[Federal Register Volume 85, Number 155 (Tuesday, August 11, 2020)]
[Notices]
[Pages 48522-48538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17539]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1670]
Service Details on Federal Reserve Actions To Support Interbank
Settlement of Instant Payments
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Service Announcement.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
has approved the FedNow\SM\ Service as described in this announcement.
The FedNow Service is a new interbank 24x7x365 real-time gross
settlement service with clearing functionality to support instant
payments in the United States. The new service will support banks'
provision of end-to-end instant payment services and will provide
infrastructure to promote ubiquitous, safe, and efficient instant
payments in the United States.
DATES: September 10, 2020.
FOR FURTHER INFORMATION CONTACT: Kirstin Wells, Principal Economist
(202-452-2962), Susan V. Foley, Senior Associate Director (202-452-
3596), Division of Reserve Bank Operations and Payment Systems; Jess
Cheng, Senior Counsel (202-452-2309), 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 payment system is a core part of our nation's infrastructure.
For more than a century, the Federal Reserve has provided payment and
settlement services to promote an accessible, safe, and efficient U.S.
payment system.\1\ Throughout its history, the Federal Reserve has
provided these services alongside, and in support of, private-sector
service providers. The Federal Reserve Banks (Reserve Banks) fulfill
this statutory role by offering services that provide core
infrastructure for financial transactions, including check, automated
clearinghouse (ACH), and funds transfer services.\2\ This operational
role provides key public benefits, including enhanced resiliency,
healthy competition, increased innovation, and more equitable access.
Since the Federal Reserve does not have plenary regulatory or
supervisory authority over payments, this operational role has also
helped catalyze fundamental improvements in the nation's payment
system.\3\ This role in the payments system has allowed the Federal
Reserve to advance its broader mission of providing the nation with a
modern, safe, and effective financial system.
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\1\ Additional information about the Federal Reserve's role in
the payment system is available in The Federal Reserve System
Purposes & Functions: Chapter 6, ``Fostering Payment and Settlement
System Safety and Efficiency,'' (October 2016). Available at https://www.federalreserve.gov/aboutthefed/pf.htm.
\2\ 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[supreg] Funds Service, the
National Settlement Service, and FedACH[supreg] services. Throughout
this notice, these services operated by the Reserve Banks will be
referred to as Federal Reserve services.
\3\ For a more detailed discussion related to the Federal
Reserve's role in the payment system, including discussion related
to regulatory and supervisory authorities, see ``Federal Reserve
Actions To Support Interbank Settlement of Faster Payments, Request
for Comments,'' 84 FR 39297 (Aug. 9, 2019). Available at https://www.federalregister.gov/d/2019-17027.
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Consistent with this history, beginning in 2013 the Federal Reserve
launched a collaborative initiative with a broad array of stakeholders
to improve the speed, safety, and efficiency of the U.S. payment
system. As part of this initiative, the Federal Reserve and
stakeholders identified the need for instant payment capabilities in
the United States that would allow individuals and businesses to
conduct and complete payments almost immediately, around the clock,
every day of the year and provide a receiver with access to funds in
seconds (instant payments).\4\ The ability to both send and receive
funds instantly allows individuals and businesses greater flexibility
and control to manage their money and make time-sensitive payments.
This flexibility in turn may help alleviate mismatches between the time
that incoming funds are available for use and the time that such funds
are needed for other purposes.
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\4\ See Faster Payments Task Force, ``Final Report Part Two: A
Call to Action,'' (July 2, 017). Available at https://fedpaymentsimprovement.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf.
The Board has previously used the term ``faster payments'' but
has transitioned in this notice to the term ``instant payments'' to
describe the types of payments the FedNow Service will support and
distinguish them from other improvements to payment speed, such as
same-day ACH. In addition, for the purposes of this notice, the term
``instant payments'' will specifically refer to a subset of payments
in which an end user receives funds in near real time, with
immediate interbank settlement of the payment also having occurred.
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For individuals, instant payments reduces the need for high-cost
borrowing and the risk of associated penalties, such as overdraft or
late fees.
[[Page 48523]]
Instant payments could be particularly helpful for individuals facing
financial constraints or in times of crisis when there is heightened
need to move money quickly and access funds almost immediately. For
businesses, and in particular for small businesses, the ability to
receive funds in near real time may result in better cash flow
management in normal times, and this may be especially important in
periods of stress. Instant payments may also provide businesses with
considerable opportunity to improve efficiency and reduce costs of
payments relative to paper checks and other existing payment methods.
In light of these and many other potential benefits, the Board and
a broad set of stakeholders determined that a core infrastructure is
essential to support the development and availability of instant
payment services. In particular, stakeholders recommended that the
Federal Reserve explore and assess the need for an operational role in
instant payments and develop a 24x7x365 settlement service to support
such payments.\5\ This sentiment was echoed by the U.S. Treasury.\6\ It
was also supported by the vast majority of over 400 comments received
by the Board in 2018 in response to a Board proposal of potential
actions to support instant payments in the United States (the 2018
Notice).\7\
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\5\ See Faster Payments Task Force, ``Final Report Part Two: A
Call to Action,'' supra note 4.
\6\ 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.
\7\ ``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.
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As a result of this extensive consultation with a wide variety of
stakeholders, the Board announced via public notice in August 2019 (the
2019 Notice), that the Reserve Banks would develop the FedNow Service,
a new interbank 24x7x365 real-time gross settlement (RTGS) service with
integrated clearing functionality to support instant payments in the
United States.\8\ In making its decision, the Board concluded that the
Federal Reserve's operation of such a 24x7x365 RTGS service would be
the most effective approach to advance the Federal Reserve's and
industry's objective of ubiquitous, safe, and efficient instant
payments in the United States.
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\8\ ``Federal Reserve Actions To Support Interbank Settlement of
Faster Payments, Request for Comments,'' supra note 3.
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Consistent with the Federal Reserve's historical role in supporting
payment system improvements, the Board concluded that the Reserve
Banks' operation of the FedNow Service would support broader
modernization of the nation's payment system as the industry moves
towards instant payments.\9\ Serving as an operator would also be
consistent with the Federal Reserve's historical role as a provider of
payment services alongside the private sector, which is currently the
established model for almost every major payment system in the United
States.\10\
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\9\ For example, in retail payment systems, improvements
achieved through Reserve Bank operational roles in the past include
facilitating efficient nationwide clearing of checks, supporting the
development of the ACH system, and encouraging the nation's
transition to a virtually all-electronic check-processing
environment.
\10\ As described in the 2019 Notice, implementing the FedNow
Service is consistent with the requirements of the Monetary Control
Act and longstanding Federal Reserve policy criteria for the
provision of new financial services.
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An operational role for the Federal Reserve would also help ensure
competition in the market--an outcome that the U.S. Government
Accountability Office concluded benefits consumers in other payment
systems.\11\ Notably, over the course of the Federal Reserve's
multiyear engagement with the industry on instant payments, only one
private-sector RTGS service for instant payments has been established
in the United States (the existing private-sector service). The Board's
analysis supporting the decision to develop the FedNow Service
indicated that the existing private-sector service was likely to remain
the sole private-sector provider of RTGS services for instant payments
in the United States. The Board explained in the 2019 Notice that no
traditional payment system in the United States has only a single
private-sector provider, and that such an outcome would create
significant risks to the safety and efficiency of the nation's payment
system. In particular, the Board explained that a single private-sector
service would face significant challenges in establishing an accessible
infrastructure for instant payments with nationwide reach, would result
in limited competition that could have negative effects on pricing and
innovation, and could create a single point of failure in the nation's
instant payments infrastructure.
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\11\ 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. 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.
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In light of these significant risks, the Board determined that an
operational role would allow the Federal Reserve to advance a number of
important objectives, including establishing an accessible nationwide
infrastructure, fostering stability in times of crisis, supporting
resiliency through redundancy, and stimulating healthy competition for
clearing and settling instant payments.
Given their operational role in providing payment and settlement
services, the Reserve Banks have established broad reach and invested
in connections and customer service relationships with more than 10,000
diverse financial institutions, both small and large, across the
country. This reach, in turn, will support the Federal Reserve's
ability to provide a nationwide infrastructure for instant payments
through the FedNow Service, furthering the goal of ubiquitous instant
payments in the United States by connecting banks across the
nation.\12\ As a result, banks of every size, in every community will
have the ability to offer instant payment services to their customers,
which is essential to their ability to meet evolving customer demands
effectively. This, in turn, will ensure that individuals and businesses
across the country have the ability to use such services regardless of
geography.
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\12\ Throughout this notice, the term ``bank'' refers to any
type of depository institution. Depository institutions include
commercial banks, savings banks, savings and loan associations, and
credit unions.
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The Federal Reserve has also 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 in an
operational role in instant payments will allow the Federal Reserve
additional capacity in the future to respond to financial turmoil,
natural disasters, and other crises, as it has done in the past. In
addition, providing access to more than one RTGS service for instant
payments for backup purposes will enhance resiliency by reducing the
risks caused by a single point of failure.
The FedNow Service will also promote competition by providing
choice of instant payment services in the market. Competition exists in
nearly every payment system in the United States today, including funds
transfers, ACH, checks, and card transactions. The Board's analysis
indicated that choice in
[[Page 48524]]
RTGS services for instant payments would likely result in efficiencies
related to pricing, service quality, and innovation. Moreover, it will
give banks and third-party service providers a neutral infrastructure
to build on, allowing them to offer a variety of innovative and
convenient instant payment services to individuals and businesses.
A. An Overview of the FedNow Service
The FedNow Service will be available to banks in the United States
and will enable individuals and businesses to send instant payments any
time of day, any day of the year through their bank accounts. An
instant payment facilitated by the FedNow Service begins when a sender
(that is, an individual or business) initiates a payment using a
service provided by their bank, such as a banking application accessed
on a computer, tablet, or mobile device.\13\ After the sender's bank
receives this request, it will send a message through the FedNow
Service to the receiver's bank, with information about the payment.\14\
Upon receipt of this message, the receiver's bank will indicate whether
it intends to accept the payment. If it intends to accept the payment,
the receiver's bank will send a positive confirmation back, and upon
receipt the FedNow Service will transfer the funds between the Federal
Reserve accounts associated with the banks. Each bank will debit and
credit their customer's account accordingly. The entire process is
intended to take place in a matter of seconds, so the receiver will
have funds available to use in near real time. Completed payments will
be final, meaning they are irrevocable.\15\
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\13\ The following discussion illustrates a completed payment
through the FedNow Service in its simplest form. Other steps could
occur; for example, a payment could be rejected. In addition, the
Federal Reserve may also consider supplementing this message flow
and settlement process with additional options to facilitate certain
uses of the service in the future.
\14\ References to receiver and receiver's bank in this
discussion are intended to refer to the beneficiary and the
beneficiary's bank, respectively, of a funds transfer.
\15\ This does not prevent banks from implementing procedures to
resolve erroneous payments, or the ability for the receiver to send
a new transaction to return funds in certain circumstances (see the
discussion of return transfers as part of the Payment Flow and
Message Types discussion in section III).
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From a technical perspective, the FedNow Service will be designed
to maintain uninterrupted 24x7x365 processing with security features to
support payment integrity and data security. The FedNow Service will
enable credit transfers that support a range of different types of
payments for individuals and businesses, and will also support the
transfer of supplemental information, such as invoices, related to a
payment.\16\ The service will have a 24-hour business day each day of
the week, including weekends and holidays. End-of-day balances will be
reported on Federal Reserve accounting records for each participating
bank on each FedNow Service business day. Access to intraday credit
will be provided to participants in the FedNow Service.\17\
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\16\ Credit transfers are those where a sender initiates a
payment to an intended receiver and require the sender to authorize
and initiate each individual payment. Credit transfers are distinct
from debit transfers, in which 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.
\17\ Access to intraday credit in the FedNow Service would be
provided during its business day under the same terms and conditions
as for other Federal Reserve services.
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Because instant payment services such as the FedNow Service process
and settle each payment separately and continuously on a 24x7x365
basis, participants will need adequate funds or available credit
(liquidity) in their accounts at all times in order to settle each
payment. In some circumstances, banks with account balances beyond
their current needs may supply liquidity to those facing a shortfall.
Typically, banks can use a service like the Fedwire[supreg] Funds
Service to conduct such liquidity transfers. However, when those
services are closed, participants in the FedNow Service or the existing
private-sector service may need an alternative method to transfer
liquidity.
To facilitate such transfers, the FedNow Service will provide a
liquidity management tool to support instant payment services that will
be a critical enabler not only of the FedNow service but also the
existing private-sector service. The tool will enable participants in
the FedNow Service to transfer funds to one another to support
liquidity needs related to payment activity in the FedNow Service. The
tool will also support participants in a private-sector instant payment
service backed by a joint account at a Reserve Bank by enabling
transfers between the master accounts of participants and a joint
account.\18\ Access to the tool would be available to users regardless
of whether they are full participants using the FedNow Service to send
instant payments between end users or if they use the FedNow Service
only to make liquidity transfers.\19\ The tool will be available during
specific hours, for example, when such transfers are not currently
possible through other Federal Reserve services.
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\18\ In 2017, the Board approved 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. 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 instant 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.
\19\ Throughout this notice, the term ``end users'' encompasses
individuals and businesses.
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The Federal Reserve is committed to using widely accepted standards
in designing the FedNow Service to aid in accomplishing the key goals
of achieving nationwide reach for instant payments and promoting
interoperability with the existing private-sector service. To support
these goals, the service will use the widely accepted ISO 20022
standard and adopt other industry best practices, that would remove
barriers to interoperability, in order to avoid unnecessary and
burdensome incompatibilities, to the extent the existing private-sector
service also uses publicly available, widely accepted standards.\20\
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\20\ 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 used for instant payments.
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The Federal Reserve intends to launch the FedNow Service as soon as
practicably possible. Although the target release date remains 2023 or
2024, the Federal Reserve intends to announce a more specific time
frame for launch, as well as earlier pilot programs, through
established Reserve Bank channels once additional work is completed.
This and other work related to the implementation of the FedNow Service
is ongoing and includes development of the necessary infrastructure,
integration with existing Federal Reserve systems, and continued
engagement with industry stakeholders on features and design.
The Federal Reserve will take a phased approach to providing
additional features and functionality over time. Although this may
result in the introduction of certain desirable features after the
initial release, this approach will ensure the core features
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and functionality are delivered as quickly as possible. The Board
believes this approach most appropriately balances the competing
demands for the Federal Reserve to launch the FedNow service quickly
and to provide enhanced features beyond core capabilities.
Specifically, the first release of the FedNow Service will provide
baseline functionality that will support market needs and help banks
manage the transition to a 24x7x365 service. The first release will
also offer additional optional features where there is high demand,
such as fraud prevention tools, the ability to join initially as a
receive-only participant, request for payment capability, and tools to
support participants in their handling of payment inquiries,
reconcilements, and certain exceptions. Other aspects of the service,
such as fee structures and governing terms, will be announced prior to
the launch of the service through established Reserve Bank
communication channels.
The Federal Reserve also recognizes that market needs and
technology related to instant payments are constantly evolving and
intends to continue engaging with stakeholders and remain flexible in
its approach when building out additional features and functionality of
the FedNow Service. Based on ongoing stakeholder engagement, additional
features and service enhancements will be introduced over time. For
example, the service will endeavor to offer additional features in the
initial period following launch to support alias-based payments such as
directories, as well as fraud prevention, error resolution, or case
management tools. Other features in the future might include support
for bulk payments or enhanced remittance information. The Federal
Reserve will continue to engage with stakeholders on these and other,
more complex considerations, such as cross-border capability.
B. Organization of Notice
This notice provides a high-level discussion of the comments
received by the Board in response to the 2019 Notice (Section II). The
notice details the core features and functionality of the FedNow
Service at launch and related comments considered by the Board (Section
III). Section III also outlines the Federal Reserve's approach to the
introduction of additional features and service enhancements that may
be offered in subsequent phases. Lastly, this notice provides a final
competitive impact analysis of the FedNow Service (Section IV). Future
communications about the FedNow Service, including but not limited to
technical specifications, detailed product offerings, pricing, and
implementation timeline, will be provided through established channels,
such as FRBservices.org.
II. Comment Summary
The Board received 182 comments in response to the 2019 Notice. Of
those comment letters, 3 included signatures from multiple parties, for
a total of 353 entities responding to the 2019 Notice. Comments were
submitted by a wide variety of stakeholders from the following
segments: Small and midsize banks, large banks, individuals, consumer
organizations, merchants, service providers, private-sector operators,
financial technology companies (fintechs), trade organizations, and
other interested parties.\21\ Overall, small and midsize banks were the
largest group of respondents, providing more than 40 percent of the
total comment letters and representing institutions from 25 states.
Trade organizations submitted letters representing several commenter
segments, including small and midsize banks, large banks, merchants,
fintechs, and service providers. Generally, these letters aligned with
comments submitted by respondents in the same segment as a trade
organization's membership. The majority of comments provided specific
feedback on features and functionality of the FedNow Service. While
this Section provides an overview of comments, a more detailed
discussion of comments can be found in Sections III and IV.
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\21\ ``Banks'' include any type of depository institution, such
as commercial banks, savings banks, savings and loan associations,
and credit unions. For the purposes of this notice, large banks are
defined as having assets of more than $50 billion, while small and
midsize banks are defined as having assets of less than $50 billion.
``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
existing private-sector service for instant payments and payment
card networks. ``Other interested parties'' include payment
standards organizations, a congressional member organization,
research and academic groups, consultancies, and regulatory bodies.
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The Board also received 2,246 form letters from individuals. These
form letters argued that the Federal Reserve should not operate in
competition with the private sector and viewed the decision to develop
and implement the FedNow Service as an inappropriate expansion of the
Federal Reserve's role that is inconsistent with its historical
purpose. Generally, these commenters stated that the introduction of
the FedNow Service would lead to decreased innovation and unfair
competition with the private sector. These topics were addressed by the
Board as part of its analysis in the 2019 Notice. In the 2019 Notice,
the Board provided the rationale for its conclusion that the Federal
Reserve should offer the FedNow Service. This rationale was based on
input received in response to the Board's 2018 notice requesting
comment on the Federal Reserve's role in the payment system and whether
to develop the FedNow Service.\22\
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\22\ As the Board explained in the 2019 notice, the Federal
Reserve has played an operational role in the payment system by
providing key clearing and settlement infrastructure since its
founding in 1913. In fulfilling this role, the Reserve Banks operate
services, including check, ACH, and funds transfer services, that
provide core infrastructure for financial transactions. The Federal
Reserve operating alongside the private sector is consistent with
almost every major payment system in the United States. The Board
therefore believes offering the FedNow Service is consistent with
its historical role in the payment system and is not an expansion of
the Federal Reserve's powers. Further, the Board continues to view
the Reserve Banks' operation of the FedNow Service as the most
effective approach to advance the Federal Reserve's and industry's
objective of ubiquitous, safe, and efficient instant payments in the
United States. The FedNow Service is expected to provide public
benefits ranging from enhanced resiliency, healthy competition,
increased innovation, and more equitable access.
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Approximately 80 commenters, largely representing small and midsize
banks, trade organizations and individuals, addressed the proposed
implementation time frame for the service. Nearly all of these
commenters stated that the Federal Reserve should accelerate
development and bring the FedNow Service to market sooner than the
anticipated implementation date of 2023 or 2024. In general, these
commenters indicated that the FedNow Service should be made available
as soon as possible. These commenters generally believed that market
needs and technology for instant payments are rapidly evolving and that
an earlier implementation would better support innovation and
widespread adoption of the FedNow Service and instant payments more
broadly.
Approximately 75 commenters, largely representing small and midsize
banks, trade organizations, and service providers, recommended that the
FedNow Service offer enhanced functionality that participants can use
to mitigate fraud. While a majority of these commenters agreed that
banks are primarily responsible for combatting fraud related to the
accounts of their customers, most suggested that the Reserve Banks
should nevertheless provide enhanced fraud prevention tools for FedNow
Service participants. Most of these commenters offered
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specific recommendations as to how fraud prevention tools should be
designed and implemented. Two commenters, however, stated that fraud
prevention tools for the FedNow Service should be provided by the
private sector and not the Reserve Banks.
Approximately 80 commenters, largely representing small and midsize
banks, trade organizations, and fintechs, addressed the inclusion of
directory services to support alias-based payments as part of the
FedNow Service.\23\ Nearly all these commenters noted that availability
of a directory, whether provided by the Reserve Banks or the private
sector, would support widespread adoption of the service for person-to-
person (P2P) payments and reduce payment routing errors. Approximately
40 commenters, largely representing small and midsize banks, trade
organizations, and individuals, described potential approaches to the
development of directory services, with most of these commenters
recommending that the FedNow Service provide either a centralized link
to existing directories or build its own directory. Several commenters
raised various other considerations with respect to directory services
and highlighted potential complexities with day-to-day management of a
directory service, such as protecting data privacy and security.
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\23\ Alias-based payments provide a sender with the ability to
send payments to a receiver based solely on public identifiers, or
aliases, of the receiver, without a sender having to know the bank
account number of the receiver. Aliases are generally linked to an
email or phone number, or other personal identifier. Directory
services can support alias-based payments by connecting an alias
with a receiver's banking information to ensure that a payment is
routed to the correct end user in a way that is private and secure.
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Approximately 100 commenters, representing all commenter segments,
expressed views related to interoperability. Nearly all 100 commenters
highlighted the benefits of interoperability between the FedNow Service
and the existing private-sector service. Approximately 40 commenters,
representing small and midsize banks, trade organizations and service
providers, expressed the view that interoperability would promote
ubiquitous access to instant payments in the United States and support
widespread usage and adoption of instant payments. Approximately 35
commenters, largely representing small and midsize banks, trade
organizations, and other interested parties, noted that
interoperability would streamline operations for banks and service
providers, allow for a consistent end-user experience with respect to
funds availability, and generally promote efficiencies and savings.
Very few commenters expressed views on how interoperability should be
achieved, and many commenters appeared to use varying operational
definitions of interoperability.\24\
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\24\ For example, some commenters discussed adoption of
standardized messaging formats between the FedNow Service and
existing private-sector service, which would allow customers to
choose to route a payment to either service. Other commenters
discussed intermingling and sharing key processing steps between the
services.
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Commenters also addressed considerations related to participant and
service provider preparedness for FedNow Service onboarding and, more
broadly, the transition to 24x7x365 real-time operations for instant
payments. Approximately 40 commenters, largely representing small and
midsize banks, trade organizations, and individuals, noted that
successful integration of existing core service-provider systems is
critical to achieving widespread adoption of the FedNow Service.\25\
These commenters noted that small and midsize banks rely on core
service providers and that the Reserve Banks should share technical and
operational requirements with such service providers well in advance of
service implementation so that small and midsize banks are not
disadvantaged. More generally, approximately 15 commenters highlighted
various challenges related to transitioning to 24x7x365 real-time
processing of instant payments. The majority of these commenters raised
concerns that increased staffing costs and upgrades to technology
required to maintain continuous operations may limit adoption of the
service.
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\25\ Most of these commenters were specifically referring to
service providers that manage core banking systems for their bank
customers. Typically, core service providers support their
customers' daily transaction processing and account management.
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Other groups of commenters raised relevant topics beyond specific
features and functionality of the FedNow Service. For example,
approximately 35 commenters, largely representing small and midsize
banks, trade organizations, and other interested parties, emphasized
the importance of effective governance for the FedNow Service and
suggested, more generally, that the Reserve Banks take part in any
future industry efforts that may arise to develop common rules and
standards for instant payments. Another 8 commenters noted that
introduction of the FedNow Service may necessitate revisions of
existing regulations. These commenters cited a wide range of rules and
regulations that may need to be adjusted, including regulations related
to funds availability and funds transfers through Federal Reserve
services. Another 6 commenters emphasized that the FedNow Service
design should incorporate robust cybersecurity controls (for example,
endpoint security requirements). Finally, approximately 10 commenters
suggested that the Reserve Banks design the FedNow Service to minimize
the possibility that the service might be used in a way that can cause
consumer harm. Additionally, these commenters recommended that the
Reserve Banks develop industry standards for disputing payments in the
event of a fraudulent or erroneous transfer.
III. The FedNow Service
In the 2019 Notice, the Board proposed potential features and
functionality for the FedNow Service. Based on additional analysis
informed by the comments received in response to the 2019 Notice, the
Board has approved the FedNow Service as described in this notice.
Recognizing that market needs and technology for instant payments are
rapidly evolving, the Board also expects that additional service
modifications or features, other than those described here, could be
included in the service at launch and in the future. The Federal
Reserve intends to take a phased approach to developing and enhancing
the FedNow Service, with flexibility to adjust features and
functionality in response to available technology, industry
developments, and evolving needs of banks and their customers.
Additions or changes to the features described in this notice will be
announced through established Reserve Bank communication channels.
Consistent with the Board's pricing principles, the Board will request
public comment when changes in fees and service arrangements are
proposed that would have significant longer-run effects on the nation's
payment system.\26\
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\26\ Section 11A of the Federal Reserve Act requires the Board
to adopt a set of pricing principles for Reserve Bank services and a
schedule of fees based on those principles. 12 U.S.C. 248a. The
principles adopted by the Board incorporate statutory requirements
and include additional provisions consistent with the purposes of
section 11A. 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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A. General Description of the FedNow Service
In the 2019 Notice, the Board explained that the FedNow Service
would be designed to process individual payments continuously, 24 hours
a day,
[[Page 48527]]
7 days a week, 365 days a year. The Board did not receive comments
related to modifying the hours or days over which the service would be
available, and the 24x7x365 functionality of the service will be
adopted as proposed.
In the 2019 Notice, the Board indicated the service would support
credit transfers, where a sender initiates a payment to an intended
receiver. Three commenters suggested that the Board also consider
inclusion of debit transfer functionality, such that a receiver would
be able to initiate a transfer that ``pulls'' funds from a sender's
account.\27\ These commenters expressed the view that debit transfers
would facilitate certain types of payments (for example, recurring bill
payments) and support broader adoption of the service.
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\27\ Many payments in the United States, such as debit card
payments and some electronic bill payments, have traditionally been
conducted as debit transfers, with the sender providing information
and authorization to the receiver that allows the receiver's bank to
initiate a debit to the sender's bank account with funds
subsequently credited to the receiver's bank account.
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Although debit transfer functionality may facilitate some increased
adoption of the FedNow Service and instant payments more broadly based
on specific use cases, the Board believes that the risks of the FedNow
Service supporting debit transfers outweigh the potential benefits, at
least at the outset. Credit transfers require the sender to authorize
and initiate each payment, which can decrease the risk of fraudulent or
otherwise unauthorized payments and enhance the safety of the payment
system.\28\ In addition, recurring bill payments and other payments
that are typically made by debit transfer can also be supported by a
``request for payment'' functionality that builds on credit transfer
functionality (see the Request for Payment section). Therefore, the
FedNow Service will only support credit transfers as proposed.
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\28\ According to a 2018 Federal Reserve study on U.S. payments
fraud, in 2015, the fraud rate for ACH debit payments from general-
purpose transaction accounts was more than double the rate for ACH
credit payments. See Board of Governors of the Federal Reserve
System, ``Changes in U.S. Payments Fraud from 2012 to 2016: Evidence
from the Federal Reserve Payments Study,'' (Oct. 2018). Available at
https://www.federalreserve.gov/publications/files/changes-in-us-payments-fraud-from-2012-to-2016-20181016.pdf.
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In the 2019 Notice, the Board explained that the FedNow Service
would facilitate domestic payments. Four commenters suggested that the
FedNow Service should be designed to accommodate nondomestic (that is,
cross-border) payments. The Board recognizes that the ability to send
and receive instant payments to and from other countries is
functionality that could facilitate certain types of payments,
including remittances to family members abroad and corporate trade
payments. A number of regulatory and operational considerations,
including cooperation with international operators, would need to be
addressed before cross-border payments could be supported by the FedNow
Service. In line with prioritization of a timely launch, the FedNow
Service will only support domestic instant payments initially. The
Board will continue to evaluate the costs and benefits of expanding the
FedNow Service to allow for cross-border payments in the future,
recognizing the need to address the heightened risks and compliance
issues associated with cross-border payments.
In the 2019 Notice, the Board indicated that the FedNow Service
would be available to institutions eligible to hold accounts at the
Reserve Banks, pursuant to applicable federal statutes and Federal
Reserve rules, policies, and procedures.\29\ Seven commenters stated
that eligibility to participate in the FedNow Service should be
expanded to other institutions, including nonbanks that are not
eligible for Federal Reserve accounts. These commenters stated that
nonbanks' reliance on banks to access the service would result in
increased costs and other inefficiencies. Additionally, these
commenters emphasized that participation by entities such as nonbank
lenders, money transmitters, and fintechs would promote competition and
broader adoption of instant payment services. In contrast,
approximately 20 commenters, largely representing small and midsize
banks and trade organizations, emphasized that participation in the
FedNow Service should be limited to federally insured institutions.
Nearly all of these commenters noted that allowing nonbanks to
participate directly in the FedNow Service would introduce risk to the
service and the broader payment system.
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\29\ 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 also maintain accounts for
additional entities under other statutory authorities.
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While the Board recognizes the variety of perspectives offered by
commenters, federal statutes and Federal Reserve rules, policies, and
procedures limit the scope of entities eligible to receive Federal
Reserve accounts, as the Board indicated in the 2019 Notice. Although
the service will be available only to institutions eligible to hold
accounts at the Reserve Banks, entities that are not eligible to hold
accounts at the Reserve Banks may nevertheless be able to act as
service providers or agents for participants in the FedNow Service, as
described later.
In the 2019 Notice, the Board proposed that the FedNow Service
would settle interbank obligations through debit and credit entries to
balances in master accounts held at the Reserve Banks.\30\ Nine
commenters expressed support for settlement of payments in master
accounts. Another group of four commenters suggested that, instead of
using master accounts, the Reserve Banks should establish separate
accounts to settle payments through the FedNow Service. These
commenters stated that use of a separate settlement account would
reduce the overall complexity of managing instant payments and allow
banker's banks and corporate credit unions to manage and reconcile
their customers' account balances more easily.
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\30\ A master account is the record of financial rights and
obligations between account-holding banks and a Reserve Bank.
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As discussed in the 2019 Notice, the Board previously sought
comment on and analyzed a two-account structure, with a separate
account dedicated to settlement of instant payments, but determined
based on those comments that such a structure would introduce
significant operational complexity for both the Federal Reserve and
participating banks.\31\ Therefore, as proposed, the FedNow Service
will settle payments in master accounts held at the Reserve Banks.
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\31\ The Board's proposal that the FedNow Service would rely on
a single account structure using master accounts at the Reserve
Banks was in response to feedback from the public to the 2018
Notice, in which the Board requested comment on the operational
burden banks would face if an instant payment service were designed
using a settlement account separate from a master account.
Commenters indicated that the benefits of such a design would have
to outweigh the added costs of managing two accounts.
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In the 2019 Notice, the Board also proposed that settlement entries
for transactions through the FedNow Service would be final. The
finality of settlement entries would mean that interbank settlement is
irrevocable. The Board did not receive comments on the topic of
finality and therefore interbank settlement for transactions through
the service will be final, as proposed.\32\
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\32\ The finality of settlement entries does not preclude
institutions from implementing procedures to resolve erroneous
payments, or the ability for the receiver to send a new transaction
to return funds in certain circumstance (see the discussion of
return transfers as part of the Payment Flow and Message Types
section).
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[[Page 48528]]
In the 2019 Notice, the Board proposed that participating banks
would be required to make the funds associated with individual payments
available to their end-user customers immediately after receiving
notification of settlement from the service. Several commenters
suggested that the Board further clarify funds availability
expectations through industry standards or amendments to existing
regulations.
To be consistent with the goal of supporting instant payments for
individuals and businesses, participating banks must agree to make the
funds associated with individual payments available to their customers
in near real time after receiving notification of settlement from the
service, as proposed.\33\ The Board is assessing applicable laws and
regulations, and, to the extent changes to the Board's regulations are
identified as necessary to clarify funds availability, the Board will
request public comment.
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\33\ Details for participating banks will be specified in
technical or operational documentation that will describe the
service or in terms as part of the Reserve Banks' Operating Circular
for the FedNow Service.
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In the 2019 Notice, the Board indicated that a participating bank
would be permitted to designate a service provider or agent to submit
or receive payment instructions to and from the FedNow Service on its
behalf. The Board also stated that a participating bank could choose to
settle payments in the master account of a correspondent bank.\34\ The
Board received 5 comments that supported the ability for a bank to
designate a service provider to process FedNow payments on its behalf.
These commenters noted that this ability would be especially important
for community banks that rely on service provider relationships to
access existing Federal Reserve services. Approximately 10 commenters
expressed support for the inclusion of correspondent/respondent
settlement relationships in the FedNow Service. These commenters
emphasized that to support the management of correspondent/respondent
relationships, respondent-level information, including settlement
activity and account balances, should be provided to correspondents.
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\34\ 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 Board agrees with commenters that use of service providers and
correspondent banks will facilitate access to the FedNow Service, and
these features will be adopted as proposed. In addition, the FedNow
Service will be designed to provide correspondent banks with
transaction-level and summary reports for respondent banks to which
they provide services (see the Reporting section).
Finally, banks will have the option of enrolling in the FedNow
Service as a ``receive-only'' participant, a feature that was not
proposed in the 2019 Notice. Such a participant will not be required to
have the ability to originate payments through the FedNow Service but
can still receive instant payments. The Federal Reserve expects that
this option may ease the burden of adopting the FedNow Service,
especially for small banks as they gain experience with instant
payments.
B. Implementation
In the 2019 Notice, the Board acknowledged the time-to-market
pressure for the payment industry related to instant payment services
and indicated that the Federal Reserve is committed to launching the
FedNow Service as soon as practicably possible. Many commenters raised
concerns about the Federal Reserve's anticipated implementation in 2023
or 2024. Commenters largely representing small and midsize banks, trade
organizations and service providers stated that the Federal Reserve's
key role as a provider of payment and settlement services to most of
the nation's banks warranted an accelerated implementation timeline for
the service to better support innovation related to instant payments,
as well as development of third-party services. Other commenters,
largely representing small and midsize banks, raised concerns that the
current timeline would limit small and midsize banks' ability to meet
growing customer demand for instant payments services. These commenters
also suggested that many smaller banks will delay offering their own
instant payment services until the FedNow Service is available.
The Board understands these timing concerns, and the Reserve Banks
are working to bring the FedNow Service to market as soon as
practicably possible, while also ensuring the requisite level of
security and resiliency. Although the target release date remains 2023
or 2024, the Federal Reserve will announce a more specific time frame
for launch, as well as earlier pilot programs, through established
Reserve Bank channels. This and other work related to the
implementation of the FedNow Service is ongoing and includes
development of the necessary infrastructure, integration with existing
Federal Reserve systems, and continuous engagement with industry
stakeholders on features and design. As the development of the FedNow
Service progresses, the Federal Reserve is committed to providing
specific details in advance that will allow industry partners to take
appropriate steps to ensure they are prepared to use the FedNow Service
when it becomes available.
Deployment of the FedNow Service will take a phased approach so
that the service can be launched expeditiously while maintaining
flexibility to augment features and functionality over time. The first
release of the FedNow Service will provide baseline functionality that
will support market needs and help banks manage the transition to a
24x7x365 service. The Federal Reserve will continue to engage with
stakeholders as market needs and technology evolve and the service
matures. Based on this ongoing engagement, additional features and
service enhancements will be released over time. While this phased
approach may result in the introduction of certain desirable features
after the initial release, it will ensure core features and
functionality are delivered as quickly as possible with a high level of
security and resiliency. The Board believes this approach most
appropriately balances the industry's desires for the Federal Reserve
to both move quickly and provide features beyond core clearing and
settlement capabilities.
C. Core Features of the FedNow Service
1. Payment Flow and Message Types
In the 2019 Notice, the Board proposed a payment flow that
described how a standard payment message could be processed and settled
by the FedNow Service.\35\ The Board received approximately 15 comments
that addressed the payment flow. All of these commenters expressed
support for the flow as proposed. In particular, most commenters were
in favor of the proposed process where, before interbank settlement
occurs over the service, the receiver's bank has an opportunity to
confirm that it holds a valid account for the receiver and intends to
accept the payment message. Several of these commenters noted that this
confirmation step could reduce
[[Page 48529]]
errors and increase end-user confidence in the service.
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\35\ References to the FedNow Service in this section are
intended to refer to one or more Reserve Banks acting as sending and
receiving banks, in connection with the FedNow Service.
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The flow of a standard payment message, called a credit transfer
message, will operate largely as proposed.\36\ Figure 1 illustrates a
completed credit transfer over the FedNow Service in its simplest
form.\37\ This process is intended to take place within seconds.\38\
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\36\ The payment flow proposed in the 2019 Notice included a
provisional hold on funds between steps 3 and 4, which may be
included in future releases of the service but will not be a
component of the first release.
\37\ Aspects of the payment flow would be different, for
example, if either the sender's bank or the receiver's bank were to
use an agent, service provider, or correspondent bank.
\38\ More specifically, steps 2-6 will have a defined maximum
time period such that transactions not completed within the defined
time will be rejected. As a result, the sender's bank will know that
it should receive notification of a completed payment or a rejection
within the defined time period. In addition, other payment message
types, including return transfers, will also have a defined maximum
time period. The defined time period will be specified in technical
or operational documentation that will describe the service or in
terms as part of the Reserve Banks' Operating Circular for the
FedNow Service.
[GRAPHIC] [TIFF OMITTED] TN11AU20.031
In step 1, a sender (that is, an individual or business)
initiates a payment by sending a payment message to its bank through an
end-user interface outside the FedNow Service.\39\ The sender's bank is
responsible for screening the payment according to its internal
processes and requirements.\40\
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\39\ The end-user interface will most likely be provided by the
sender's bank or a service provider working with the sender's bank.
\40\ While specific internal bank processes vary, this step
could include authenticating the sender, validating the payment, and
performing any screening or other procedures on the payment.
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In step 2, the sender's bank submits a payment message to
the FedNow Service.
In step 3, the FedNow Service validates the payment
message, for example, by verifying that the message meets message
format specifications.
In step 4, the FedNow Service sends the contents of the
payment message to the receiver's bank to seek confirmation that the
receiver's bank intends to accept the payment message. At this point,
the receiver's bank will have the opportunity to confirm or deny that
it maintains the specified account.
In step 5, the receiver's bank sends a positive response
to the FedNow Service, confirming that it intends to accept the payment
message.\41\ Steps 4 and 5 are intended to reduce the number of
misdirected payments and resulting exception cases that can occur in
high-volume systems.
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\41\ As noted previously, Figure 1 illustrates a completed
payment through the FedNow Service in its simplest form. Other steps
could occur, for example, if the receiver's bank responds with a
negative response. As another alternative, if the receiver's bank
needs additional time to determine whether to refrain from crediting
the receiver's account for legal or compliance reasons, the service
will accommodate such need, with associated notifications, up to an
additional specified time period. Additional information and
specifications for all the payment flows and processes that will be
available as part of the FedNow Service will be provided through
existing Reserve Bank communication channels.
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In step 6, the FedNow Service debits and credits the
designated master accounts of the sender's and receiver's banks (or
their correspondent banks), respectively.
In step 7, the FedNow Service sends a payment message
forward to the receiver's bank with an advice of credit and in parallel
sends an acknowledgement to the sender's bank notifying it that
settlement is complete.\42\
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\42\ In sending a payment message forward to the receiver's bank
with an advice of credit, the FedNow Service ``executes'' the
payment message that it received from the sender's bank.
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In step 8, the receiver's bank credits the receiver's
account.\43\ As a condition of the FedNow Service, the receiver's bank
must agree to make funds available to the receiver almost immediately
after step 7. This crediting to the receiver's account as well as the
debiting of the sender's account by their respective banks happens
outside the FedNow Service.\44\
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\43\ At this stage in the flow, the receiver's bank will have
the option of sending a message through the FedNow Service to the
sender's bank indicating that the payment has been posted to the
receiver's account.
\44\ The receiver's bank agrees to make the funds associated the
payment available to their customer in near real time after
receiving notification of settlement in step 7. The sender's bank
debits the sender according to its internal processes or policies,
which could occur at various points in the payment flow, for
example, as part of step 2. In addition, the sending and receiving
banks may notify their customers that the payment has been
completed.
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In addition to the standard credit transfer message type, the
FedNow Service will also include at least two additional payment
message types and several nonvalue message types in the first release
of the FedNow Service.\45\ One of the additional payment message types
will be a return transfer. The return transfer will be part of a
payment return process that will be included in the service to assist
participating banks with exception processing. This process will enable
the sender's bank to request and potentially obtain a return of the
previous payment. In this process, a sender's bank will send a nonvalue
``request for return'' message to a receiver's bank, requesting that
funds previously sent through the FedNow Service be returned. After
investigating the payment, the receiver's bank will either initiate a
return transfer to the sender's bank to return the amount of the
previous payment or send a nonvalue ``status'' message indicating it
will not return funds. The return transfer will be a type of credit
transfer,
[[Page 48530]]
but the message will be distinct from a standard credit transfer
message. In particular, a return transfer will carry information
associating it with the original credit transfer that the sender's bank
requested to be returned.
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\45\ Nonvalue message types include a request for return,
discussed as part of the return transfer payment message type in
this section; request for payment, discussed later (see the Request
for Payment section); and administrative messages such as payment
status request, report request, or request for additional
information about a payment.
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The second additional payment message type in the FedNow Service
will be for interbank funds transfers that do not involve end users.
This message type is intended primarily to support the liquidity
management needs of participants in either the FedNow Service or a
private-sector instant payment service that is backed by a joint
account at a Reserve Bank (see the Liquidity Management Tool section.)
2. Message Standard
In the 2019 Notice, the Board proposed that payment messages in the
FedNow Service would use the ISO 20022 standard and its implementation
with respect to instant payments in the United States. Approximately 30
commenters, largely representing small and midsize banks, trade
organizations, and other interested parties, addressed payment message
formats for the FedNow Service. Nearly all of these commenters
supported use of ISO 20022, noting that this standard is flexible
enough to support various use cases and enables the transmission of
payment data (for example, remittance and invoice information) along
with a payment. Over half of these commenters noted that ISO 20022 is
rapidly becoming the global standard for messaging frameworks and
expressed the view that use of the ISO 20022 standard would align the
FedNow Service with international and domestic payment systems. These
comments indicated that adoption of a common messaging framework would
support FedNow Service interoperability with other services for instant
payments and facilitate the possibility of cross-border capabilities in
the future. A group of 5 commenters specifically recommended that the
Reserve Banks implement the ISO 20022 messaging framework in a way that
is consistent with the ISO 20022 Real-Time Payments Group
guidelines.\46\
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\46\ The ISO 20022 Real-Time Payments Group (RTPG) is composed
of more than 70 international stakeholders, with representation from
payment associations, payment service providers, financial
institutions, international and domestic clearinghouses, regulators,
and others. The RTPG publishes usable sets of ISO 20022 usage
guidelines that can be found here: https://www.iso20022.org/catalogue-messages/additional-content-messages/iso-20022-real-time-payments-group-rtpg.
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The Board recognizes the benefits of ISO 20022 and agrees with
commenters that the message standard could provide a common foundation
for exchanging payment messages domestically and internationally in the
future. As proposed, the FedNow Service will be based on the ISO 20022
standard. The Federal Reserve intends to continue engaging with the
industry on topics related to the ISO 20022 standard and will provide
ISO message specifications, including specific message types and
interpretation of ISO formats prior to the launch of the FedNow Service
through established Reserve Bank communication channels. As the
standard evolves, the Reserve Banks will review changes to the standard
and consider adjustments to message formats for the FedNow Service.
3. Transaction Value Limit
In the 2019 Notice, the Board proposed that the FedNow Service
would include a transaction value limit of $25,000, with the potential
to increase the limit over time. The $25,000 value limit was intended
to restrict the size of potential fraudulent transactions, while also
supporting payments associated with a variety of use cases.
Approximately 25 commenters, largely representing small and midsize
banks, trade organizations, and other interested parties, addressed the
$25,000 limit, stating that the Federal Reserve should increase the
initial value limit at service launch or shortly thereafter. Many
commenters recommended that the Federal Reserve adjust the transaction
limit to be consistent with market practices at service launch and that
the limit should continue to align with those practices over time.
Commenters noted that the $25,000 limit could inhibit use of the FedNow
Service for many use cases, such as large-value business-to-business
payments.
The Board agrees that the FedNow Service should support a wide
variety of uses, including certain large-value transfers, and that the
limit should be consistent with market practices and needs for instant
payments. Therefore, prior to the launch of the service, the Reserve
Banks will establish a transaction limit consistent with market
practices and needs at the time and will announce the limit through
established Reserve Bank communication channels. In addition,
participating banks will have the ability to establish lower
transaction value limits (see the Fraud Prevention Tools section).
4. Business Day
In the 2019 Notice, the Board proposed that the FedNow Service
would have a 24-hour business day each day of the week, with defined
opening and closing times. The Board specifically proposed that the
FedNow Service should align with the business day of the Fedwire Funds
Service to maintain consistency with practices for existing Federal
Reserve services. Given the continuous operation of the FedNow Service,
the opening time would occur immediately after the closing time, and
the transition between closing and opening would not disrupt continuous
processing.\47\ The Board also proposed that, for the purpose of the
Reserve Banks' accounting processes, transactions processed after the
FedNow Service's close but before midnight eastern time each calendar
day would be recorded on Federal Reserve accounting records as
transactions occurring on the next calendar day.\48\ For example, a
FedNow Service transaction that occurs after the closing time and
before midnight eastern time on a Saturday would be recorded as
occurring on Sunday. The Board also explained in the 2019 Notice that
the account recording convention used by the Federal Reserve would not
dictate that participating banks adopt the same convention or preclude
other conventions.
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\47\ Transactions that are in process when the FedNow Service
switches from one day to the next will continue to be processed. The
settlement date of such transactions will be the date when Step 6
shown in Figure 1 occurs (debits and credits to the designated
master accounts of the sender and receiver banks or their
correspondent banks).
\48\ This approach mirrors the approach used by the Reserve
Banks for recording Fedwire Funds Service transactions that occur
after the service's opening at 9 p.m. eastern time (ET) and before
midnight ET, where these transactions are recorded as occurring on
the next business day.
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The Board received approximately 10 comments that addressed the
proposed FedNow Service business day and accounting processes. A few of
these commenters recommended that the business day for the FedNow
Service align with the calendar day.\49\ Two commenters expressed
support for allowing banks to determine their own business day and
accounting conventions, whereas one commenter suggested that the
Federal Reserve develop a standard for transaction posting and funds
availability.
---------------------------------------------------------------------------
\49\ Most of these commenters did not suggest a specific time
zone for the calendar day.
---------------------------------------------------------------------------
While the Board recognizes potential challenges that the proposed
business day of the FedNow Service may pose, a business day based on
calendar day would mean the closing time for the FedNow Service would
not align with other Federal Reserve services, which would introduce
significant complexity to the service. Therefore, to maintain
consistency with other Federal Reserve services, the FedNow Service
business
[[Page 48531]]
day will be adopted as proposed with the following additional
clarifying detail. The Board has determined that the closing time of
the FedNow Service will align on all calendar days with the scheduled
close of the Fedwire Funds Service.\50\ If the Fedwire Funds Service
close is extended on any given day, the FedNow Service close would be
extended to maintain alignment.
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\50\ 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. As of March 2021, the service is expected to close at
7:00 p.m. ET. On weekends and holidays when the Fedwire Funds
Service is closed, the FedNow Service close will still align with
this closing time. The schedule for funds transfers through the
Fedwire Funds Service is provided in the Reserve Banks' Operating
Circular 6.
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Additionally, the Board expects that participating banks will
record FedNow Service transactions in their customer accounts according
to their own business day and accounting conventions (while still
providing immediate access to funds received through the FedNow
Service). The Board recognizes that a bank's definition of a business
day may also affect its conventions for reporting and recording
transactions that occur on weekends and holidays, which is discussed in
the next section, Seven-Day Accounting.
5. Seven-Day Accounting
In the 2019 Notice, the Board proposed that the Reserve Banks
implement a seven-day accounting regime as part of implementing the
FedNow Service. Under this regime, an end-of-day balance would be
calculated for each day of the week, with transactions occurring on
weekends and holidays recorded and reported in the same way as
transactions occurring Monday through Friday (see the Business Day
section).\51\ Approximately 15 commenters addressed topics related to
implementation of a seven-day accounting regime. Although the majority
of commenters were supportive of seven-day accounting for FedNow
Service transactions, commenters recommended that the Federal Reserve
provide guidance to banks that prefer to maintain a five-day accounting
regime, in order to assist those institutions with calculating reserve
balances over the weekend and on holidays. Commenters noted that this
guidance would be particularly helpful for small and midsize banks that
may participate in the FedNow Service but do not wish to conduct all of
their internal operations on a 24x7x365 basis.
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\51\ For FedNow Service participants, interest on reserve
account balances will be calculated each day of the week based on
that day's closing balance.
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The Board recognizes that seven-day accounting is a significant
shift from current practice in the banking industry and will require
FedNow Service participants to update accounting systems and practices.
A seven-day accounting regime adopted by the Federal Reserve, however,
does not dictate or preclude use of specific other accounting regimes
by participating banks. Based on the specific applicability of
accounting principles, participating banks may choose to use
alternative accounting approaches for recording and reporting FedNow
Service transactions on weekends and holidays to their financial
records (though still providing immediate access to funds received
through the FedNow Service). In addition, the service will provide
reports to support reconcilement and reporting by participating banks
under their chosen internal accounting approaches. The Board also
believes that as adoption of instant payments grows over the long term,
seven-day accounting is likely to become the industry standard.
Implementing seven-day accounting is therefore likely to be less
disruptive and more efficient than switching from five- to seven-day
accounting in the future. For these reasons, the Board has determined
that a seven-day accounting regime is appropriate.
6. Reports
In the 2019 Notice, the Board stated that the FedNow Service would
provide reports to participating banks to support transaction
monitoring, reporting, and reconciliation. Eight commenters agreed that
the FedNow Service should provide reporting capabilities and
recommended that account balance information be available to
participants on a 24x7x365, real-time basis. These commenters explained
that such reporting capabilities would assist banks with management of
their account balances at the Reserve Banks.
The Board agrees that reporting capabilities will be important to
facilitate participants' effective use of the FedNow Service, and the
FedNow Service will offer reports as proposed. Reports about FedNow
Service payment activity, such as transaction-level or summary-level
activity reports, will be available as part of existing end-of-day
reports provided for other Federal Reserve services or by request.\52\
FedNow Service participants will also have the ability to request
intraday account balances, which would reflect a master account balance
inclusive of FedNow Service payment activity. Summary-level reports
will provide the total dollar value of sent and received transactions,
the number of completed and rejected transactions, and other
information. Correspondent banks will also be able to obtain these
transaction-level and summary reports for their respondents. Details on
reports available through the FedNow Service will be announced prior to
the launch of the service through established Reserve Bank
communication channels.
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\52\ Banks will be able to choose whether to receive daily
reports according to business day, for example, if participants do
not wish to receive reports on weekends and holidays.
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7. Liquidity and Credit
In the 2019 Notice, the Board stated that it would consider
providing intraday credit on a 24x7x365 basis to support FedNow Service
transactions. The Reserve Banks currently provide liquidity in the form
of intraday credit, also known as daylight overdrafts, to eligible
banks in support of Federal Reserve services and subject to the Federal
Reserve's Policy on Payment System Risk, Part II (PSR Policy).\53\
Approximately 10 commenters addressed intraday credit, and all were
supportive of the Reserve Banks providing intraday credit on a 24x7x365
basis to support FedNow Service transactions. Several commenters noted
that access to intraday credit would provide flexibility for banks of
varying sizes as they look to manage their account balances at the
Reserve Banks and emphasized the importance of intraday credit to the
smooth functioning of the FedNow Service. Commenters also stated that
account balance management will become more complex in a 24x7x365
environment where payments settle continuously in master accounts.
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\53\ 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,'' Available at https://www.federalreserve.gov/paymentsystems/psr_about.htm.
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The Board agrees with commenters that access to 24x7x365 intraday
credit would support the smooth functioning of the FedNow Service.\54\
Accordingly, access to intraday credit will be provided for
participants in the FedNow Service during its business day under
[[Page 48532]]
the same terms and conditions as are available for other Federal
Reserve services.\55\ As is the case today, participating banks will be
expected to manage their master accounts in compliance with Federal
Reserve policies, including avoiding negative balances at the close of
the business day, each day of the week, to avoid overnight
overdrafts.\56\ Therefore, some participating banks may need to adjust
internal account monitoring practices to manage intraday liquidity.\57\
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\54\ In particular, over the weekend or on a holiday, a FedNow
Service participant that faced an unexpected outflow of payments
could experience a depletion of its master account balance. Absent
intraday credit, a FedNow Service participant in this situation
could have its payments rejected by the FedNow Service, to the
detriment of that participant and its end-user customers.
\55\ Specific changes to the Board's PSR policy will be proposed
separately.
\56\ To minimize Reserve Bank exposure to overnight overdrafts,
the Board charges a penalty fee to discourage institutions from
incurring overnight overdrafts. 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. If a bank has a
negative balance at the end of the business day, it is charged an
overnight overdraft penalty for a 24-hour period. The Board expects
this would continue to be the case after launch of the FedNow
Service, even if an overdraft is cured shortly after on the next
business day through incoming FedNow payments or a liquidity
transfer from another FedNow Service participant (see the Liquidity
Management Tool section). On weekends, the Board expects overnight
overdrafts will be counted for a 24-hour period (as opposed to the
current 72-hour period), since there will be an opportunity to use
the FedNow Service to cure overdrafts on Saturday and Sunday.
Specific changes to the Overnight Overdraft Policy will be proposed
separately.
\57\ Participating banks will be able to request intraday
balances through the FedNow Service (see the Reports section).
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In the 2019 Notice, the Board also explained that, while discount
window loans would initially not be available on weekends and holidays,
the Board would conduct an analysis to determine when it may be
beneficial to expand discount window availability times.\58\
Approximately 10 commenters recommended that the Federal Reserve extend
discount window availability to include weekends and holidays.
Commenters noted that the ability to access funding during weekends and
holidays will be critical, particularly while participants are still
familiarizing themselves with 24x7x365 payment operations after the
FedNow Service first becomes available.
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\58\ 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 recognizes that the ability of participants in the FedNow
Service to access funding during weekends and holidays will be
important. The Board also expects that initially the need for overnight
credit on weekends and holidays will be limited, given that net value
of payment inflows and outflows related to FedNow Service transactions
will likely represent a small portion of banks' master account
balances. In addition, as outlined in the next section, the FedNow
Service will provide participants with a liquidity management tool that
will assist with liquidity management in a 24x7x365 environment.
Therefore, the Board has determined that, as proposed, the discount
window will continue to be available until the close of the Fedwire
Funds Service, Monday through Friday, under the same terms as today.
The Reserve Banks will monitor account balance activity and review the
need for overnight credit on weekends and holidays as the FedNow
Service matures.
8. Liquidity Management Tool
In the 2019 Notice, the Board discussed the importance of banks'
ability to manage liquidity needs associated with instant payments,
given that such payments involve real-time gross settlement between
banks on a 24x7x365 basis. For example, a participant in the FedNow
Service could experience unexpectedly high outgoing payment volume that
exceeds the participant's liquidity available in its master account for
settlement. If this outflow occurs during hours when the Fedwire Funds
Service is not operating, the participant may incur an overdraft of its
master account that it cannot address through a liquidity transfer from
another FedNow Service participant, possibly resulting in an overnight
overdraft. An analogous liquidity management issue can arise for
participants in a private-sector instant payment service that is backed
by a joint account at a Reserve Bank.\59\ The Board explained in the
2019 Notice that the Federal Reserve would explore expanded hours for
the Fedwire Funds Service and National Settlement Service (NSS) as an
option to provide such liquidity management functionality.\60\
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\59\ A participant in such a service could find that its
customers' payment activity has depleted its position on the
service's ledger, but the participant has no way to provide
supplemental funding to the joint account to support an increase in
that ledger position when the Fedwire Funds Service is closed.
\60\ In the 2018 Notice, the Board requested comment on the
development of a liquidity management tool. Comments received in
response to the 2018 Notice generally supported development of such
a tool and also supported expansion of hours for existing Federal
Reserve services to support other industry needs. Reflecting this
input, the Board indicated in the 2019 Notice that the Reserve Banks
would explore the expansion of Fedwire Funds Service and NSS hours
to provide liquidity management functionality and for other
purposes.
---------------------------------------------------------------------------
Approximately 20 commenters, largely representing small and midsize
banks, trade organizations, and other interested parties, addressed the
need for a liquidity management tool. Commenters noted that tools to
manage liquidity on a 24x7x365 basis should be available at the launch
of the FedNow Service and suggested that those tools could include
automated transfers between FedNow Service participants, based on
preestablished account thresholds and limits. Half of these commenters
suggested that expansion of Fedwire Funds Service and NSS hours would
allow for efficient liquidity management in a 24x7x365 environment.
The Board agrees with commenters that the ability to manage
liquidity needs resulting from the 24x7x365 real-time nature of instant
payments is important, both for the FedNow Service at launch and for
instant payment services more broadly. As a 24x7x365 service, the
FedNow Service will inherently be able to support liquidity transfers
around the clock and therefore will incorporate a liquidity management
tool (FedNow LMT) as a core feature.\61\ The FedNow LMT will enable
participants in the FedNow Service to transfer funds between one
another to support liquidity needs related to payment activity in the
FedNow Service. The tool will also support participants in private-
sector instant payment services backed by joint accounts at a Reserve
Bank by enabling transfers between the master accounts of such
participants and their joint account.
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\61\ The Federal Reserve continues to explore expanded hours for
the Fedwire Funds Service and NSS. As explained in the 2019 Notice,
further analysis is needed to fully evaluate the relevant
operational, risk, and policy considerations with expanded hours for
the Fedwire Funds Service and NSS, given the systemic importance of
the Fedwire Funds Service.
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Because of the general importance of liquidity management for
instant payment services, the Board recognizes the importance of
flexibility related to the way that participants in such services might
look to access the FedNow LMT. As a result, users of the FedNow LMT
will not be required to be full FedNow Service participants. For
example, participants in a private-sector joint account-based instant
payment service, or providers of liquidity to FedNow Service
participants, will be able to access the FedNow LMT functionality
without joining as a full FedNow Service participant because they would
not need the FedNow Service's full set of features for sending
[[Page 48533]]
and receiving instant payment transactions involving end users.\62\
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\62\ Liquidity providers may have an interest in providing
liquidity to FedNow Service participants without making standard
FedNow Service payments. Allowing participation by such liquidity
providers could allow small and midsize banks to retain
relationships with their existing liquidity providers for purposes
of instant payment liquidity management.
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The Reserve Banks anticipate imposing certain controls on the
FedNow LMT to ensure that use of the functionality is limited to
liquidity transfers in support of instant payments. Such controls will
include transaction-value limits or limits on the hours of the
functionality, such as when transfers are not possible through other
Federal Reserve services. Controls related to the FedNow LMT, service
terms, eligibility requirements, and enrollment processes will be
announced prior to the launch of the FedNow Service through established
Reserve Bank communication channels.
9. Network Access
In the 2019 Notice, the Board explained that participating banks
would access the FedNow Service through the FedLine[supreg] network,
which would be enhanced to support the service's 24x7x365
processing.\63\ The Board received seven comments related to network
access, all of which were generally supportive of accessing the FedNow
Service through the FedLine network. Several of these commenters noted
that use of the FedLine network to access the FedNow Service will
streamline onboarding processes generally, as the Federal Reserve has
existing relationships with most banks in the United States. Several of
these commenters also noted that it will be important for the Federal
Reserve to work with service providers and processors in order to
ensure that smaller institutions without direct FedLine connections are
also able to access the service. One small bank commenter recommended
that the Reserve Banks assess whether any contemplated upgrades to
FedLine components could disproportionately affect smaller institutions
that may not have the ability to test or maintain enhanced components.
---------------------------------------------------------------------------
\63\ 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 the Board is not envisioning doing so at this
time, it may consider in the future whether enabling access to the
FedNow Service through alternate messaging networks would enhance
resiliency or interoperability for instant payments.
---------------------------------------------------------------------------
As proposed, the FedLine network will serve as the channel through
which participating banks access the FedNow Service. Participating
banks will need to test and deploy enhanced or upgraded FedLine
components to enable the FedNow Service. Depending on their electronic
connection with the FedLine network, banks would need to maintain
adequate telecommunications services to support the transaction time
requirement (see the Payment Flow and Message Type section). The Board
recognizes that this need for adequate telecommunications services
could present potential challenges for small and midsize banks that
rely on telecommunication services through their internet service
providers. As a result, the Federal Reserve intends to review and
update its policies, standards, procedures and guidelines related to
network access to provide direction and information to banks of all
sizes regarding network access requirements for bandwidth, latency, and
availability.
10. Request for Payment
In the 2019 Notice, the Board sought comment on the incremental
value and timing of including request-for-payment functionality in the
FedNow Service. Request-for-payment functionality would involve a
specific nonvalue message type. This message type would support
participants' ability to provide a potential receiver the capability,
through an end-user service, to prompt a sender to initiate a standard
credit transfer through the FedNow Service. The Board explained that
this functionality may increase the use of instant payments by allowing
end users to more easily conduct certain types of transactions, such as
bill payments.
Approximately 30 commenters, largely representing trade
organizations, small and midsize banks, and other interested parties,
addressed request-for-payment functionality. Nearly all of these
commenters agreed that such functionality would support widespread use
of instant payments. Six commenters highlighted that request-for-
payment functionality offers similar benefits to a debit (``pull'')
transfer but allows the payment sender to actively authorize any
payment to the receiver. Of those that specified a timeline for
introduction of request-for-payment functionality, approximately 10
commenters supported its inclusion as a feature at the launch of the
FedNow Service. Seven commenters suggested that this functionality be
considered for future releases of the FedNow Service, indicating that
it may add unnecessary complexity to the first release.
The Board agrees that request-for-payment functionality may enable
a wider variety of transactions and help facilitate broader adoption of
instant payments. The Board also does not believe that inclusion of the
feature will introduce unnecessary complexity to the technical design
of the FedNow Service. Therefore, the request-for-payment message type
will be available as part of the FedNow Service at launch.
11. Fraud Prevention Tools
In the 2019 Notice, the Board stated that, while participating
banks would continue to serve as a primary line of defense against
fraudulent transactions, the FedNow Service could offer fraud
prevention tools to support participating banks in fulfilling that role
or other tools at the payment-system level. Approximately 75 commenters
raised topics related to fraud prevention tools, and over half of these
commenters, largely representing small and midsize banks, trade
organizations, and service providers, indicated that tools for
monitoring and alerting participants to potentially fraudulent
transactions should be included in the FedNow Service. Many of these
commenters made specific suggestions about how such tools should be
designed. For example, approximately 15 commenters recommended that
tools should automatically stop potentially fraudulent transactions.
Approximately 15 commenters recommended that FedNow Service
participants have the ability to set controls to restrict payments by
value, volume, and other characteristics. Finally, a few commenters
suggested that the Reserve Banks assign a ``score'' to payment
transfers in order to communicate potential fraud risk to participants.
Commenters also suggested other tools that could support a safe and
secure instant payment ecosystem. Approximately 25 commenters, largely
representing small and midsize banks, recommended that the Reserve
Banks develop a database that facilitates sharing of payment fraud
information among instant payment stakeholders. The majority of these
commenters specified that the database would rely on information
contributed by FedNow Service participants. Additionally, approximately
15 commenters recommended that the Reserve Banks leverage their
position as network operator to analyze network-wide data in order to
identify patterns of potentially fraudulent activity.
Based on public comments and analysis by the Reserve Banks of
available fraud prevention tools and technology, the FedNow Service
will include a set of fraud prevention tools at launch and in future
phases. At
[[Page 48534]]
implementation, the tools available to participating banks to assist
them in their role as the primary line of defense against fraudulent
transactions will include (1) the ability to set lower transaction
value limits, (2) the ability to specify certain conditions under which
transactions would be rejected, such as by account number, and (3)
reporting features and functionality, including reports on the number
of payment messages that were rejected based on a participant's
settings. The first two tools will allow banks to proactively set
parameters that limit transaction activity in the FedNow Service, based
on banks' knowledge of their own customers. The third tool will provide
summary information that banks can incorporate into their fraud-
monitoring activities. The Federal Reserve intends to explore other
features that could be made available as part of future releases to aid
participating banks in managing fraud risk, such as value limits that
could be tailored to certain uses, aggregate value or volume limits for
specific periods (for example, per business day), or centralized
monitoring performed by the FedNow Service such as functionality that
leverages advanced statistical methods and historical patterns to
identify potentially fraudulent payments.
D. Features for Consideration in Future Releases
The Reserve Banks intend to take a phased approach to developing
and expanding the FedNow Service, as discussed earlier. The Board
believes this approach will most effectively meet the need for the
Federal Reserve to move quickly while still offering additional
features as part of later releases intended to improve overall
accessibility, safety, and efficiency of instant payments in the United
States. For example, the service will seek to, as part of later
releases, support alias-based payments through directories and
application programming interfaces (APIs), both of which are discussed
in further detail later in this section. Other features to be explored
for later releases include support for bulk payments or enhanced
remittance information. The Federal Reserve recognizes that market
needs and the technology related to instant payments are constantly
evolving and intends to continue engaging with stakeholders in order to
be flexible in its approach when augmenting the features and
functionality of the FedNow Service. Based on this engagement,
additional features and service enhancements will be introduced over
time. Any additional functionality will be announced through
established Reserve Bank communication channels.
1. Support for Alias-Based Payments
In the 2019 Notice, the Board explained that the Reserve Banks
intended to engage with industry stakeholders to understand more fully
the benefits and drawbacks of various approaches to providing directory
services.\64\ Directory services can enable alias-based payments by
connecting a receiver's alias (such as phone number or email address)
with the receiver's banking information to ensure that a payment is
routed to the correct end user in a way that is private and secure.
Approximately 80 commenters, largely representing small and midsize
banks, trade organizations, and fintechs, addressed the inclusion of
directory services as part of the FedNow Service. All of these
commenters noted that directory services would be a critical tool to
enable alias-based payments, and approximately 40 commenters provided
specific recommendations as to how the Reserve Banks should provide
access to directory services to FedNow Service participants.
Commenters' recommendations varied widely, with approximately 20
commenters suggesting the Reserve Banks provide a centralized link to
existing directories. Another 20 commenters suggested the Reserve Banks
develop their own directory, either as an independent service or in
addition to a centralized link to existing directories. Additionally,
several commenters highlighted potential risks and complexities
associated with implementation and maintenance of directory services,
such as the need for controls to ensure secure collection, storage and
management of public identifiers.
---------------------------------------------------------------------------
\64\ The 2018 Notice requested comment on whether a directory
service is needed for an RTGS service for instant payments. The
question generated a large number of responses, with commenters
stating that directories are an important driver for adoption of
instant payments because end users value the ability to send
payments to receivers based solely on public identifiers, or
aliases, without a sender having to know the bank account number of
a receiver.
---------------------------------------------------------------------------
The Board recognizes that originating a payment using only the
public alias of a receiver is becoming increasingly common, especially
for individuals seeking a quick and convenient way to send money to
each other. The Board also recognizes that banks of all sizes across
the country wish to offer this type of service to their customers, and
some of these banks are expecting the FedNow Service to provide the
infrastructure necessary for them to enable end-user services for
alias-based payments.
The Board also agrees that facilitating aliased-based payments,
through a directory service or other means, is a desirable feature for
the FedNow Service and could help drive adoption of instant payments.
At the same time, as indicated elsewhere in this notice, the Federal
Reserve's goal is to launch the service as soon as practicably
possible. Therefore, the Federal Reserve has made a conscious decision
to focus first on the core interbank clearing and settlement
functionality necessary for supporting instant payments to facilitate
an expeditious launch. Offering a directory service or similar feature
at launch would add complexity that would extend the time frame
necessary to launch the service. As a result, the FedNow Service will
not include a directory service or other approach to support alias-
based payments at launch, but instead will seek to provide this
supplemental feature in a future release of the FedNow Service.\65\
---------------------------------------------------------------------------
\65\ As part of conducting FedNow transactions, participants in
the FedNow Service are not precluded from using alias-based payment
services that are unaffiliated with the FedNow Service.
---------------------------------------------------------------------------
The Federal Reserve is actively exploring various approaches based
on suggestions from commenters to provide participants in the FedNow
Service the means to facilitate alias-based payments.\66\ One approach
would be to connect to one or more existing directories that could
provide routing information for all or a subset of participants in the
FedNow Service. Given that existing alias-based directories are
typically embedded within proprietary payment services (mostly for
person-to-person payments), contain information only for a closed user
group, and are not designed for broader open access, this approach
raises several considerations that will need to be further
explored.\67\ The Federal Reserve is also exploring options for
building a directory, which could function independently or supplement
existing directories. This approach would mean that all participants in
the FedNow Service would be able to provide and update alias
information for their account holders to a Federal Reserve directory,
if they wish to accept alias-based payments through the FedNow Service.
Both of these approaches present a host of legal, security, and
operational
[[Page 48535]]
challenges that would need to be resolved. Because of these
complexities and challenges, many of which were highlighted by
commenters, additional analysis on the appropriate approach is needed.
---------------------------------------------------------------------------
\66\ In support of alias-based payments, the Federal Reserve may
also consider message flows and settlement processes different from
the basic credit transfer flow described earlier.
\67\ In this context, a closed user group is where the sender
and receiver of a payment have signed up with a specific service.
---------------------------------------------------------------------------
In addition to these potential options, the Federal Reserve will
continue to explore other avenues for how the Reserve Banks might offer
alias-based payment functionality as a feature of the FedNow Service
after launch. The Board fully acknowledges the industry's need for
clarity regarding an alias-based capability in the FedNow Service, and
the Federal Reserve will communicate its progress through established
Reserve Bank communication channels.
2. Application Programming Interfaces (APIs)
The Board received approximately 20 comments regarding the use of
APIs within the FedNow Service. An API is a type of software technology
that enables computer systems or applications to connect to each other,
allowing information to be shared across the systems.\68\ Commenters,
representing small and midsize banks, fintechs, and service providers,
noted that APIs could be useful for allowing banks or their service
providers to submit requests for various informational reports or
allowing third parties to develop value-added services related to the
FedNow Service.
---------------------------------------------------------------------------
\68\ More specifically, in computer programming, an API is a set
of routines, protocols and tools used to facilitate interactions
between applications. An API specifies how software components
should interact with each other, inclusive of formats and processes
to facilitate data calls and requests. Among a variety of other
uses, an API can be used to retrieve data from one application and
process it in another application.
---------------------------------------------------------------------------
The Board recognizes that the use of APIs facilitates the provision
of value-added end-user services and provides useful tools for a number
of purposes, such as providing real-time service status updates,
providing downloadable information like message specifications as part
of automated services, or even initiating and receiving transactions.
The Federal Reserve will continue to engage with industry stakeholders
as it explores the best ways to support APIs in the FedNow Service and
will provide updates through established Reserve Bank communication
channels.
E. Interoperability
In the 2019 Notice, the Board indicated that, in a market structure
with multiple operators of instant payment services, the ability to
achieve ubiquity in instant payments is advanced when customers of a
bank participating in one instant payment service are able to reach the
customers of a bank participating in another instant payment service.
Over half of the comment letters received in response to the 2019
Notice emphasized the importance of the FedNow Service having
interoperability with the existing private-sector service. Of the
approximately 100 commenters that addressed interoperability,
approximately 40, largely representing small and midsize banks and
trade organizations, addressed issues related to timing. Approximately
20 commenters stated that interoperability should be available at
service launch. Approximately 10 commenters did not specify whether the
service should be interoperable at launch, but noted that the Federal
Reserve should balance the importance of an expeditious launch against
achieving interoperability. Another 10 commenters stated that
interoperability is not critical at launch of the FedNow Service.
Approximately 25 commenters, largely representing large banks,
small and midsize banks, and trade organizations, recommended that the
FedNow Service rely on common rules and standards with the existing
private-sector service to support interoperability. Many of these
commenters recommended that the FedNow Service offer the same message
types that are currently available with the existing private-sector
service. Additionally, a group of approximately 20 small and midsize
banks expressed the concern that they may be disadvantaged if they join
the FedNow Service and cannot send payments to or receive payments from
banks participating in the existing private-sector service that are not
also FedNow Service participants.
The Board agrees with commenters on the importance of
interoperability. Nationwide reach is one of the Federal Reserve's
primary policy objectives for instant payments, and interoperability
between the FedNow Service and the existing private-sector service can
help advance this goal. The Federal Reserve, however, cannot accomplish
interoperability for instant payments alone. The industry--banks, bank
service providers, and service operators--must work towards this common
goal, as it has in the past with other payment services.
Interoperability could take different forms. As noted in a recent
paper by the U.S. Faster Payments Council, three primary models of
interoperability have been used to accomplish nationwide reach in other
types of payments, two of which the Board believes are more suitable
for instant payments.\69\ The first model, which is used in card
payments and wire transfers and is likely to be most relevant to
instant payments, relies on the sending bank routing payments through a
specific service based on the path(s) available to reach the receiver;
if there is more than one path, the sending bank may choose the service
it uses based on specific criteria, such as price and features. In this
model, nationwide reach can be achieved if banks choose to participate
in the same service, such that there is always at least one path
between any two banks. Further, banks can choose to participate in
additional services as part of this model.
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\69\ The U.S. Faster Payments Council is an industry-led
membership organization whose mission is to facilitate faster
payments in the United States. The paper is available at https://fasterpaymentscouncil.org/userfiles/2080/files/Faster%20Payments%20Interoperability%20WP_June%202020.pdf. A third
model outlined by the Faster Payments Council, currently used for
check payments and certain international payments, is one in which a
series of intermediary banks are expected to clear, settle, and
route payments. This model can lead to friction in payment flows,
which makes this approach less attractive for domestic instant
payments.
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The second model is interservice message exchange, in which banks
choose to participate in one service, and a payment originated through
that service can be cleared, settled, and received through another
service. ACH payments use this model, which is designed for bilateral
exchange between two service operators. This model can achieve
nationwide reach by connecting individuals and businesses across the
country through their banks, which are in turn connected to a service
operator that enables the message exchange arrangement with the other
service operator. The message exchange model, however, poses several
additional complexities (such as technical message exchange and common
settlement) and would require the commitment and active engagement by
the existing private-sector service.
The form and timeline for achieving interoperability depends on the
level of commitment and engagement across the industry. The Federal
Reserve is committed to working towards compatible standards and
operating procedures with the existing private-sector service, which
will enable interoperability through the model of payment routing, and
has initiated discussions on this subject with the existing private-
sector service toward that end. The Federal Reserve is also committed
to using the widely accepted ISO 20022 standard and other industry best
practices to remove unnecessary and burdensome incompatibilities that
[[Page 48536]]
could be a barrier to payment routing interoperability. The Federal
Reserve is open to interoperability based on interservice message
exchange in the future, after introduction of the FedNow Service.
F. Cost Recovery & Service Fees
In the 2019 Notice, the Board concluded that, due to considerations
specific to new services, long-run cost recovery for the FedNow Service
will fall outside of the traditional 10-year period for cost recovery
typically applied by the Board to mature services. Similar to how cost
recovery has been applied to new services in the past, the Board
determined that until the service reaches maturity with relatively
stable costs and revenues, FedNow Service fees will be based on
transaction costs associated with mature volume estimates.
In the 2019 Notice, the Board requested 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. Approximately
15 commenters raised topics related to long-run cost recovery for the
FedNow Service. Of these comments, 9 supported the Board's proposed
approach to cost recovery, with several commenters expressing the
concern that if the traditional 10-year cost recovery were applied to
the FedNow Service, fees would be prohibitively high. Two commenters
stated that the Board should apply the traditional 10-year cost
recovery period to the FedNow Service. Several commenters also
suggested that the Federal Reserve make additional information public
about its cost estimates and long-term cost-recovery strategy.
The Board agrees with the majority of commenters that applying the
traditional 10-year cost recovery period to the FedNow Service, when
volumes are low and potentially variable while fixed costs are high,
could result in unnecessarily volatile prices or prohibitively high
service fees. Such an outcome would negatively affect service usage,
and ultimately undermine the Federal Reserve's public policy objectives
in providing the FedNow Service. In addition, the cost recovery
provisions in section 11A of the Federal Reserve Act state that the
Board's pricing principles for Federal Reserve services should give due
regard to competitive factors and the provision of an adequate level of
service nationwide.
Therefore, the Board continues to expect long-run cost recovery for
the FedNow Service to occur outside the 10-year period typically
applied by the Board to mature services. The Board also expects that
fees will be based on transaction costs associated with mature volume
estimates until the service reaches maturity with relatively stable
revenues and costs. This approach will limit prohibitively high service
fees, and allow for realization of the public benefits the Board
identified in its approval of the FedNow Service. As part of this
approach to cost recovery, the Board will monitor progress toward
matching revenues and costs and will regularly confirm its expectation
that the service will meet cost recovery objectives over the long run.
To provide transparency as part of this process, the Board will also
regularly disclose the service's cost recovery.
In addition, approximately 40 commenters, representing small and
midsize banks, trade organizations and individuals, raised topics
related to FedNow Service fees. Approximately 15 of these commenters
recommended that the FedNow Service rely on a per-item fee schedule, as
opposed to volume-based pricing. Additionally, 4 commenters suggested
that FedNow Service fees align with market practices at the time of
service launch. Another group of 4 commenters recommended that both the
sender's and receiver's banks be assessed fees for a FedNow Service
transfer. Other commenters recommended that the Reserve Banks
communicate the service fee schedule as soon as possible, to provide
participants adequate time to prepare for onboarding.
The Board recognizes the need for additional specificity on service
fees in advance of the FedNow Service's launch. Based on prevailing
market practices, the Board expects that the fee structure will include
a combination of per-item fees, charged to the sender's bank and
potentially to the receiver's bank, and fixed participation fees. The
ultimate fee structure and schedule will be informed by the Federal
Reserve's assessment of market practices at the time of implementation.
The Reserve Banks will publish the initial fee schedule for the FedNow
Service well before its launch through established communication
channels.\70\
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\70\ Following the release of the FedNow Service's initial fee
schedule, the Board will also publish FedNow Service fees in its
annual service-pricing process for all services.
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IV. 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 FedNow Service.\71\ In the 2019 Notice, the Board conducted an
initial competitive impact analysis for the FedNow Service and
requested comment on that analysis. In light of the comments received
and the Board's additional assessment, the Board has conducted a final
competitive impact analysis.
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\71\ 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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As part of a competitive impact analysis, the Board 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 order to do so, the
Board first identifies relevant private-sector providers of similar
services and then compares those providers' services with the FedNow
Service. In instances where any differences create direct and material
adverse effects on the ability of the private-sector providers to
compete effectively, 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 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.
A. Relevant Private-Sector Providers of Similar Services
In conducting a competitive impact analysis, the Board first
identifies relevant private-sector providers of similar services. As
part of its initial competitive impact analysis, the Board identified
one comparable private-sector service for instant payments in the
United States, which has been operational since November 2017 (the
existing private-sector service). Like the
[[Page 48537]]
FedNow Service, the existing private-sector service conducts payment-
by-payment final settlement of interbank obligations on a 24x7x365
basis for instant payments. Unlike the FedNow Service, which will
settle in central bank money using master accounts, the existing
private-sector service relies on an internal ledger maintained by its
operator to conduct settlement, which is supported by funds held in a
joint account at a Reserve Bank.\72\ One commenter suggested the Board
broaden its definition of relevant service providers in performing its
competitive impact analysis to include entities, such as card companies
that offer end-user solutions that may compete with instant payment
solutions. 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 interbank RTGS services for instant payments, the Board does
not view them as private-sector providers of similar services and,
therefore, has not considered them as part of its final competitive
impact analysis.
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\72\ 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 compares those providers' services with the FedNow
Service. The purpose of this comparison is to identify differences
between private-sector and Federal Reserve services. Ultimately, it is
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.\73\ The Board's
competitive impact analysis therefore focuses on those differences that
could create a direct and material adverse effect on the ability of the
private-sector services to compete effectively with the Federal
Reserve.
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\73\ 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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As part of its initial competitive impact analysis, the Board
identified specific differences between the FedNow Service and the
existing private-sector service. The Board requested comment on whether
these differences, in addition to any other differences identified, had
a direct and material adverse effect on the ability of the existing
private-sector service to compete effectively with the Federal Reserve.
1. Use of Master Accounts
In order to participate in the FedNow Service, participants must
use a master account at the Reserve Banks (directly or indirectly),
whereas the existing private-sector service uses a separate joint
account that each participant must prefund (directly or indirectly
through a funding agent). As part of its initial analysis, the Board
noted that use of master accounts may provide an advantage to the
FedNow Service because funds remain in participants' Federal Reserve
master accounts, earning interest and counting towards reserve
requirements, and can be used for other purposes.\74\ Unlike funds held
in a master account, prefunding held in the existing private-sector
service's joint account does not earn interest or count toward reserve
requirements and is not available for other purposes that may arise,
such as satisfying payment or liquidity needs outside the existing
private-sector service.\75\
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\74\ When the Board announced its decision that the Reserve
Banks would develop the FedNow Service (August 2019), the maximum
reserve ratio on net transaction accounts was 10 percent. On March
15, 2020, the Board announced reserve ratios on all transaction
accounts would be reduced to zero effective March 26, 2020.
\75\ 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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Approximately 15 commenters addressed the potential competitive
advantages that the use of master accounts may provide the FedNow
Service. These commenters raised different options for ways the Federal
Reserve could mitigate the effects of this difference. Approximately 10
commenters also stated the Federal Reserve should pay interest on the
balances held in the joint account and count these balances towards
reserve requirements in order to mitigate the FedNow Service's
potential competitive advantage of settling in master accounts. A few
commenters also pointed to the excess balance account (EBA) model as a
potential example that the Federal Reserve could follow with the
existing private-sector service.\76\ Two commenters suggested that
expanding the Fedwire Funds Service and NSS hours to provide the
ability to move funds to and from the joint account outside current
operating hours for liquidity management purposes could ameliorate any
adverse effect. In addition, one commenter suggested that the Federal
Reserve could segregate funds used for transactions in the FedNow
Service and not pay interest on those balances.
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\76\ An EBA is an interest-bearing account at a Reserve Bank
established for one or more institutions that are eligible to earn
interest on balances held at the Reserve Banks and managed by an
agent. Only excess balances may be placed in an EBA; the account
balance cannot be used to satisfy reserve balance requirements or
for general payments or other activities.
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Commenters offered differing views on the impact of these potential
advantages. Only two of these commenters offered views on the
materiality of these potential advantages. One commenter suggested the
decision to pay interest on balances in the joint account and allow
balances in this account to count towards reserve requirements would
materially influence its decision on how to route payments and manage
funds. Another commenter stated that the FedNow Service's use of master
accounts would not affect the existing private-sector service's ability
to compete and that the FedNow Service enhances competition.
Taking into account the comments received and the provision of
additional liquidity management features that will be available as
discussed in Section III, the Board has assessed that the use of master
accounts by the FedNow Service is a difference that will not create a
direct and material adverse effect on the ability of the existing
private-sector service to compete effectively.\77\ Only
[[Page 48538]]
one commenter stated that the inability of funds held in the joint
account to earn interest would materially affect its decision to join
the existing private-sector service. But, as discussed earlier, the
Federal Reserve's provision of the liquidity management tool will
enable banks to move excess funds in and out of the joint account,
thereby allowing banks to minimize the balances in the joint account on
an ongoing basis. Additionally, following the Board's decision to
reduce reserve ratios on all transaction accounts to zero, which was
announced on March 15, 2020, reserve requirements have been effectively
eliminated for all depository institutions.\78\ Thus, there is not at
this time any advantage relating to master account balances' being
eligible to count towards satisfaction of reserve requirements. The
Board, however, remains committed to creating as much competitive
parity as possible, including by paying interest on the joint account.
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\77\ The Board recognizes that in addition to the payment of
interest and treatment of balances for reserve purposes, additional
differences may exist between the existing private-sector service's
use of a joint account and the FedNow Service's use of the master
account that require participants to manage their account positions
in different ways. On the one hand, the FedNow Service's use of
master accounts may create burden by requiring consideration of the
defined closing and opening of other Federal Reserve services also
settling in the same account. Use of master accounts for a service
operating 24x7x365, such as the FedNow Service, also adds a layer of
complexity to banks' management of their positions to avoid
overnight overdrafts and associated penalties. On the other hand,
unlike the master account, 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 in order to ensure funding requirements are met to avoid
rejected payments on the ledger of the existing private-sector
service. Overall, the Board does not believe these differences are
significant enough to have a direct and material adverse effect on
the ability of the existing private-sector service to compete
effectively. Moreover, the ability to transfer liquidity between
master accounts and the joint accounts as described earlier in
Section III will further minimize any potential impacts.
\78\ See ``Federal Reserve Actions to Support the Flow of Credit
to Households and Businesses,'' March 15, 2020. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm.
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2. Access to Intraday Credit
Participants in the FedNow Service will have access to intraday
credit under the same terms and conditions as apply to participation in
other Federal Reserve services. Such intraday credit would lower the
risk that payments will be rejected because of lack of funds. The
Federal Reserve expects banks to manage their master accounts at all
times in compliance with Federal Reserve policies.
In the existing 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 payment transactions in the
existing private-sector service being rejected. As part of the Board's
initial competitive impact analysis, the Board noted that access to
intraday credit for funding a joint account 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. However, as noted in Section III, the Reserve
Banks will provide a mechanism for transferring liquidity. As a result,
participants in the existing private-sector service could use this
functionality to transfer funds from their master accounts to the joint
account, for example by using intraday credit if they so choose,
including during times when transfers are not possible through other
Federal Reserve services. Therefore, the Board has determined that
there is no direct and material adverse effect on the ability of the
existing private-sector service to compete effectively because
participants in both the existing private-sector service and the FedNow
Service will have access to intraday credit during non-Fedwire Funds
Service hours.
3. Additional Differences
Commenters mentioned differences in addition to those noted in the
Board's initial competitive impact analysis. One commenter stated that
the Federal Reserve is not subject to antitrust laws and suggested that
the private sector has no remedy if the Reserve Banks engage in
monopolistic or anticompetitive activity, so the Federal Reserve should
commit to act in the public interest and ensure strong competition in
the instant payments market. The same commenter also suggested that the
limits on number of participants and reporting required on joint
accounts that support settlement of instant payments, which is not
required for any other private-sector retail payment system, provides a
competitive advantage for the FedNow Service if it is not subject to
similar requirements.
The Reserve Banks are subject to section 11A of the Federal Reserve
Act, which was added in part to ensure that the Reserves Banks were
competing fairly with the private sector in the provision of financial
services.\79\ Because the requirements imposed by section 11A are
designed to ensure a level playing field with the private sector, such
as the establishment of pricing principles and requirements that the
Reserve Banks recover costs over the long run, the Board does not
believe that not being subject to antitrust laws creates a direct and
material adverse effect on the ability of the existing private-sector
service to compete effectively.
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\79\ 12 U.S.C. 248a.
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In addition, the Reserve Banks report significant amounts of data
to the Board on a regular basis and upon request for the purpose of
policy analysis, including transaction-level data that the existing
private-sector service does not report. The Board and Reserve Banks
also make aggregate value and volume data available publicly. Further,
while the Federal Reserve may initially impose limits on the number of
participants in a joint account arrangement to ensure use of the
account meets the public policy objectives set forth in the Board's
joint account guidelines, such as efficient risk management, the Board
in its oversight capacity expects the FedNow Service to meet the same
public policy objectives before it can launch. In light of this
analysis, the Board does not believe that any of these differences
create a direct and material adverse effect on the ability of the
existing private-sector service to compete with the FedNow Service.
C. Conclusion
Based on this analysis, the Board does not believe that any of the
differences identified create a direct and material adverse effect on
the ability of the existing private-sector service to complete
effectively with the FedNow Service.
By order of the Board of Governors of the Federal Reserve
System.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2020-17539 Filed 8-10-20; 8:45 am]
BILLING CODE P