Fed to Build Own Real-Time Payments System


The Federal Reserve announced today it will challenge a banking industry-backed group for real-time payments customers by developing its own system.

The Federal Reserve Board said the Federal Reserve Banks will develop a new, round-the-clock, real-time payment and settlement service, called FedNow, to support faster payments in the United States.

“Everyone deserves the same ability to make and receive payments immediately and securely, and every bank deserves the same opportunity to offer that service to its community,” Federal Reserve Board Governor Lael Brainard said in a statement. “FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers.”

The board is now requesting comments in the next 90 days on how the new service might be designed to most effectively support the full set of payment system stakeholders and the functioning of the broader U.S. payment system. The board anticipates FedNow will be available in 2023 or 2024.

The Clearing House is a banking association and private payments company owned by the largest commercial banks and settles nearly $2 trillion in U.S. dollar payments each day. TCH two years ago developed a system for all financial institutions that clear and settle payments in real time. Fed officials believe their existing payments settlement network, which includes over 10,000 financial institutions across the country, will give FedNow a nationwide reach and an edge on TCH’s product.

The Fed’s board last year requested public comment on potential services that could be developed by the Federal Reserve to support faster payments. Of the more than 350 comments that took a position on whether the Federal Reserve should develop a new service for faster payments, the central bank said in a statement, over 90 percent supported the Federal Reserve operating a round-the-clock real-time payment and settlement service alongside services provided by the private sector.

Unlike central banks in Australia and the European Union, the Federal Reserve currently does not operate on a real-time basis, but instead under a lag model. This model is considered risky because when a transaction is made between two parties, the recipient’s receiving bank has paid out the funds before actually receiving the money from the sender’s bank. However, the delay can be helpful if a bank uncovers a suspicious transaction, giving time to stop it before all the funds are transferred. Under a real-time model, the settlement would happen before the receiver has access to funds.

TCH has so far been able to sign up large national and regional banks such as Bank of America, JPMorgan Chase and Citizens Bank.  TCH said its network currently reaches over 51 percent of the demand deposit accounts in the country.

In response to the Fed’s announcement, TCH issued a statement that it was “excited about the many ways that this revolution in payments will continue to deliver new benefits to depository institutions and their customers. While we will stay abreast of the Fed’s efforts to develop its own real-time payments system which may become available in 2023 or 2024, our focus will remain on ensuring that the RTP network has reach to all depository institutions.”

The American Bankers Association said it planned to continue urging all banks to use TCH’s existing real-time payments network.

“The reality is that any Fed-built system will still take some time to build,” the ABA said in a statement. “We believe any Fed system must be fully interoperable with the [TCH] RTP network, remain accessible only to chartered financial institutions and be available through all core processing companies and without volume discounts that disadvantage smaller banks.”

In addition to announcing its payments system plans, the board stated it planned to expand the operating hours for the Fedwire Funds Service and National Settlement Service hours, offering services 24 hours a day, every day of the year.