would yield a clear public benefit.
B. Public Benefits Criterion: The Federal Reserve must expect that
its providing the service will yield a clear public benefit, including,
for example, promoting the integrity of the payments system, improving
the effectiveness of financial markets, reducing the risk associated
with payments and securities-transfer services, or improving the
efficiency of the payments system.
The Board's Public Benefits Criterion requires that a new service
yield long-term benefits to the public and the economy as a whole.
Therefore, in determining whether the Federal Reserve should develop
the FedNow Service, the Board has considered the expected public
benefits and potential offsetting costs of the service.
1. Relevant Measures
The Public Benefits Criterion focuses on whether the service is
expected to provide a clear public benefit. In the context of payments,
public benefits result from a payment system that is accessible, safe,
and efficient. Such a payment system is a key component of commerce and
economic activity. The criterion also provides specific examples of
potential public benefits related to safety (promoting the integrity of
the payment system, reducing the risk associated with payments and
securities-transfer services) and efficiency (improving the efficiency
of the payment system).
Therefore, in evaluating a new service under the Public Benefits
Criterion, the Board considers three measures consistent with the
Federal Reserve's longstanding public policy objectives: accessibility,
safety, and efficiency. The measure of accessibility is closely related
to those of scope and equity, as considered in the context of the Other
Providers Criterion. In particular, a payment service is generally more
accessible if it is available to banks on equitable terms. Moreover, a
service that is broadly accessible should more easily achieve
nationwide scope in the long term. The measures of safety and
efficiency are identical to those considered in the context of the
effectiveness measure in the Board's Other Providers Criterion.
2. Public Comments
a. Accessibility
Approximately 130 commenters addressed whether a Federal Reserve
RTGS service would affect accessibility in the faster payment
market.\54\ Approximately 110 commenters, from most commenter segments,
expressed the view that the Federal Reserve developing an RTGS service
for faster payments would help ensure equal access for banks
nationwide.\55\ In contrast, around 20 commenters, comprising large
banks and private-sector operators, expressed the view that the Federal
Reserve's involvement would hinder development of faster payments in
the United States in the short term.
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\54\ Approximately 15 additional commenters raised issues
related to accessibility but did not express a view about whether a
Federal Reserve RTGS service would affect accessibility in the
faster payment market.
\55\ These commenters included small and midsize banks,
individuals, merchants, service providers, fintech companies, and
trade organizations.
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Many commenters, in particular small and midsize banks, stated that
a Federal Reserve RTGS service would provide banks of all sizes the
ability to access an RTGS infrastructure for faster payments. Some of
these commenters noted that most banks already have relationships with
the Federal Reserve, including access to Federal Reserve accounts,
either directly or through a correspondent banking relationship, that
could be used for faster payments and would lower barriers to
participation compared to other services without such existing
relationships. Commenters, comprising small and midsize banks,
merchants, service providers, fintech companies, and trade
organizations, noted that the Federal Reserve's history of providing
services to banks on fair and equitable terms would facilitate similar
access to RTGS services for faster payments. Many of these commenters
argued that, unlike the private sector, the Federal Reserve has a
unique mission and demonstrated history of providing nationwide access
to payment services, noting the Federal Reserve's check and ACH
services as specific examples.
Other commenters, comprising private-sector operators and large
banks, argued that a Federal Reserve RTGS service is unnecessary to
ensure access for all banks because industry participants are already
in the process of implementing the private-sector RTGS service for
faster payments. These commenters argued that the private-sector RTGS
service has mechanisms in place to allow all banks to access the
service and that the service's operator has already committed to
providing access on equitable and impartial terms.
Commenters also argued that the Federal Reserve's existing
connections and relationship would not necessarily facilitate
accessibility of RTGS services for faster payments, noting that such
connections are not easily extended to handle faster payments, as they
are not equipped to support the volumes, speeds, and redundancies
required for an RTGS service. In addition, many of these commenters
expressed concern that a Federal Reserve RTGS service could be
detrimental to achieving nationwide reach of an RTGS infrastructure.
Several commenters argued it would take the Federal Reserve too long to
build such a service. Other commenters stated that a market with
multiple RTGS services may require banks to connect to multiple
services to achieve nationwide reach and that only the largest banks
would do so because of the significant costs of additional connections.
Finally, more than 130 commenters, from all commenter segments,
discussed the importance of interoperability for achieving nationwide
access to an RTGS infrastructure for faster payments.\56\
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\56\ Topics related to interoperability are further discussed in
the Board's analysis of accessibility.
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b. Safety
More than 80 commenters expressed views on whether a Federal
Reserve RTGS service would promote the safety of faster payments.\57\
Nearly all of these commenters argued that the Federal Reserve would
improve the safety of faster payment through the development of an RTGS
service for faster payments.\58\ A few commenters expressed doubt that
a Federal Reserve RTGS service would have any significant impact on the
safety of faster payments.\59\
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\57\ Approximately 60 additional commenters raised issues
related to safety but did not express a view about whether a Federal
Reserve RTGS service would promote the safety of faster payments.
\58\ These commenters included small and midsize banks,
individuals, consumer organizations, merchants, service providers,
fintech companies, trade organizations, and other interested
parties.
\59\ Commenters expressing this view included those from the
following segments: Large banks, private-sector operators, and
individuals.
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Commenters that expressed views on safety emphasized the importance
of resiliency for RTGS services. Many of these commenters, especially
small and midsize banks, argued that development of a Federal Reserve
RTGS service for faster payments would be consistent with the Federal
Reserve's role in promoting the safety of the payment system.
Commenters argued that because of this role, the Federal Reserve would
be committed to a higher level of safety than private-sector service
providers. A few commenters specifically argued that, unlike private-
[[Page 39310]]
sector service providers, the Federal Reserve would focus on broader
public policy objectives rather than returns on investment when
considering the safety of faster payments. Many small and midsize banks
argued that the Federal Reserve's operational role provides stability
in the financial system during a time of crisis, citing the Federal
Reserve's role following the terrorist attack on September 11, 2001, as
an example. Some commenters also suggested that having multiple RTGS
services for faster payments in the market could increase faster
payment resiliency through redundancy, similar to other retail payment
systems for which there are multiple operators.
A few commenters expressed doubts about whether a Federal Reserve
RTGS service for faster payments would improve safety and resiliency.
Large banks in particular argued that, although integration with a
second RTGS service may bring marginal improvements to the safety of
faster payments, these improvements would come at a high cost. Finally,
at least one commenter expressed concerns that adopting a second RTGS
service would divert bank resources, which could instead be used to
improve resiliency and security of the private-sector RTGS service.
c. Efficiency
Approximately 120 commenters expressed views about whether a
Federal Reserve RTGS service would promote efficiency in the faster
payment market.\60\ Approximately 100 commenters, from nearly all
segments, argued that a Federal Reserve RTGS service would promote
efficiency in the faster payment market.\61\ In contrast, approximately
20 commenters, mostly comprising large banks and private-sector
operators, argued that such a service would not improve efficiency and
could create additional burdens for banks with limited resources.
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\60\ Approximately 20 additional commenters raised issues
related to efficiency but did not express a view on whether a
Federal Reserve RTGS service would promote efficiency.
\61\ These commenters included small and midsize banks,
individuals, consumer organizations, merchants, service providers,
fintech companies, trade organizations, and other interested
parties.
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Commenters that argued a Federal Reserve RTGS service for faster
payments would promote efficiency generally discussed how such a
service would enhance competition, promote innovation, or reduce costs.
These commenters, comprising merchants and small and midsize banks,
argued that historically, the Federal Reserve's presence as an operator
has improved competition and efficiency, leading to lower prices and
accelerated payment system improvements, such as the shift from paper
to electronic payments. Some commenters further cited the payment card
market as an example where concentration of market power in the absence
of the Federal Reserve having an operational role led to inefficiencies
in the market, such as high fees and restrictive rules that limit
competition and innovation. At least one commenter argued that by the
time such inefficiencies began to emerge in the early 2000s, it was too
late for the Federal Reserve to provide a service to the market as an
operator. Many small and midsize banks also stated that a Federal
Reserve RTGS service would enhance competition in the broader banking
market by allowing small and midsize banks to remain competitive with
large banks and new entrants like fintech companies.
Other commenters argued that a Federal Reserve RTGS service for
faster payments would not offer any measurable efficiency benefits over
the current private-sector service and could distort the market. Many
of these commenters argued that a Federal Reserve RTGS service would be
costly to develop and that banks would need to expend additional
resources to connect to multiple RTGS services for faster payments. A
few of these commenters also suggested that the Federal Reserve's long-
run cost recovery mandate is less demanding than the challenges facing
the private sector, including scrutiny from shareholders and auditors,
and may discourage private-sector entities from developing competing
services. Finally, a few commenters also argued that cost-based pricing
could stifle innovation by forcing RTGS service providers to divert
resources away from developing new features.
3. Board Analysis
The Board expects that the Reserve Banks providing the FedNow
Service would yield a clear public benefit. In particular, the Board's
analysis suggests that, by serving an operational role, the Federal
Reserve can help to create an accessible, safe, and efficient RTGS
infrastructure for faster payments. This role would align with the
Federal Reserve's history of providing services for most other payment
systems alongside, and in support of, similar services offered by the
private sector. The expected public benefit stems in large part from
contributions the FedNow Service would make towards achieving
nationwide reach of an RTGS infrastructure for faster payments,
promoting the safety and resiliency of that infrastructure, and
encouraging competition between payment services.
a. Accessibility
Enabling virtually all banks to gain access to a nationwide RTGS
infrastructure for faster payments would support the core objective of
ubiquitous faster payment services for individuals and businesses in
the United States. However, as discussed with respect to the Board's
Other Providers Criterion, the breadth and diversity of the U.S.
banking system makes it difficult to implement an RTGS infrastructure
that connects virtually all banks in the United States. The Board
expects that the Federal Reserve's provision of the FedNow Service
would help address this challenge in a number of ways, enhancing the
accessibility of an RTGS infrastructure for faster payments and
allowing that infrastructure to achieve nationwide reach.
In light of the significant heterogeneity in the nation's banking
system, achieving nationwide reach will inevitably be challenging for
any provider of RTGS services for faster payments, including the
Federal Reserve. However, since its inception, an underlying public
policy rationale for the Federal Reserve's involvement in the payment
system has been to provide services in a safe and efficient manner to
banks nationwide. Because of this long-standing policy commitment to
promoting nationwide access, the Federal Reserve has historically
extended access to banks of all sizes, including smaller banks in rural
and remote areas of the country. Applied to the FedNow Service, this
longstanding policy commitment would result in a service that is
similarly accessible to banks of all sizes, ultimately increasing the
long-term likelihood of such banks both accessing an RTGS
infrastructure and implementing faster payment services.
As a provider of payment services to thousands of banks today, the
Federal Reserve is in a unique strategic position to promote
accessibility of an RTGS infrastructure for faster payments.\62\ For
small and midsize banks seeking to implement faster payment services,
an RTGS service provided by the Federal Reserve is likely to be
particularly important. The relatively high cost and difficulty of
onboarding such institutions to an RTGS service is likely to constitute
a significant obstacle for
[[Page 39311]]
private-sector operators. Regardless of any investments in developing
clearing and settlement technology, a private-sector operator without
existing relationships would nevertheless have to incur substantial
costs to build connections and customer service capabilities before it
could onboard the significant number of smaller banks needed to achieve
true nationwide reach.\63\ The Federal Reserve, however, has already
made substantial investments in such capabilities, including
connections and customer support systems, and have significant
experience and expertise in providing services to smaller banks. The
associated long-standing relationships with and connections to
thousands of banks across the country provide a solid foundation for
the FedNow Service to facilitate those banks gaining access to an RTGS
infrastructure for faster payments. The FedNow Service therefore can
reasonably be expected to reach thousands of smaller banks in the
United States that might otherwise not have access to an RTGS
infrastructure. The resulting widespread access to an RTGS
infrastructure for faster payments would benefit small and midsize
banks and the communities they serve.
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\62\ The payment services that the Federal Reserve provides to
banks today allow for settlement directly in banks' accounts held at
the Reserve Banks or in settlement accounts held by other banks
through a correspondent relationship.
\63\ The use of service providers is unlikely to resolve this
obstacle fully because some banks may prefer to use a direct
connection or may already have relationships with service providers
that are not connected to a private-sector RTGS service.
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Furthermore, the FedNow Service may serve as an impetus for many
small and midsize banks to implement faster payment services. Although
small and midsize banks responding to the 2018 Notice generally
indicated an interest in adopting faster payment services, thousands of
other banks may face significant uncertainty about the overall benefits
of offering such services and the appropriateness of RTGS-based
settlement arrangements for smaller institutions. The Federal Reserve's
commitment to promoting payment system improvements through its
provision of modernized infrastructure may decrease such uncertainty
for those banks. With more certainty about the benefits of joining an
RTGS infrastructure for faster payments, small and midsize banks may be
more likely than they otherwise would have been to upgrade their
capabilities and offer RTGS-based faster payment services to their
customers.
Finally, the Board has also considered as part of its analysis the
possible relationships between the FedNow Service and the private-
sector RTGS service, and the resulting effect on nationwide reach. In a
payment system with multiple operators, banks would have a choice
whether to join a single service or multiple services such that an RTGS
infrastructure for faster payments could achieve nationwide reach in
two main ways.
First, interoperability via direct exchange of payments between
RTGS infrastructure operators could allow payments originated by a
participant of one service to be received by a participant of another
service. If multiple services are interoperable in such a way, no
single service needs to achieve nationwide reach on its own. This
situation exists today with the nation's ACH system.
Second, banks could participate in multiple services that are not
interoperable, but nationwide reach could still be achieved through at
least one service achieving nationwide reach on its own. This situation
exists today with large-value funds transfer systems. In this
environment, banks could benefit from the existence of multiple
services despite the lack of interoperability. A bank that participates
in multiple services could choose which service to use for
transactions, depending on any number of factors, such as fees,
functionality, and the counterparties that a particular service can
reach.
Many commenters described interoperability as important in the case
of RTGS services for faster payments, with some commenters noting that
interoperability could be developed in incremental steps. Commenters
also expressed the view that the Federal Reserve would be well
positioned to facilitate interoperability between RTGS services for
faster payments. Commenters comprising large banks and private-sector
operators, however, expressed significant concerns that
interoperability poses potentially insurmountable technical and
operational challenges.
The Board agrees with commenters that interoperability between RTGS
services for faster payment services is a desirable outcome but also
recognizes that it may be difficult to achieve, especially early on. As
opposed to interoperability in and of itself, the Board views
nationwide reach as a key objective for an RTGS infrastructure. Such
reach does not inherently depend on interoperability between RTGS
services, because there are other paths to achieving this objective.
During its engagement with the industry, the Federal Reserve
intends to explore both interoperability and other paths to achieving
nationwide reach. Although direct exchange of payments between RTGS
infrastructure operators may not be an initial element of the FedNow
Service, as standards, technology, and industry practices change over
time and the relationship between RTGS services for faster payments
evolves, interoperability will continue to be a desirable outcome that
the Board pursues.
b. Safety
As the use of faster payment services increases in the future, the
safety of such services will be crucial to the long-term safety of the
overall payment system. The Federal Reserve has a long-standing focus
on promoting the safety of the U.S. payment system. Recognizing that a
safe payment system is crucial to the nation's economic growth and
financial stability, the Federal Reserve has historically played an
important role in promoting the safety of the U.S. payment system by
providing liquidity and operational continuity in times of crisis.
Serving an operational role in the payment system has allowed the
Federal Reserve to take action in response to financial turmoil,
terrorist attacks, natural disasters, and other crises. Indeed,
comments in response to the 2018 Notice indicate that industry
stakeholders and the public look to the Federal Reserve to use the
tools at its disposal to provide support when needed, actions that
might not be possible if the Federal Reserve were not in an operational
role. As the prominence of faster payments in the United States grows,
the development of the FedNow Service would allow the Federal Reserve
to retain its ability to provide stability and support to the banking
system and the broader economy in times of crisis.
Providing the FedNow Service would also allow the Federal Reserve
to facilitate the safety of faster payments in the United States.
Because of their irrevocable, real-time nature, the overall safety of
faster payments depends in part on how well fraud can be detected and
prevented. As the operator of the FedNow Service, the Federal Reserve
would be in a position to promote the development and implementation of
industry-wide standards, as has been the case in other payment systems
where the Federal Reserve has played an operational role.\64\ This
ability to
[[Page 39312]]
promote industry-wide standards would be particularly important in the
development and adoption of standards to mitigate fraud. Moreover, if
the Federal Reserve were to play an operational role, competition among
RTGS services for faster payments may increase innovation related to
fraud prevention, contributing to a safer faster payment environment.
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\64\ For example, in the early 2000s, using its operational role
in the check system, the Federal Reserve was able to support and
encourage the industry's transition from paper to more efficient
electronic check processing. Similarly, the Federal Reserve was able
to improve speed and reduce risks associated with ACH payments in
the early 1990s by facilitating electronic origination and receipt
of ACH transactions processed by the Federal Reserve. See Federal
Reserve Bank of New York, ``All-Electronic ACH Proposal,'' (Jan. 9,
1991). Available at https://fraser.stlouisfed.org/files/docs/historical/ny%20circulars/nycirc_1991_10424.pdf#pdfjs.action=download.
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Finally, the development of the FedNow Service could also enhance
the safety of the U.S. payment system by promoting resiliency through
redundancy. In particular, the availability of multiple RTGS services
for faster payments would allow banks to connect to more than one such
service, as a number do today for wire, ACH, and check services.
Although connecting to multiple services could result in additional
costs and operational complexity, the choice to connect would lie with
the banks, many of which have expressed a desire historically to
connect to multiple services for contingency purposes. These banks may
instead look to achieve resiliency by using existing retail payment
methods, for example ACH or payment cards. Over time, however, such
alternatives will likely not provide adequate substitutes for RTGS-
based faster payments from a cost, technological, operational, or end-
user perspective.
c. Efficiency
The efficiency benefits associated with the FedNow Service are
likely to come from two sources. First, by providing banks with an
alternative RTGS service with integrated clearing functionality and by
improving the prospect of banks' gaining access to a nationwide RTGS
infrastructure for faster payments, the FedNow Service could allow more
banks and their customers to reach one another. Such enhanced ability
to reach one another would increase the benefits to each bank
participating in the RTGS infrastructure, with the resulting network
effects leading to improved efficiency in the faster payment market.
Even banks that would already have joined the private-sector RTGS
service could benefit from the broader reach that would result from the
FedNow Service, because they would be able to join a service that
provides access to counterparty banks that they would otherwise be
unable to reach. Furthermore, as discussed in the context of the
Board's Other Providers Criterion for evaluating new services,
competition among RTGS services for faster payments could yield
efficiency benefits by leading to lower prices and higher service
quality.
Second, the development of the FedNow Service could indirectly
generate efficiency benefits at the level of end-user faster payment
services. A nationwide RTGS infrastructure would make the development
of new faster payment services based on real-time settlement more
attractive, increasing innovation and competition in the market for
end-user faster payment services. Because the Federal Reserve seeks to
encourage payment system improvements, the FedNow Service could serve
as a neutral platform for private-sector entities to offer competitive
and innovative faster payment services to end users based on transfers
between banks.
Finally, the Board recognizes that the FedNow Service would
generate societal costs that may reduce the net efficiency benefit of
the service. In particular, the FedNow Service would require societal
resources to develop in the short term and to operate in the long term.
Further, banks that choose to connect to multiple RTGS services for
faster payments in pursuit of broader reach or resiliency through
redundancy may incur additional connection costs.\65\ However, the
Board expects that the benefits of the FedNow Service, as discussed
earlier, would ultimately outweigh these additional costs. Therefore,
the Board expects that overall the FedNow Service will yield a clear
public benefit in the areas of accessibility, safety, and efficiency.
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\65\ The need to connect to multiple RTGS services in pursuit of
broader reach would occur if the FedNow Service and private-sector
RTGS services were not interoperable.
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C. Cost Recovery Criterion: The Federal Reserve Must Expect to Achieve
Full Recovery of Costs Over the Long Run
The Board's Cost Recovery Criterion accounts for the requirements
in the MCA. In evaluating whether a new service or major service
enhancement can be expected to achieve full cost recovery, the Board
further considers its policy, ``Principles for the Pricing of Federal
Reserve Bank Services'' (pricing principles), and its previous
application of those principles to existing services.\66\
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\66\ Board of Governors of the Federal Reserve System,
``Principles for the Pricing of Federal Reserve Bank Services,''
(Issued 1980). Available at https://www.federalreserve.gov/paymentsystems/pfs_principles.htm.
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1. Relevant Measures
a. The MCA
The MCA required the Board to adopt a set of pricing principles for
Federal Reserve services and a schedule of fees pursuant to those
principles. The MCA specified certain principles on which fees must be
based, including the principle that ``(o)ver the long run, fees shall
be established on the basis of all direct and indirect costs actually
incurred in providing the Federal Reserve services.'' \67\ In addition,
the MCA provided that the pricing principles ``shall give due regard to
competitive factors and the provision of an adequate level of such
services nationwide.'' \68\
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\67\ These costs include imputed costs that a private-sector
firm would incur if it were to provide the services. See Public Law
96-221, supra note 18. This imputed cost is referred to as the
private-sector adjustment factor.
\68\ See Public Law 96-221, supra note 18.
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b. The Pricing Principles
The pricing principles incorporate the statutory requirements of
the MCA and include additional provisions consistent with the purposes
of the MCA.\69\ Although Congress intended the MCA to stimulate
competition to promote the provision of services at the lowest cost to
society, Congress was also concerned about achieving an adequate level
of services nationwide and avoiding the reemergence of undesirable
banking practices--such as nonpar banking or circuitous routing of
checks--that the Federal Reserve's operational role in the payment
system was intended to eliminate.\70\ Therefore, like the Board's
policy for evaluating new services, the pricing principles balance the
importance of competitive fairness in the Federal Reserve's provision
of services with the Federal Reserve's objectives to promote the
accessibility, safety, and efficiency of the payment
[[Page 39313]]
system.\71\ Three pricing principles are relevant in considering this
balance.
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\69\ For example, the Board's principles 1 and 2 mirror the
MCA's statutory requirements that all covered Federal Reserve
services must be explicitly priced and available to nonmember banks
at the same price as member banks. In adopting the pricing
principles, however, the Board noted that ``the Monetary Control Act
and its legislative history recognize the importance of the Federal
Reserve maintaining an operational presence in the nation's payments
mechanism, providing an adequate level of service nationwide and
encouraging competition.'' The Board explained that ``in the light
of these considerations, the Federal Reserve has developed
additional pricing principles that build on those of the Act.''
Therefore, other pricing principles reflect policy determinations by
the Board intended to provide guidance on the pricing policies and
strategies the Federal Reserve will follow, such as principle 6's
expectation that the Federal Reserve should be sensitive to the
changing needs for services in particular markets. See Board of
Governors of the Federal Reserve System, ``Federal Reserve Bank
Services; Proposed Fee Schedules and Pricing Principles,'' 45 FR
58689, 58690-58692 (Sep. 4, 1980). Available at https://cdn.loc.gov/service/ll/fedreg/fr045/fr045173/fr045173.pdf.
\70\ See ``Principles for the Pricing of Federal Reserve Bank
Services,'' supra note 66.
\71\ Specifically, in preparing the pricing principles, the
Board stated that the principles and future fee schedules take into
account ``the objectives of fostering competition, improving the
efficiency of the payment mechanism, and lowering costs of these
services to society at large. At the same time, the Board is
cognizant of, and concerned with, the Federal Reserve's continuing
responsibility for maintaining the integrity and reliability of the
payment mechanism and providing an adequate level of service
nationwide.'' ``Principles for the Pricing of Federal Reserve Bank
Services,'' supra note 66.
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First, pricing principle 3 directly incorporates relevant
provisions from the MCA requiring that over the long run, fees shall be
established on the basis of all direct and indirect costs actually
incurred in providing the services priced. In doing so, principle 3
includes the MCA's requirement to give due regard to competitive
factors and the provision of an adequate level of such services
nationwide.
Second, although the MCA mandates cost recovery for Federal Reserve
services as a whole, pricing principle 5 specifies that the Board
further intends fees to be set so that revenues for major service
categories match costs, including a private-sector adjustment factor.
However, principle 5 also notes that, during an initial start-up
period, new operational requirements and variation in volume may
temporarily change unit costs for some service categories. Principle 5
states that, in such a situation, the Federal Reserve intends to match
revenues and costs as soon as possible.\72\
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\72\ Principle 5 explains that the Board will monitor progress
in meeting this goal by reviewing regular reports submitted by the
Reserve Banks. In the event that the Board authorizes a fee schedule
for a service below cost in the interest of providing an adequate
level of services nationwide, principle 5 states that the Board will
announce its decision. See ``Principles for the Pricing of Federal
Reserve Bank Services,'' supra note 66.
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Finally, pricing principle 7 states that fee structures may be
designed to reflect desirable long-run improvements in the nation's
payment system. Principle 7 also states that the Board will seek public
comment when changes in fees and service arrangements are proposed that
would have significant long-run effects on the nation's payment system.
2. Public Comments
Approximately 20 commenters addressed cost recovery in response to
the 2018 Notice.\73\ Approximately 15 commenters believed the Federal
Reserve would be able to recover the costs of developing and operating
an RTGS service for faster payments, pointing to the Federal Reserve's
ability to achieve cost recovery goals in the past for other
services.\74\ Fewer than 10 commenters argued that the Federal Reserve
may not be able to recover costs for a new RTGS service, generally
noting the significant cost of developing and operating such a
service.\75\
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\73\ Approximately 15 additional commenters raised issues
related to cost recovery but did not express a view about whether a
Federal Reserve RTGS service could recover its costs.
\74\ These commenters included small and midsize banks,
individuals, consumer organizations, and trade organizations.
\75\ These commenters included large banks, trade organizations,
and other interested parties.
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3. Board Analysis
The Board believes that the provision of the FedNow Service would
satisfy the Cost Recovery Criterion. In particular, the Board expects
that the FedNow Service would achieve full recovery of costs over the
long run, although the first instance of long-run cost recovery is
expected to occur outside the 10-year period that the Board typically
applies to existing, mature services. The Board's view that the service
would satisfy the Cost Recovery Criterion is based on its consideration
of the MCA's requirements regarding long-run cost recovery, the Board's
pricing principles as they relate to new services compared with mature
services, the Federal Reserve's public policy objectives, including the
provision of an adequate level of service nationwide, and the previous
application of these considerations to other Federal Reserve services.
The MCA does not specify the ``long-run'' period over which Federal
Reserve services must recover costs, nor does the legislative history
of the MCA indicate that Congress intended a specific length of time
for the cost recovery period. The Board has typically used a rolling
ten-year period when assessing long-run cost recovery of existing
services (10-year cost recovery).\76\ The Board views this standard 10-
year cost recovery expectation as appropriate for assessing the long-
run cost recovery of mature services, which generally have stable and
predictable volumes, costs, and revenues.
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\76\ Notwithstanding the Board's standard 10-year long-run cost
recovery period for existing services, the Board has previously
needed to balance competing considerations in determining long-run
cost recovery for those services. For example, efforts to modernize
Federal Reserve check services in the early 2000s resulted in
intermittent under-recovery of the service's costs during certain
10-year cost recovery periods.
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However, a new service, such as the FedNow Service, differs from
mature services in a number of important ways. By its nature, a new
service generally involves high development costs. Moreover, unlike
mature services, a new service may not initially have a critical mass
of customer participation and, as a result, is likely to have low and
unpredictable initial volumes. Certain specific circumstances--such as
the length of time to develop the service, the use of the service by
certain customer segments, or changes to the market landscape--may
affect volumes and, thus, the costs and revenues of a new service.
Taken together, these factors imply that, unlike mature services, a new
service is unlikely to have stable costs and revenues when it is first
deployed, making cost recovery challenging in the time frame that the
Board has typically applied to mature services.
Given these considerations, the Board believes that the 10-year
period used to evaluate cost recovery for mature services is an
inappropriate standard for evaluating the long-run cost recovery of a
new service similar to the FedNow Service. Applying such a standard
could limit the Federal Reserve's ability to develop new services or
undertake major service enhancements that support the provision of an
adequate level of services nationwide or induce desirable long-term
changes in the payment system.
The Federal Reserve's ACH service, the last new retail payment
service developed by the Federal Reserve, provides an illustrative
historical example of the importance of these considerations for cost
recovery of new services. In evaluating the expected cost recovery of
the FedACH service, the Board determined that, compared with the time
frame for existing services, an extended cost recovery time frame was
appropriate. It did so to encourage the development of an electronic
funds transfer system for retail payments and to foster the development
of efficient new technologies that would benefit the public in the long
run.\77\ Based on the
[[Page 39314]]
service's anticipated long-term benefits, the Board determined, both
before and after passage of the MCA, that the nascent service's fees
should be based on the costs associated with mature volume
estimates.\78\ As volume grew, the service first achieved annual cost
recovery nearly 15 years after launching a pilot in 1972, and achieved
10-year cost recovery after more than 20 years of operation.\79\
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\77\ In partnership with the private sector, the Federal Reserve
began piloting ACH services in the late 1960s. The Federal Reserve
determined that ACH services had the potential to yield long-term
improvements to the payment system because of concerns related to
rapidly growing paper check volumes. For example, in 1971, the
Federal Reserve's ``Statement of Policy on the Payments Mechanism''
explained that ``(i)ncreasing the speed and efficiency with which
the rapidly mounting volume of checks is handled is becoming a
matter of urgency. Until electronic facilities begin to replace
check transfer in substantial volume, the present system is
vulnerable to serious transportation delays and manpower
shortages.'' Board of Governors of the Federal Reserve System,
``Statement of Policy on the Payments Mechanism,'' (June 18, 1971).
Available at https://fraser.stlouisfed.org/files/docs/publications/frbrichreview/rev_frbrich197107.pdf. The first ACH pilot service
became fully operational in the early 1970s. The Federal Reserve
worked with the industry and the U.S. Treasury to expand the service
during the 1970s and 1980s.
\78\ In establishing fees for the Federal Reserve's ACH service,
the Board allowed fees to be set based on costs of operating a
mature service instead of current costs. See Board of Governors of
the Federal Reserve System, ``Adoption of Fee Schedules and Pricing
Principles for Federal Reserve Bank Services,'' 46 FR 1338, 1343
(Jan. 6, 1981). Available at https://cdn.loc.gov/service/ll/fedreg/fr046/fr046003/fr046003.pdf.
After passage of the MCA, the Board approved a fee schedule that
recovered 40 percent of the service's current costs and required the
service to increase its cost recovery targets 20 percent each year
thereafter until the service achieved 100 percent cost recovery. See
Board of Governors of the Federal Reserve System, ``Fee Schedules
for Federal Reserve Bank Services,'' 47 FR 53500 (Nov. 26, 1982)
available at https://cdn.loc.gov/service/ll/fedreg/fr047/fr047228/fr047228.pdf; Board of Governors of the Federal Reserve System,
``Fee Schedules for Federal Reserve Bank Services,'' 50 FR 47624,
47625 (Nov. 19, 1985) available at https://cdn.loc.gov/service/ll/fedreg/fr050/fr050223/fr050223.pdf. The Board does not believe it is
appropriate at this time to similarly set a specific year in which
the new FedNow Service would recover costs, as was done for the ACH
service. This is largely because the ACH service was not an entirely
new service at the time the principles were adopted and, for a new
service in a dynamic market, the likelihood of accurately
forecasting when cost recovery will occur is low. The Board will
annually review the appropriateness of setting such an expectation
for the FedNow Service.
\79\ The ACH service became fully operational in 1974. See ``The
Federal Reserve System Purposes & Functions,'' supra note 4.
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Like the Federal Reserve's ACH service, the Board expects that the
FedNow Service will take significant time to mature, as the industry
takes steps to adopt the service. Ultimately, although the Board
expects the service's first instance of long-run cost recovery to occur
outside the 10-year cost recovery period typically applied to mature
services, the service is nevertheless expected to achieve full recovery
of costs over the long run in compliance with the Board's Cost Recovery
Criterion. This expectation is based on certain conditions related to
demand for faster payments, overall expansion of the market over the
long term, time to market for the service, and direct or indirect
participation in the service by banks of all sizes.
Expected long-run cost recovery for the FedNow Service outside the
traditional 10-year cost recovery period for mature services may also
affect aggregate cost recovery of Federal Reserve priced services,
which would comprise the new FedNow Service and existing mature
services. As noted above, although the Board's pricing principles
impose an objective of full cost recovery for each service line, the
cost recovery objective specified in the MCA only requires overall cost
recovery of Federal Reserve services as a whole. Combining the revenues
and costs of the FedNow Service with those of mature services may
create the appearance of under-recovery for Federal Reserve services
overall. Therefore, the Board believes it would be most appropriate to
report the FedNow Service's cost recovery independently of mature
Federal Reserve services until the FedNow Service reaches maturity.
The Board believes that an approach to cost recovery for the FedNow
Service, as a new service, that does not rely on the standard applied
to mature services is consistent with the language and purpose of the
MCA and the Board's pricing principles for a number of reasons.
First, this approach is consistent with the MCA's requirement,
incorporated in pricing principle 3, for the Federal Reserve to give
due regard to the provision of an adequate level of service nationwide.
As described above with respect to the Board's Other Providers
Criterion and Public Benefits Criterion, in the absence of the FedNow
Service, the objective of achieving an adequate level of service
nationwide to support the development of ubiquitous RTGS-based faster
payments in the United States is unlikely to be realized.
Second, this approach is consistent with pricing principle 5 as it
relates to the start-up period for a service. In explaining its
adoption of principle 5, the Board specifically noted the need for
pricing flexibility during an initial start-up period when low and
potentially variable volumes and high fixed costs could result in
prohibitively high service fees, negatively affecting service usage and
policy goals.\80\ Such issues could arise for the FedNow Service if the
Board required cost recovery over the same period as mature services.
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\80\ See ``Adoption of Fee Schedules and Pricing Principles for
Federal Reserve Bank Services,'' supra note 78.
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Finally, this approach is consistent with pricing principle 7.
Specifically, in adopting principle 7, the Board explained that pricing
flexibility may be necessary to induce desirable long-run changes in
the payment system and to foster development of services that will
ultimately benefit the public.\81\ Given that a nationwide RTGS
infrastructure for new faster payments is a desirable long-run
improvement, and in light of the benefits that would be likely to occur
with the FedNow Service, as discussed under the Public Benefits
Criterion, the Board believes that an expected cost recovery period of
longer than 10 years is appropriate.
---------------------------------------------------------------------------
\81\ See id.
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As part of this approach to cost recovery, the Board will regularly
disclose the service's cost recovery beginning the year the service is
available to participating banks and will monitor progress toward
matching revenues and costs.\82\ The Board will regularly confirm the
expectation that the service will meet cost recovery objectives over
the long run. As would be applicable to any Federal Reserve service, if
it becomes clear that the FedNow Service is no longer expected to
achieve long-run cost recovery or that the service will challenge the
cost recovery of Federal Reserve priced services overall, the Board
would reassess whether to continue providing the service. Such a
reassessment would only occur after giving time for market development
and adoption and would take into account other objectives, including
the provision of equitable access to payment services and an adequate
level of services nationwide.\83\ Further information on expected
service pricing is found in Part Two, including areas where comment is
requested.
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\82\ Costs would include those related to development of the
service and ongoing operations.
\83\ As stated in the Board's policy ``The Federal Reserve in
the Payments System,'' ``a decision to continue to provide a service
that could not reasonably be expected to meet cost-recovery
objectives would be made by the Federal Reserve Board only after
seeking public comment and only where there were clear public
benefits to such a course of action. Similarly, any decision to
withdraw from the service would be undertaken in an orderly way,
giving due regard to the transition problems associated with the
discontinuation of a service.'' ``The Federal Reserve in the
Payments System,'' supra note 18.
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IV. Assessment of Expanded Operating Hours for the Fedwire Funds
Service and the National Settlement Service To Support Liquidity
Management for Faster Payments and For Other Purposes
The second potential action in the 2018 Notice was the development
of a liquidity management tool to support RTGS services for faster
payments. RTGS-based faster payment services require banks to have
sufficient liquidity to perform interbank settlement at any time, on
any day.\84\ Without sufficient liquidity to conduct
[[Page 39315]]
settlement, a faster payment cannot be completed in an RTGS-based
service where, by design, interbank settlement occurs before final
funds can be made available to the receiver. This risk of payments not
being completed highlights the need for banks to be able to manage
their liquidity on a 24x7x365 basis in accounts that support settlement
of faster payments.
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\84\ Liquidity can take various forms, including funds in an
account at a settlement institution or extensions of credit that
allow payments to be completed when funds in an account are not
sufficient to cover outgoing payments.
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At present, the Federal Reserve does not offer a service that would
allow banks to move liquidity as needed, in particular on weekends and
holidays, to support real-time settlement of faster payments.\85\ To
reduce the risk of insufficient liquidity during those periods, banks
can increase the funds in accounts that support settlement of faster
payments to provide additional prefunding for future transactions. This
additional prefunding, however, could be costly for banks because it
prevents those funds from being used for other purposes. Prefunding
also requires predicting the number and aggregate value of future
customer payments, which has a degree of uncertainty. In consideration
of the risk of failed transactions because of insufficient liquidity,
the Board proposed developing a tool that would enable movement of
funds between accounts at the Reserve Banks on a 24x7x365 basis, either
by expanding the hours of current Federal Reserve services or through a
new service.
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\85\ The Fedwire Funds Service operating hours for each business
day begin at 9:00 p.m. eastern time (ET) on the preceding calendar
day and end at 6:30 p.m. ET, Monday through Friday, excluding
designated holidays. Current operating hours for NSS are 7:30 a.m.
ET to 5:30 p.m. ET, Monday through Friday, excluding designated
holidays.
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A liquidity management tool could support private-sector RTGS
arrangements for faster payments that are based on a joint account at a
Reserve Bank.\86\ Such a tool, as described in the 2018 Notice, could
enable movement of funds between a joint account and banks' master
accounts at any time of the day, any day of the year.\87\ This tool
would allow funds to be transferred, as needed, to support the payment
activity of participants in private-sector RTGS services using a joint
account.\88\
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\86\ In such an arrangement, real-time settlement occurs on an
internal ledger maintained by a private-sector operator of an RTGS
service for faster payments, supported by funds that are held in an
account at a Reserve Bank for the joint benefit of the service's
participants. To support settlement through such a service, each
participant bank ensures sufficient funding in the joint account to
cover its payment obligations on a 24x7x365 basis.
\87\ A master account is the record of financial rights and
obligations between an account-holding bank and a Reserve Bank. The
account is where opening, intraday, and closing balances are
determined.
\88\ The private sector could develop alternative mechanisms to
enable liquidity management for participants in a private-sector
RTGS service for faster payments based on a joint account. For
example, to address liquidity needs over the weekend, a private-
sector operator could allow participants with excess funds on its
ledger to transfer those funds within the service to those with a
shortage.
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In the 2018 Notice, the Board requested feedback on whether the
Federal Reserve should provide such a liquidity management tool and, if
so, the desirable functionality of such a tool. The Board further
requested comment on whether such a tool could be used for purposes
other than supporting real-time settlement of faster payments.
A. Public Comments
Approximately 230 commenters expressed views about whether the
Federal Reserve should develop a liquidity management tool to support
RTGS services.\89\ Approximately 225 commenters, from all segments,
supported the Federal Reserve developing such a tool. Fewer than five
commenters were not supportive of the Federal Reserve developing a
liquidity management tool to support RTGS services.\90\
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\89\ At least one additional commenter raised issues related to
a liquidity management tool but did not express a view about whether
the Federal Reserve should offer such a tool.
\90\ Commenters expressing this view included those from the
following segments: Private-sector operators and fintech companies.
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Several large banks and other commenters indicated that the
proposed tool could help with managing liquidity in the existing
private-sector RTGS service for faster payments. Other commenters more
generally discussed the importance of liquidity management in RTGS
services for faster payments and noted the challenge of managing the
timing of payment inflows and outflows on a 24x7x365 basis. Many
commenters emphasized the importance of automated features for a
liquidity management tool, such that liquidity transfers could occur
outside standard business hours without the need for operational staff
at participating banks during those hours. At least one commenter noted
that functionality provided through a liquidity management tool should
be available to all systems that could benefit from it. This comment
was consistent with those from other commenters that emphasized the
Federal Reserve should more generally enhance its current services to
support a variety of payment activities.
Most of the commenters that addressed how the Federal Reserve
should provide a liquidity management tool expressed the view that it
should do so through expansion of operating hours for the Fedwire Funds
Service. Commenters noted the potential for a variety of payment
activities to benefit from expanded operating hours for the Fedwire
Funds Service. A few commenters stated that the Federal Reserve should
expand operating hours for NSS. No commenters suggested that the
Federal Reserve should develop a new service to support liquidity
management in RTGS services for faster payments.
The commenters that did not support the Federal Reserve developing
a liquidity management tool indicated that liquidity management could
be accomplished through software developed by the private sector that
would alert a bank about balance levels in their account at the Reserve
Banks.
B. Board Analysis
The Board believes that expanding the operating hours of the
Fedwire Funds Service and NSS, potentially up to 24x7x365, would be the
most effective way to provide the liquidity management functionality
described in the 2018 Notice and could provide additional benefits to
financial markets broadly.
The ability to transfer funds from master accounts to a joint
account during nonstandard business hours would allow participants in a
private-sector RTGS service to manage liquidity on a ``just-in-time''
basis. Just-in-time liquidity management would remove the need to
increase funding in a joint account ahead of weekends, holidays, and
other times when liquidity transfers are not currently possible. Just-
in-time liquidity management would also decrease the likelihood that a
bank would have insufficient liquidity to settle a payment. As a
result, the system would have less risk that an individual or business
would experience an incomplete payment because its bank does not have
the requisite funds available in a joint account to support settlement.
These benefits might broaden the appeal of a private-sector RTGS
service using a joint account, thereby potentially expanding the use of
RTGS services for settlement of faster payments.
Expanded hours for the Fedwire Funds Service and NSS could also
benefit other retail payment services. For retail services that conduct
interbank settlement on a deferred basis, including certain faster
payment services and traditional payment card services, expanded hours
could enable these services to settle net interbank
[[Page 39316]]
obligations at times not currently possible, including weekends and
holidays. Expanded Fedwire Funds Service and NSS hours could also
benefit ACH payments by enabling additional settlement windows.\91\
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\91\ In a separate notice, the Board has requested comment on
potential modifications to Federal Reserve payment services to
facilitate adoption of a later same-day ACH processing and
settlement window. Under the proposal in that notice, the Federal
Reserve would extend the daily operating hours of the Fedwire Funds
Service and NSS by 30 and 60 minutes, respectively, to accommodate a
third same-day ACH settlement window at 6:00 p.m. ET. See Board of
Governors of the Federal Reserve System, ``Potential Modifications
to the Federal Reserve Banks' National Settlement Service and
Fedwire Funds Service To Support Enhancements to the Same-Day ACH
Service and Corresponding Changes to the Federal Reserve Policy on
Payment System Risk, Request for Comments,'' 84 FR 22123, 22129 (May
16, 2019). Available at https://www.federalregister.gov/d/2019-09949.
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In addition, expanded Fedwire Funds Service hours would increase
the overlap between the hours of the Fedwire Funds Service and those of
large-value payment systems in other countries, thereby supporting
wholesale payment activity in multiple markets. For example, expanded
hours could allow U.S. banks that provide clearing services to global
correspondents and multinational corporations to meet client needs
outside standard business hours. Expanded hours could support a broad
range of domestic wholesale payment activity as well, such as margin
payments related to trading conducted on 24-hour platforms or payments
related to mergers and acquisitions that close on a weekend.
In light of these potential benefits, the Board has determined that
the Federal Reserve should explore the expansion of Fedwire Funds
Service and NSS hours. However, because of the systemic importance of
the Fedwire Funds Service and the Board's risk management expectations
for the service, additional analysis is needed to evaluate fully the
relevant operational, risk, and policy considerations for both the
Reserve Banks and participants. The Federal Reserve plans to engage
with the industry on issues related to expanded Fedwire Funds Service
and NSS operating hours, as well as potential approaches for expanding
those hours. Implementation approaches could range from limited
availability on weekends and holidays to full 24x7x365 availability.
Through this engagement, the Federal Reserve intends to solicit
additional information about the industry's specific needs and
readiness related to these options. The Board will announce any
decision regarding the expansion of hours for the Fedwire Funds Service
and NSS, including issuing a request for comment if necessary, after
further analysis is completed.
Part Two
V. FedNow Service Description
In what follows, the Board has outlined a general description of
the planned FedNow Service and provided additional details on the
service's potential features and functionality. The features and
functionality, along with related implementation considerations,
incorporate feedback from comments received in response to the 2018
Notice.
The Board is seeking comment on all aspects of the FedNow Service.
The Federal Reserve also intends to convene industry groups and
facilitate other outreach forums to gather input on the service.\92\
The Federal Reserve will use the feedback gained through written
comments and other channels to finalize the design and features of the
FedNow Service. Once these details have been finalized, a final service
description will be published in a subsequent Federal Register notice
with additional information provided through existing Reserve Bank
communication channels.
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\92\ The Reserve Banks will communicate information about
industry groups and forums through established channels. Industry
engagement is expected to be a continual process as part of ongoing
service and product development.
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A. Public Comments
In the 2018 Notice, the Board sought input on certain issues
related to the design and implementation of a potential RTGS service
for faster payments. First, the Board sought comment on the ideal
timeline for implementing such a service. Second, the Board requested
comment on the adjustments that banks and their customers would need to
make under an accounting regime in which the Reserve Banks would record
and report end-of-day balances for each calendar day, including
weekends and holidays (a seven-day accounting regime).\93\ Third, the
Board sought input on the operational burden that banks would face if
an RTGS service for faster payments were designed to use accounts
separate from banks' master accounts.\94\ Fourth, the Board sought
feedback on the need for auxiliary services, such as fraud prevention
services that provide tools to detect fraudulent payments or a
directory that allows faster payment services to route end-user
payments using the receiver's public identifier, such as a phone number
or email address, rather than bank routing and account information.\95\
For each question, commenters from nearly every segment provided input.
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\93\ At present, end-of-day balances are recorded and reported
for each banking day that Federal Reserve services operate. Normal
banking days are Mondays through Fridays. Because Federal Reserve
services do not currently operate over the weekend (or on holidays),
this current practice corresponds to a five-day accounting regime.
\94\ As described previously, a master account is the record of
financial rights and obligations between account-holding banks and a
Reserve Bank. The Reserve Banks typically permit a single master
account per eligible institution, and the settlement activity for
most Federal Reserve payment services occurs in master accounts.
\95\ The receiver's bank routing and account information is
generally required to deliver payments between end-user bank
accounts. This information can be difficult for the sender of a
payment to obtain. As a result, some payment services allow the
sender to direct a payment using a public identifier of the intended
receiver. For such a public identifier to be used in a payment, the
sender's bank must be able to link the public identifier to the
intended receiver's banking information. A directory allows a bank
to obtain this information through a database that connects public
identifiers with the receiver's banking information, without
requiring the sender to have that information or the receiver to
reveal it to the sender.
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More than 140 commenters, from all segments, addressed the ideal
timeline for implementing a Federal Reserve RTGS service for faster
payments. The majority of these commenters encouraged the Federal
Reserve to implement such a service as quickly as possible. These
commenters noted that the market for faster payments is rapidly
evolving and that, if the Federal Reserve were unable to provide a
service in the near future, it would face difficulty achieving
widespread adoption. A few commenters cautioned that, while acting
quickly may be ideal, the timing of a new service should take into
consideration the adjustments that banks and service providers would
need to make to implement the service.
Approximately 40 commenters addressed operational adjustments that
would be required if an RTGS service for faster payments used a seven-
day accounting regime.\96\ Some of these commenters noted that,
although certain banks may have already adopted 24x7x365 accounting for
services such as ATM and debit card transactions, some banks and their
business customers may need to make substantial back-office adjustments
to implement a seven-day accounting regime. These adjustments included
system upgrades, operational changes, and staffing outside of standard
business hours. Approximately 10 commenters stated that the option to
defer receipt of transaction reporting during
[[Page 39317]]
nonstandard business hours might be useful until banks are able to
support 24x7x365 back-office operations.
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\96\ These commenters included small and midsize banks, large
banks, individuals, consumer organizations, service providers,
fintech companies, trade organizations, and other interested
parties.
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Approximately 50 commenters expressed views on the incremental
operational burden if an RTGS service were to settle faster payments in
dedicated Federal Reserve accounts, separate from banks' master
accounts.\97\ The majority of these commenters indicated that, if
necessary, banks would likely be able to manage separate settlement
accounts. Some of these commenters further stated that if separate
accounts were used, the benefits of such a structure would need to
outweigh the burden for banks of managing separate accounts. Commenters
also noted that a liquidity management tool would be needed to move
funds during nonstandard business hours between master accounts and
separate accounts for settlement of faster payments. Most commenters
that addressed the use of separate accounts stated that, if separate
Federal Reserve accounts were used for settlement of faster payments,
balances in those accounts should earn interest and count towards
reserve requirements.
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\97\ These commenters included small and midsize banks, large
banks, individuals, service providers, fintech companies, and trade
organizations.
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More than 100 commenters, from all segments, discussed whether a
directory service is needed for an RTGS service for faster payments.
Many of these commenters stated that directories are an important
driver for adoption of faster payments because individuals and
businesses value the ability to make payments based on public
identifiers. These commenters often indicated that the Federal Reserve
should support development of a directory service for faster payments,
citing their views of the Federal Reserve as a trusted service provider
with broad reach. Some of these commenters suggested the Federal
Reserve could build and operate its own directory service whereas
others suggested that it could serve as a centralized link to existing
directories. A few commenters did not support the Federal Reserve
developing its own directory service because private-sector directories
are already available.
More than 90 commenters addressed the importance of fraud
prevention services.\98\ Many of these commenters suggested that an
RTGS service for faster payments should include fraud prevention
services, with some noting that such services could be more efficient
and less susceptible to vulnerabilities if they were an integral part
of an RTGS service for faster payments. Some commenters noted that
fraud prevention services could include a database of known fraudulent
accounts or automated fraud detection tools to identify unusual payment
activity. Some commenters noted that a potential Federal Reserve RTGS
service for faster payments would not require fraud prevention services
because the private sector already offers such services. In the context
of discussing fraud prevention services, some commenters also
highlighted the need for tools that would assist in compliance with
regulations to prevent money laundering and terrorist financing.
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\98\ These commenters included small and midsize banks,
individuals, merchants, service providers, and trade organizations.
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B. General Description of the FedNow Service
The FedNow Service would process individual payments within
seconds, 24 hours a day, 7 days a week, 365 days a year. The service
would be designed to support credit transfers, where a sender initiates
a payment to an intended receiver for a variety of use cases, such as
person-to-person payments, bill payments, and smaller-value business-
to-business payments.\99\ The service would settle interbank
obligations through debit and credit entries to balances in banks'
master accounts at the Reserve Banks. All settlement entries for
transactions through the FedNow Service would be final, meaning that
settlement cannot be cancelled or revoked once a transaction is
processed by the service. Consistent with the goal of supporting faster
payments, use of the service would require participating banks to make
the funds associated with individual payments available to their end-
user customers immediately after receiving notification of settlement
from the service. The service would support values initially limited to
$25,000.\100\ The service would have the ability to process a large
volume of payments rapidly, including volumes that may be unusually
large at certain times of the day or days of the year.
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\99\ Some traditional payments, such as card payments and
certain ACH payments, are conducted as debit transfers. In a debit
transfer, the party that wishes to be paid provides instructions
that allow its bank to pull funds from the account of the party that
needs to pay for a good or service, subject to the approval of that
party and its bank. Because credit transfers require the sender to
authorize and initiate each individual payment, services based on
such transfers can decrease the risk of fraudulent or otherwise
unauthorized payments. This and other considerations have led credit
transfers to be the basis of faster payment systems in other
countries.
\100\ The initial $25,000 value limit would be intended to
restrict the size of potential fraudulent transactions, while also
supporting payments associated with a variety of use cases. Like
other aspects of the service, this value limit could change after
experience with the service provides additional information about
whether a change would be appropriate. Banks would also be able to
establish value limits for their customers below the $25,000 limit.
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The FedNow Service would incorporate clearing functionality with
messages containing information required to complete end-to-end
payments, such as account information for the sender and receiver, in
addition to interbank settlement information. The service would also
support the inclusion of additional descriptive information related to
a payment, such as remittance or invoice information, and may further
allow for nonvalue message types.\101\ Payment message format would be
based on the ISO 20022 standard.\102\
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\101\ For example, one possible message type is a ``request for
payment'' in which the intended receiver submits a request for the
sender to initiate a payment. A request-for-payment message type is
addressed in the discussion of specific service features.
\102\ Additional information about the ISO 20022 standard is
provided in the discussion of specific service features.
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In its simplest form, a completed payment through the FedNow
Service involving two participating banks would have the following
steps.\103\ To start, a sender would initiate a payment through its
bank, by submitting instructions to it using an end-user interface
outside the FedNow Service. After the sender's bank authenticates the
sender and validates the payment, it would submit a payment message to
a Reserve Bank using the FedNow Service. The FedNow Service would
authenticate the sender's bank and validate the payment message, for
example, by verifying that the message meets the FedNow format
specifications. Before the Reserve Bank executes the payment message,
the service would place a provisional hold on funds in the master
account of the sender's bank and would then send an inquiry message to
the receiver's bank seeking confirmation that the receiver's bank,
among other things, maintains a valid account for the receiver included
in the payment message received by the Reserve Bank. If the receiver's
bank sends a positive response to the inquiry, the FedNow Service would
execute the payment for the Reserve Banks by sending a payment message
forward with an advice of credit to the receiver's bank and nearly
simultaneously processing a final debits and final credit to the master
accounts of the sender's bank and receiver's bank,
[[Page 39318]]
respectively.\104\ The banks are responsible for debiting and crediting
their customers' accounts and providing further notification to their
customers that the payment has been completed. The entire process would
take place within seconds.
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\103\ Other steps could occur, for example, if either bank were
to use an agent, service provider, or correspondent or if a
directory service were used.
\104\ The receiver's bank would need to respond to the message
sent to it by the service within a certain amount of time. In the
event that the response process is not completed within the expected
time, the transaction would not be completed. Instead, the payment
would be rejected, with the provisional hold on funds removed from
the master account of the sender's bank and the banks being notified
of the rejection. A payment could also be rejected, with associated
notifications of payment rejection, if any of the necessary steps
were not completed. For example, a payment could be rejected because
of invalid account information for the receiver, which would cause
the receiver's bank to reject the payment.
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Like current Federal Reserve services, the FedNow Service would be
available to banks eligible to hold accounts at the Reserve Banks under
applicable federal statutes and Federal Reserve rules, policies, and
procedures.\105\ Participating banks would be able to designate a
service provider or agent to submit or receive payment instructions on
their behalf. Participating banks could also choose to settle payments
in the account of a correspondent bank.\106\
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\105\ Section 13(1) of the Federal Reserve Act permits Reserve
Banks to receive deposits from member banks or other depository
institutions. 12 U.S.C. 342. Section 19(b)(1)(A) of the act includes
as depository institutions any federally insured bank, mutual
savings bank, savings bank, savings association, or credit union. 12
U.S.C. 461(b). The Reserve Banks may maintain accounts for
additional institutions under other statutory authority.
\106\ A correspondent bank is a bank that has authorized a
Reserve Bank to settle debit and credit transaction activity to its
master account for a respondent bank. Correspondent/respondent
relationships are established under Federal Reserve Operating
Circular 1.
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The service would establish a ``business day'' by setting opening
(beginning-of-day) and closing (end-of-day) times (in eastern time).
This business day would be used to determine end-of-day balances and
conduct associated reserve and interest calculations, as well as for
transaction reporting and account reconciliation purposes. The
existence of these opening and closing times would not affect the
service's 24x7x365 continuous processing of payments. End-of-day
balances would be calculated for master accounts on each calendar day,
including weekends and holidays, as part of a seven-day accounting
regime. Banks would be expected to manage their accounts to have a
positive end-of-day account balance each day and avoid overnight
overdrafts.
The Board recognizes that, in a market structure with multiple
operators of RTGS services for faster payments, the ability to achieve
ubiquity in faster payments is advanced when customers of a bank
participating in one RTGS service are able to reach the customers of a
bank participating in another RTGS service. This type of reach can be
achieved in multiple ways, such as by banks participating in multiple
services, or through interoperability where direct exchange of payments
across services is possible. Each of these requires some degree of
cooperation among private-sector operators, banks, and service
providers. During its engagement with the industry, the Federal Reserve
intends to explore both interoperability and other paths to achieving
nationwide reach in support of ubiquitous faster payments, recognizing
that these approaches may change over time.
C. Discussion of Specific Features and Functionality
The Board has considered the specific features and functionality of
the planned FedNow Service. These features and functionality, as well
as whether they would be part of the service initially, offered
incrementally after the service is operational, or offered at all, may
need to be adjusted based on the Federal Reserve's industry engagement
efforts. In addition, industry engagement may identify other features
and functionality not described here that may be addressed in the
subsequent Federal Register notice as part of the final service
description or through existing Reserve Bank customer communication
channels.
1. Message Standard
Payment message formats in the FedNow Service would be based on the
ISO 20022 standard and its implementation with respect to faster
payments in the United States.\107\ The service would support various
message types, including payment instructions, confirmations, and
request for payment. As part of a payment, the service would also
support the exchange of remittance or other information related to a
specific payment or invoice. Message specifications for the service,
including specific message types and interpretation of ISO formats,
would be provided to the industry prior to the initial launch of the
service through established Reserve Bank communication channels.
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\107\ The ISO 20022 standard is a message format standard for
payments, securities, trade services, payment cards, and foreign
exchange. For more information, see https://www.iso20022.org/. The
standard is published by the International Organization for
Standardization (ISO), an independent, non-governmental organization
comprised of 161 national standards bodies. For more information,
see http://www.iso.org. The ISO 20022 standard is increasingly being
adopted around the world as part of efforts to modernize payment
services, including those that are used for faster payments.
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2. Settlement Account
Like other Federal Reserve payment and settlement services, the
FedNow Service would settle payments in master accounts.\108\ Depending
on the services used by a participating bank, transactions from
multiple Federal Reserve services would settle in a master account at
any given time during standard business hours.\109\ Banks would need to
monitor their master accounts and possibly adjust practices in managing
those accounts because of the real-time settlement activity associated
with the FedNow Service (see also the Liquidity and Credit discussion).
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\108\ As discussed in the 2018 Notice, the Board contemplated a
two-account structure, with a separate account dedicated to
settlement of faster payments to possibly reduce the technical
complexity of an RTGS service and reduce time-to-market. However,
this structure would introduce significant operational complexity
for both the Federal Reserve and participating banks. For example, a
separate account for settlement of faster payments would require new
balance reconciliation procedures and introduce the need for
participating banks to make transfers between the two accounts.
\109\ These other services are check services, the Fedwire Funds
Service, NSS, the Fedwire Securities Service, and FedACH services.
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3. Seven-Day Accounting Regime
After considering Financial Accounting Standards Board (FASB)
principles, the Board believes that a seven-day accounting regime is
appropriate for the FedNow Service.\110\ 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. Therefore,
in light of the FASB principles' guidance on when transferred assets
should be recognized on each parties' financial records, the Reserve
Banks would record and report transactions for accounting purposes as
they occur, each day of the week, including weekends and holidays.\111\
[[Page 39319]]
Similarly, an end-of-day balance would also be calculated for each
participating bank at the FedNow Service's designated closing time each
day of the week, including weekends and holidays (see also the Business
Day discussion).
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\110\ FASB accounting principles are developed under the FASB
Statements of Financial Accounting Concepts, which the FASB states
are ``intended to serve the public interest by setting the
objectives, qualitative characteristics, and other concepts that
guide . . . financial reporting.'' More information on the FASB
Statements of Financial Accounting Concepts is available at https://www.fasb.org/cs/ContentServer?c=Page&cid=1176156317989&d=&pagename=FASB%2FPage%2FPreCodSectionPage.
\111\ The Board considered a five-day accounting regime for the
service, which would be consistent with the Federal Reserve's
current approach and that of many banks, but determined that, under
the FASB principles, a seven-day regime is most appropriate for the
FedNow Service. Specifically, the FASB principles outline that once
control of an asset, such as balances in a Federal Reserve account,
is transferred to a new owner, the asset should be removed from the
original owner's financial records and recognized on the new owner's
financial records.
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A seven-day accounting regime adopted by the Federal Reserve for
the FedNow Service does not dictate or preclude use of specific other
accounting regimes by participating banks. Based on their
interpretation of accounting principles, participating banks may choose
to use other accounting approaches internally; for example, banks may
use five-day accounting in which they record and report weekend
transactions on their financial records as occurring on Monday.\112\
The service would provide queries, confirmations, and reports to
support transaction monitoring, reporting, and reconciliation by
participating banks under their chosen internal accounting approach.
Banks could elect either to receive daily accounting reports at the end
of each business day to allow management of reserve balances or to
receive reports for weekends and holidays on the next business day.
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\112\ Over time, participating banks could alternatively choose
to adopt a seven-day accounting approach.
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4. Business Day
In considering the implications of a business day for the FedNow
Service in light of business day practices for current Federal Reserve
services, the Board has determined that the business day of the FedNow
Service should align with the business day of the Fedwire Funds
Service.\113\ Given the 24x7x365 nature of the FedNow Service, the
opening time would be designated to occur immediately after the closing
time, with the intention that transitions between closing and opening
for the next business day would not disrupt continuous processing.
Transactions completed after the FedNow Service's closing but before
midnight each calendar day would be recorded on Federal Reserve
accounting records as transactions occurring on the next business day.
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\113\ Today, the Fedwire Funds Service closes at 6:30 p.m. ET
and re-opens for the next business day at 9:00 p.m. ET on the same
calendar day. The Board recently requested comment on moving the
close of the Fedwire Funds Service to 7:00 p.m. ET to accommodate
later settlement for ACH transactions. See ``Potential Modifications
to the Federal Reserve Banks' National Settlement Service and
Fedwire Funds Service,'' supra note 91.
Fedwire Funds transactions between 9:00 p.m. ET and midnight ET
are recorded as occurring on the next business day and typically
support international markets and settlement of other domestic and
global payment systems. The Board considered setting a midnight ET
closing time for the FedNow Service to align across business and
calendar days. However, such an approach would not allow balance
calculations performed by the Federal Reserve to be measured on the
same business day for the Fedwire Funds service and the FedNow
Service, making calculation of balances problematic. Such a
misalignment could have consequences for the current activity
occurring over the Fedwire Funds Service.
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A business day for the FedNow Service that aligns with the Fedwire
Funds Service, however, does not dictate that participating banks adopt
the same convention, or preclude other conventions, for recording
transactions in their customers' accounts. For example, banks could
post faster payment transactions occurring after the close of the
FedNow business day to customers' accounts in real time based on the
calendar day in which they are received.\114\
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\114\ This practice would be akin to banks' common practice of
``memo posting'' for ATM withdrawals and certain other transaction
activity. Under this practice, transactions are provisionally posted
to customers' accounts on the date they are made but are reported on
a later date for the purposes of monthly account statements.
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5. Liquidity and Credit
Comments in response to the 2018 Notice indicated concerns about
adequate liquidity being available to support faster payments,
particularly on weekends and holidays. To support their current payment
services, the Reserve Banks provide liquidity in the form of intraday
credit, also known as daylight overdrafts, to eligible banks and
subject to the Federal Reserve's Policy on Payment System Risk (PSR
Policy).\115\ Intraday credit supports the smooth functioning of the
payment system by supplying temporary liquidity to cover shortages that
can result when the timing of payment inflows and outflows are not
balanced.
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\115\ Intraday credit is generally available to banks that are
financially healthy and have regular access to the discount window
(the Federal Reserve's program for overnight lending to banks). See
Board of Governors of the Federal Reserve System, ``The Federal
Reserve Policy on Payment System Risk,'' (As amended effective
September 15, 2017). Available at https://www.federalreserve.gov/paymentsystems/psr_about.htm.
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Like current services, access to intraday credit for FedNow
transactions could support the smooth functioning of payments through
the service. The Board is considering the impact of providing intraday
credit on a 24x7x365 basis under the same terms and conditions as for
current Federal Reserve services. As is the case today, participating
banks would be expected to manage their master accounts in compliance
with Federal Reserve policies, including avoiding overnight
overdrafts.\116\ These expectations would apply over weekends and
holidays given that the FedNow Service would operate 24x7x365.
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\116\ To minimize Reserve Bank exposure to overnight overdrafts,
policy established by the Board discourages institutions from
incurring overnight overdrafts by charging a penalty fee. See Board
of Governors of the Federal Reserve System, ``Policy on Overnight
Overdrafts,'' (Effective July 12, 2012). Available at https://www.federalreserve.gov/paymentsystems/oo_policy.htm.
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Account balance management would become more complex in a 24x7x365
environment where payments settle continuously in master accounts.
Given the retail nature of payments through the FedNow Service,
transaction values are expected to be relatively small compared with
other activity in master accounts, such as Fedwire Funds transfers.
Nevertheless, participating banks may need to adjust internal account
monitoring practices to manage intraday liquidity. Liquidity management
would be particularly important to avoid a negative balance at the
service's closing time. Specifically, banks would need to carefully
monitor transactions in real time or ensure that sufficient funding is
available in their master accounts to cover payments that may arise
shortly before the service's closing.
The Federal Reserve is conducting analysis of when it may be
beneficial to extend discount window operations to include weekends or
holidays.\117\ At least initially, however, discount window loan
originations would likely not be available on weekends and holidays.
The discount window would continue to be available until the close of
the Fedwire Funds Service on Fridays under the same or similar terms as
today.
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\117\ The discount window is a Federal Reserve lending facility
that helps to relieve liquidity strains for individual banks and for
the banking system as a whole by providing a reliable backup source
of funding. Additional information on the discount window is
available at https://www.federalreserve.gov/regreform/discount-window.htm.
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The Board will engage with the industry to consider features and
tools to assist institutions with the effective management of intraday
and end-of-day account balances.\118\ The Board may
[[Page 39320]]
apply additional controls, initially or over time, in the PSR Policy as
necessary to mitigate the credit risk incurred by the Reserve Banks in
providing access to liquidity and credit.
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\118\ Today, banks use the Reserve Bank's Account Management
Information services for a near real-time view of account balances.
At least initially, the Federal Reserve expects that banks would
need to monitor account balances outside standard business hours by
reconciling payment activity against the last available closing
balance. However, the Federal Reserve expects that the Reserve
Bank's Account Management Information services would be available
during the same hours as the FedNow Service shortly after the
service becomes available.
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6. Network Access
Participating banks would access the FedNow Service through the
FedLine[supreg] network, which would be enhanced to support the
service's 24x7x365 processing.\119\ Participating banks would need to
deploy and test enhanced or upgraded FedLine components to enable the
FedNow Service. Depending on their electronic connection with the
FedLine network, banks also would need to maintain adequate
telecommunications services to support the expected end-to-end speed of
payments through the FedNow Service.
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\119\ FedLine Solutions is a set of electronic connection
products that over 10,000 banks (or their agents) use to access
Federal Reserve payment and information services. More information
is available at https://frbservices.org/fedline-solutions/index.html.
While not envisioned at this time, the Board may consider in the
future whether enabling access to the FedNow Service through
alternate messaging networks would enhance resiliency or
interoperability for faster payments.
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7. Service Pricing
Before the FedNow Service is launched, the Board will announce the
service's fee structure and fee schedule.\120\ Based on prevailing
market practices, the Board expects that the fee structure would
include a combination of per-item fees, charged to sending and
potentially to receiving banks, and fixed participation fees.\121\
Separate per-item fees could also be charged for other message types
that may be offered in the future.
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\120\ After announcing the initial fee schedule, consistent with
existing practice, the Board would include the FedNow Service with
its annual service-pricing process for all priced services.
\121\ The ultimate fee structure and schedule would be informed
by the Board's assessment of market practices at the time of
implementation, which could evolve from today's practices.
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As discussed in Section III under the Cost Recovery Criterion, the
Board expects that the FedNow Service will take significant time to
mature, as the industry takes steps to adopt the service. The Board
expects the service's first instance of long-run cost recovery to occur
outside the 10-year cost recovery period typically applied to mature
services. The Board anticipates that, until the FedNow Service reaches
maturity with relatively stable costs and revenues and a critical mass
of bank participation, fees would be based on costs associated with
mature volume estimates.\122\ The Board believes that this approach to
cost recovery for the FedNow Service, as a new service, which would not
rely on the standard applied to mature services, is consistent with the
language and purpose of the MCA and the Board's pricing principles. The
Board is requesting comment on factors that may be relevant to consider
in evaluating the long-run cost recovery of new Federal Reserve
services compared with mature services.
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\122\ This approach is consistent with that used for the Federal
Reserve's ACH service before it became a mature service.
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8. Request for Payment
In the FedNow Service, a request for payment would be a separate
nonvalue message type that, when received through an end-user service,
would prompt a sender to initiate a payment to the receiver who is
requesting funds. The request for payment functionality allows a sender
to authorize a credit transfer in real time, based on the receiver's
request message. This functionality may increase the use of faster
payments by allowing end users to more easily conduct certain types of
transactions, such as bill payments. This functionality allows a sender
to retain control of the authorization in sending a payment in real
time, helps avoid mistakes of sending payments to the wrong party, and
reduces the fraud risk relative to that of debit transfers.\123\ The
Board is seeking input on the incremental value and ideal
implementation timing of such functionality to advance broad adoption
of faster payments in the United States.
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\123\ Many payments in the United States, such as electronic
bill payments and card payments have traditionally been accomplished
as debit transfers, in which the sender provides the receiver with
information and authorization to debit the sender's bank account.
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9. Directory Service
Comments received in response to the 2018 Notice indicated the
ability to originate payments using a receiver's public identifier,
such as an email address or cell phone number, would be beneficial to
help drive adoption of faster payments. To send a valid payment message
in the FedNow Service, however, the sender's bank must have the banking
information of the receiver. Therefore, if a sender wanted to originate
a payment using a public identifier, the sender's bank would need to be
able to find the banking information of the intended receiver using the
public identifier. The availability of a directory that connects public
identifiers with receivers' banking information would provide the
sender's bank with the needed information, without ever revealing that
information to the sender.
Access to a directory for purposes of payments made using the
FedNow Service could be accomplished in multiple ways. Individually,
banks could establish connections to existing private-sector
directories and develop an automated mechanism for populating payment
messages with information provided by these external directories.
Alternatively, the Reserve Banks could establish a centralized link
with private-sector directories on behalf of participating banks,
rather than each participating bank needing to do so individually. A
further option would be for the Reserve Banks to build their own
directory, enabling a message type that would allow banks to query the
directory as part of the FedNow Service. The Federal Reserve intends to
engage with industry stakeholders to understand more fully the benefits
and drawbacks of these potential approaches and to assess possible
paths forward to advance broad adoption of faster payments in the
United States.
10. Fraud Prevention Services
Comments received in response to the 2018 Notice emphasized the
heightened risk of fraud with real-time transactions and noted the
importance of fraud-monitoring solutions to aid in mitigating fraud
risk. The Board agrees that strong security mechanisms are necessary to
support the overall safety of the nation's payment system. Across the
payment system, payment security at the end-user level rests between
end users and their banks, while at the payment system level, service
operators may have additional layers of security.
For the FedNow Service, participating banks would continue to serve
as a primary line of defense against fraudulent transactions, as they
do today, with solutions to mitigate fraud enabled as part of the end-
user services banks offer their customers. At the payment system level,
the FedNow Service could offer additional fraud mitigation features,
such as payment monitoring to alert participating banks of unusual
transactions. In addition, the Federal Reserve remains committed to
working with the industry on best practices and standards for
mitigating fraud across these levels. The Federal Reserve intends to
engage with industry stakeholders to better assess FedNow Service
features that could help mitigate fraud risk and advance the safety of
faster payments in the United States.
[[Page 39321]]
D. Implementation
The Board acknowledges the time-to-market pressure for industry
participants related to faster payment services and is committed to
launching the FedNow Service as soon as practicably possible. The
Federal Reserve will engage quickly with industry participants to
gather input for finalizing the initial design and features of the
service. Pending engagement with the industry, the Board anticipates
the FedNow Service will be available in 2023 or 2024.
VI. Competitive Impact Analysis
The Board conducts a competitive impact analysis when considering
an operational or legal change to a new or existing service, such as
the planned FedNow Service. The Board has considered whether the FedNow
Service as described in Section V would have a direct and material
adverse effect on the ability of other service providers to compete
effectively with the Federal Reserve in providing similar services due
to differing legal powers or constraints or due to a dominant market
position of the Federal Reserve deriving from such legal
differences.\124\
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\124\ ``The Federal Reserve in the Payments System,'' supra note
18.
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In conducting a competitive impact analysis, the Board first
determines whether the proposal has a direct and material adverse
effect on the ability of other service providers to compete effectively
with the Federal Reserve in providing similar services. In instances
where such direct and material adverse effects on the ability of the
private-sector provider to compete are identified, the Board then
considers whether such effects were due to either legal differences or
a dominant market position deriving from such legal differences. If the
Board determines that the material adverse effects were the result of
legal differences or the Federal Reserve's dominant market position,
the Board then evaluates the potential public benefits of the new
service in order to determine whether those benefits could be
reasonably achieved with a lesser or no adverse competitive impact.
Based on these considerations, the Board then either modifies the
proposal to lessen or eliminate the adverse impact on competitors'
ability to compete or determines that the payment system objectives may
not be reasonably achieved if the proposal is modified. If reasonable
modifications would not mitigate the material adverse effect, the Board
then determines whether the anticipated benefits of the new service are
significant enough to proceed with the service even though it may
adversely affect the ability of other service providers to compete with
the Federal Reserve in that service.
The Board has conducted an initial competitive impact analysis for
the FedNow Service. However, the Board will conduct a final competitive
impact analysis after considering the comments received during the
public comment period.
A. Relevant Private-Sector Providers of Similar Services
In conducting its initial competitive impact analysis, the Board
first identified relevant private-sector providers of similar services.
At present, there is one private-sector RTGS service for faster
payments in the United States, which has been operational since
November 2017.\125\ Like the planned FedNow Service, the private-sector
RTGS service conducts real-time payment-by-payment final settlement of
interbank obligations on a 24x7x365 basis. Unlike the FedNow Service,
which would settle in central bank money using master accounts, the
private-sector RTGS service relies on an internal ledger kept by its
operator to conduct settlement, which is supported by funds held in a
joint account at a Reserve Bank.\126\
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\125\ The Board recognizes that the FedNow Service may affect
additional private-sector entities that may be indirect competitors
to or users of the FedNow Service. However, because these entities
do not provide RTGS services for faster payments, the Board does not
view them as private-sector providers of similar services and,
therefore, has not considered them as part of this analysis.
\126\ A joint account enables settlement for participants in a
private-sector arrangement to be supported by funds held for the
joint benefit of the service's participants. Accordingly, the
operator of a private-sector arrangement that relies on a joint
account can perform real-time, payment-by-payment settlement by
adjusting participant positions on its own ledger, which, in the
aggregate, will be equal to or less than the amount held in the
joint account. Settlement supported by a joint account can occur at
any time or on any day at the settlement-arrangement operator's
discretion because settlement takes place on the ledger of the
settlement-arrangement operator.
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B. Material Adverse Effects on the Ability of Relevant Service
Providers To Compete Effectively
After identifying relevant private-sector providers of similar
services, the Board then compared those providers' services with the
FedNow Service. The purpose of this comparison is to identify
differences between private-sector and Federal Reserve services. Such
differences could create a direct and material adverse effect on the
ability of the private-sector services to compete effectively with the
Federal Reserve. Ultimately, it would be difficult to create total
parity between the Federal Reserve and private-sector providers in
their provision of payment services. Certain differences may provide
advantages in the Federal Reserve's provision of priced services, while
other differences may provide competitive advantages to private-sector
entities.\127\
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\127\ For example, although private-sector providers generally
do not need to publish their fees, the Federal Reserve publishes
fees for their priced services in a manner that is transparent to
competitors and customers alike.
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In this regard, certain specific differences between the FedNow
Service and the private-sector RTGS provider are relevant. For example,
the eligibility of funds held in master accounts to earn interest and
count toward reserve requirements is a particularly notable difference
between the two services. However, whether these and other differences
between the two services will, on net, have a direct and material
adverse effect on the ability of the private-sector RTGS service to
compete effectively with the Federal Reserve is unclear.
First, the FedNow Service would allow participants to use their
master accounts at the Reserve Banks, whereas the private-sector RTGS
provider uses a separate non-interest-bearing joint account that each
participant must prefund. Use of master accounts may provide an
advantage to the FedNow Service because funds remain in participants'
Federal Reserve accounts, earning interest and counting towards reserve
requirements, and can be used for other purposes. Unlike funds held in
a master account, funds held in the private-sector service's joint
account do not earn interest or count towards reserve requirements and
are not available for other purposes that may arise, such as satisfying
payment or liquidity needs outside the private-sector service.\128\
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\128\ In adopting guidelines for evaluating joint account
requests, the Board explained that the treatment of joint account
balances depends on the nature of the private-sector arrangement,
including the rights and obligations of the parties involved.
Therefore, determining whether balances held in a joint account can
be used to meet reserve requirements or are eligible for interest is
assessed for each request individually. See Board of Governors of
the Federal Reserve System, ``Final Guidelines for Evaluating Joint
Account Requests,'' 82 FR 41951, 41956 (Sept. 5, 2017). Available at
https://www.federalregister.gov/d/2017-18705.
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Second, if the Board confirms that the FedNow Service would provide
access to intraday credit under the same terms and conditions as for
current Federal Reserve services, such intraday credit would lower the
risk that payments will be rejected because of lack of funds. In such a
scenario, the Federal Reserve would expect banks to manage their
[[Page 39322]]
master accounts at all times in compliance with Federal Reserve
policies. Further, because the Board does not expect that the discount
window would be available initially on weekends and holidays,
participants in the FedNow Service would need to manage their master
accounts more actively during those times to avoid overnight
overdrafts.
In the private-sector service, participants are able to use
intraday credit available to them under the Federal Reserve's PSR
Policy to fund the joint account. Access to intraday credit in funding
the joint account mitigates the risk of private-sector RTGS faster
payment transactions being rejected. However, access would be limited
to the current operating hours of the Fedwire Funds Service, resulting
in continued risk of rejected payments because of lack of prefunding
outside those hours. Participants in the private-sector service,
however, can manage this risk by establishing credit arrangements
outside of Federal Reserve services, making the materiality of this
possible difference unclear.
The Board identified additional differences between the two
services that may provide advantages or disadvantages to either
service. The FedNow Service and the private-sector service require
participants to manage their account positions in different ways,
presenting different challenges for some institutions. The FedNow
Service's use of master accounts requires consideration of the defined
closing and opening of other Federal Reserve payment services also
settling in the same account. Further, use of master accounts for a
service operating 24x7x365, such as the FedNow Service, adds a layer of
complexity to banks' management of their positions to meet reserve
requirements and avoid overnight overdrafts and associated penalties.
At the same time, use of a joint account requires participants to
prefund that account, removing liquidity from their master accounts,
and to manage their contributions to the joint account to ensure
sufficient liquidity to avoid rejected payments.
The Board is requesting comment on whether the differences
identified above would have a direct and material adverse effect on the
ability of other service providers to compete effectively with the
Federal Reserve and whether additional differences are also relevant.
The Board will conduct a final assessment of these differences and
others that may be identified in light of comments received.
C. Legal Differences Between the FedNow Service and the Private-Sector
Service
The Board has considered whether the differences between the FedNow
Service and the private-sector service that have potential direct and
material adverse effects are due to legal differences or due to a
dominant market position deriving from such legal differences. The
Board invites comment on the following initial analysis.
Several of the differences identified above as potentially
advantageous to the FedNow Service would be available to a private-
sector service if it were to use an operating model other than one
based on a joint account at a Reserve Bank. For example, the service
could use a commercial bank to hold the prefunding that backs the
service's internal ledger. The funds in an account at a commercial bank
could potentially earn interest. A commercial bank may also allow
overdrafts and extensions of credit, thereby reducing the risk of
rejected payments. Depending on the arrangement, balances held at a
commercial bank to settle faster payments may count towards reserve
requirements.
Choice of a different operating model, however, would have
potentially negative implications for other aspects of a private-sector
RTGS service for faster payments. Most significantly, if a commercial
bank were used, balances would be subject to risk of loss if the
commercial bank holding the account were to fail. The use of a joint
account at a Reserve Bank to support settlement mitigates this risk by
reproducing, as closely as possible, the risk-free nature of settlement
in central bank money.
The Board believes that the inherently risk-free nature of deposits
at a central bank relative to deposits at a commercial bank is a unique
legal difference between the Federal Reserve and other possible
institutions, such as a commercial bank, that may result in a
competitive advantage for the FedNow Service. This advantage may have a
direct and material effect in light of the private-sector operator's
use of a joint account.
D. Achieving Potential Benefits With a Lesser, or No, Adverse
Competitive Impact
As described in Section III, the Board believes the FedNow Service
would offer clear public benefits. Specifically, the service would
promote the Federal Reserve's objective of an accessible, safe, and
efficient payment system by helping ensure nationwide access to an RTGS
infrastructure for faster payments, promoting the safety of the payment
system and reducing risks associated with faster payments, and having
positive effects on competition and innovation in the payment industry.
If the differences between the FedNow Service and the private-
sector service discussed above are determined to have a material
adverse effect on the ability of the private-sector provider to compete
effectively with the Federal Reserve as part of the Board's final
competitive impact analysis, certain actions may help to lessen those
effects while still advancing the Federal Reserve's objectives.
Specifically, if the Federal Reserve were to offer expanded Fedwire
Funds Service or NSS hours, those services could enable access to
liquidity during nonstandard business hours, when such access is
currently not available. With expanded Fedwire Funds Service or NSS
hours, direct participants in the private-sector RTGS service may be
able to reduce the amount of prefunding, in particular, on weekends and
holidays. This reduction in prefunding could then reduce the amount of
liquidity committed to the joint account and allow more funds to remain
in participants' master accounts, where those funds could accrue
interest, count towards reserve requirements, and be used for purposes
other than faster payments. Further, an expansion of Fedwire Funds
Service or NSS hours could eventually allow participants in the
private-sector RTGS service to have access to intraday credit during
times that Fedwire Funds Service and NSS are currently closed.
The expanded functionality provided by these actions, if
implemented, may help reduce, if not fully eliminate, the potentially
adverse effects described earlier. The Board is requesting comment on
modifications to the FedNow Service or other actions that would further
reduce or eliminate potentially adverse effects without significantly
compromising the anticipated public benefit associated with the
service. The Board will conduct and publish its final competitive
impact analysis of the FedNow Service as part of the subsequent Federal
Register notice presenting the final FedNow Service description.
By order of the Board of Governors of the Federal Reserve System
August 2, 2019.
Ann Misback,
Secretary of the Board.
[FR Doc. 2019-17027 Filed 8-8-19; 8:45 am]
BILLING CODE P