Trends & Research

Trends & Research

Access the power of data and objective insight. Data from various sources, including NEACH surveys and member interviews, is compiled and made available as white papers, case studies, articles, benchmarking, and industry reports to provide a snapshot of both the current and future payments landscape. 

Published on Tuesday, November 19, 2019

Stakeholders Weigh In on FedNow® Proposal

The Federal Reserve's Request for Comment on its 24x7x365 real-time gross settlement service, FedNow(SW) [OP-1670] closed November 7, 2019. The new service will support depository institutions' provision of end-to-end faster payments services and provide infrastructure to promote faster payments in the U.S. The Fed is also exploring expanded hours for its Fedwire® Funds Service and the National Settlement Service to support a wide range of payments activities, including liquidity management in private-sector, real-time gross settlement services for faster payments.

As reported by American Banker, Federal Reserve Chairman Jerome Powell told the House Budget Committee that the FedNow system is a "top priority" for the agency and he expects it to launch ahead of schedule. "Getting it right the first time is key," Powell said. "So we want to have it up and running within three to four years." 

NEACH 

NEACH last week called on the Fed to implement its FedNow Service "as soon as possible."

NEACH also raised several additional points for the Federal Reserve to evaluate, inclusive of auxiliary services, that should be included with the launch of FedNow, as well as additional auxiliary services that are of high priority to NEACH and its members, including:

  • Establishing a $25K per entry limit
  • Integration of message/clearing instructions to receiving FIs
  • Receiving institution confirmation of valid entry information
  • Depth and breadth of tools and functions for seven-day accounting
  • Use of ISO 20022 standard
  • Use of Fedline to provide access
  • And more

NEACH also broached the topic of a potential partnership between the Fed and TCH:

"In conducting a full build or buy decision, we wish the Fed would examine the possibility of partnering with other solution providers in the U.S. The private sector provider already has a solution. NEACH is certainly not in the position to define the Fed's process in any way, but depending on the most important criteria, the U.S. could benefit from a partnership. If the most important criteria is time, partnering may be the best option. However, if the most important criteria is robust auxiliary services, a system based on the features identified in our response and other, may be the best solution for improving the U.S. payments system."

NEACH is monitoring the status of the FedNow service and apprise members of new developments as they become available. 

Independent Community Bankers of America (ICBA) 

ICBA, like NEACH, expresses support for a speedy release of the FedNow Service.

"ICBA strongly urges the Board to proceed to go to market with a minimally-viable FedNow Service that would allow community banks the choice of using either FedNow or The Clearing House's RTP® network or both," Carey Whaley, first vice president of payments and technology policy for ICBA says.

In contrast to NEACH's position regarding initial transaction dollar limit, ICBA believes that the proposed dollar limit of $25,000 is insufficient to support various use cases, particularly B2B transactions. Given that SDA and RTP limits are expected to be significantly higher at the time of the FedNow launch, ICBA urged the board to adopt a dollar limit consistent with both of these networks.

ICBA also maintains that the adjustment of cutoff times for the Fedwire Funds Service and National Settlement Service (NSS), along with the extension of the discount window to accommodate evenings, weekends, and holidays is "a vital step toward payments improvement, and should be a priority for the Board." ICBA also urges the Board to keep this workstream on an accelerated, concurrent schedule. But separate from FedNow.

Nacha

Nacha's CEO Jane Larimer voices a similar perspective: 

"We urge the Fed to not let work on the FedNow initiative detract from the pending proposal, and the more immediate need, for the expansion of the National Settlement Service ("NSS") and Fedwire operating hours."

Larimer goes on to point out that NSS and Fedwire Operating Hours should be made available to all payment systems-both private-sector RTGS and other payments systems, including the ACH.

Further, NACHA holds up the ACH system as a model for operator interoperability and "respectfully" suggests the Fed consider the ACH system as it develops its FedNow service:

"The ACH system, governed by the Nacha Operating Rules as administered by Nacha, provides a model for understanding how a real-time system with interoperable operators could benefit the entire industry and preserve the ability of the private sector to compete. Should the Fed determine to proceed with an interoperable real-time system, we respectfully suggest that it look to the ACH system, the Nacha rules and Nacha administration mechanisms as the baseline for any such effort."

Whether the Fed will take up Nacha on its recommendation remains to be seen. 

The Clearing House (TCH)

As the operator of today's only functioning real-time payments system, The Clearing House (TCH) expressed a less urgent need for FedNow.

In its response to the Fed's request for comments, The Clearing House (TCH) reaffirmed that it "remains resolute in its ongoing efforts to expand real-time payments in the United States and is confident in the value and integrity of the RTP system, as fully confirmed by the strong ratings it received from the Federal Reserve's own Faster Payments Task Force."

TCH also underscored its commitment to "achieving ubiquity and working closely with every federally insured depository institution that is interested in participating in the RTP system so that each institution's customers can obtain the benefits of real-time payments."

Toward that end, TCH proposed two critical actions the Federal Reserve Board could take before the launch of the FedNow service. TCH believes these actions "will also help to create competitive equality between the private sector and the government and thereby mitigate the risk that a depository institution is disadvantaged if it wants to use the RTP system."

"First, in the near term, the Board should treat the balance in the RTP joint account as reserves and should authorize the Federal Reserve Bank of New York to pay interest on such reserves…Second, the Federal Reserve should move quickly to enable more equivalent liquidity management between the RTP system and FedNow service by expanding Fedwire Funds operating hours."

TCH further acknowledged there is strong industry interest in the interoperability of the FedNow service with the RTP system, noting that the Fed indicated that interoperability is not an immediate objective and that it "may be difficult to achieve."

Despite the difficulties inherent in attempting to align the FedNow services with RTP, TCH indicated it is willing to engage in discussions to explore potential ways that the government service may be made interoperable with the private sector.

Credit Union National Association (CUNA)

In its comment letter, CUNA indicated its strong support of the Board's decision to develop an interbank 24x7x365 real-time gross settlement service with integrated clearing functionality and stated it looks forward to working with the Federal Reserve Banks in developing the FedNow system. 

CUNA has strong words for TCH and its RTP system:

"We would be remiss in addressing the Board's decision-making process without also mentioning the effort that The Clearing House (TCH) has put into derailing the Board's decision. We note that CUNA and credit unions have supported TCH in their efforts to develop their real-time payments network, which is called RTP; however, we clearly disagree with TCH, its large bank owners and allies in their efforts to lobby Congress with the goal of causing the Board to back away from developing a complementary real-time payments network…

While TCH has created an advisory committee for credit unions and community banks, these institutions have no ownership of TCH and no formal voice in its operation. Absent the Board of another entity operating a real-time payments network, the more than 10,000 credit unions and community banks that are not owners of TCH would be beholden to the whims of TCH's bank owners for a critical aspect of their infrastructure. Our members find this unacceptable and clearly it would be business suicide."

CUNA went on to make a case for the interoperability, citing the ACH network as an example and calling for an agreed-upon set of procedures to govern transaction limits, dispute resolutions, etc..

"Interoperability across all available U.S. in-market solutions is essential to achieving ubiquity, which is a key criterion for real-time payments success," CUNA says. "That has, of course, been the case for decades with regards to ACH transactions, where the Federal Reserve and TCH operate competitive yet complementary network alternatives. An agreed-upon set of procedures governing dispute resolution, transaction limits, etc.-will be required, as exists today for ACH via Nacha."

Going Forward 

The industry is experiencing unprecedented change, and faster payment ubiquity is imminent. FedNow is going to market, and according to some reports, the service may go live as early as 2023.

To help its members better understand and respond to these changes and prepare for the ones ahead, NEACH is in the process of developing a series of tools and resources designed to give members a better understanding of faster payments and its impact on their institution, staff, and its customers and/or members.

NEACH will continue to advocate for its members throughout the FedNow developmental and implementation phases and invites members to contact them with questions or concerns.

To learn more, visit the Federal Reserve's website to read the comments in full.

 

Joe Casali, AAP, NCP

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AUTHOR: Joe Casali, AAP, NCP
Executive Vice President

As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.

 

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Author: Meagan Norlund

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