We are living in interesting times. Like many, we do want to sound the alarms of the movie 1984, where the population is living in a monitoring (surveillance) state, by the government. But, prior to use shooting up the flare, we decided to be more prudent and share what we found regarding FedNow. Let us be clear, we do not have an official position on FedNow. With that said, yes, the Federal Reserve processing instant payments has the possibility of monitoring its populous.
Instant Payments in General
- What are instant payments?
Instant payments allow individuals and businesses to send and receive payments within seconds at any time of the day, on any day of the year, such that the receiver of a payment can use the funds almost instantly. This immediacy differentiates instant payments from traditional retail payment methods, including those that appear to occur within seconds from the sender’s perspective but can take many days before funds become available to the receiver.
- What is the difference between “faster” and “instant” payments?
Although the term “faster payments” broadly describes what the FedNow Service will deliver (e.g., payments that can be sent and received within seconds at any time of the day, on any day of the year, such that receiver can use the funds almost instantly), it can also apply to other improvements to payment speed (e.g., same-day ACH). In the 2020 Federal Register notice, the Federal Reserve Board (Board) transitioned to using the term “instant payments.” Specifically, the term “instant payment” to refer to a payment in which an end user receives funds in near real time and at any time, with immediate interbank settlement of the payment also having occurred.
- What benefits do instant payments offer?
Beyond speed and convenience, instant payments can yield real economic benefits for individuals and businesses by allowing them to make time-sensitive payments whenever needed and providing them with more flexibility to manage their money. This flexibility is especially important for individuals and households on tight budgets, for whom receiving a payment in real time could help avoid the need to use expensive check cashing services, engage in high-cost borrowing, or incur overdraft or late fees that may throw off their carefully managed finances. Similarly, immediate access to funds and the ability to instantly make bill payments benefit small businesses who may otherwise need to seek costly short-term financing. Widely available instant payments would be the foundation for the next generation of payment services, catalyzing innovations that generate new economic activity.
- What is required to conduct a payment between depository institution accounts? What is clearing? Settlement?
Payments typically require “clearing” and “settlement” between depository institutions. “Clearing” refers to the exchange of information about a payment and can involve additional activities such as fraud screening. “Settlement” refers to the debiting and crediting of accounts to transfer funds for a payment. Settlement services act as the foundation for most payment systems, as they provide a universal way for the sender’s depository institution to settle a payment by moving funds to the receiver’s depository institution. Payment services offered by the Federal Reserve, such as funds transfer, check, and automated clearinghouse (for example, direct deposit) services, have historically provided clearing and settlement between depository institutions.
- What have central banks in other countries done to support instant payments?
Central banks in various countries have already implemented changes to their settlement services in support of instant payments, reflecting the foundational role that central banks play worldwide in the settlement of financial obligations between financial institutions. For example, the European Central Bank, Banco de México, and the Reserve Bank of Australia have looked to support the development of instant payments in their jurisdictions by providing services that enable payment-by-payment, real-time settlement of retail payments at any time, on any day.
Federal Reserve Actions to Support Instant Payments
- In addition to the FedNow Service, what other actions has the Federal Reserve taken to support the development of instant payments in the United States?
Since 2013, there have been several collaborative initiatives between the Federal Reserve and industry stakeholders on strategies for improving the speed, safety, and efficiency of the nation’s payment system. In 2015, the Federal Reserve convened the Faster Payments Task Force (FPTF), a 320-member group comprised of a broad range of industry participants, to identify and assess alternative approaches for implementing safe and ubiquitous instant payment capabilities in the United States. In its final report, the FPTF identified the need for ongoing industry collaboration to address infrastructure gaps; to develop models for governance, rules and standards; and to consider actions and investments that will contribute to a healthy and sustainable payments ecosystem.
Consistent with the FPTF’s recommendations, the Federal Reserve facilitated the industry’s faster payments Governance Framework Formation Team which, in late-2018, concluded its work and launched the U.S. Faster Payments Council, an industry-led membership organization that is intended to develop collaborative approaches to accelerate U.S. adoption of faster payments.
- What steps did the Federal Reserve take in determining whether and how to build the FedNow Service?
As part of the recommendations published in its final report in 2017, the Faster Payment Task Force requested that the Federal Reserve (i) develop a 24x7x365 settlement service to support instant payments and (ii) explore and assess the need for other Federal Reserve operational role(s) in faster payments. The U.S. Treasury subsequently recommended that “the Federal Reserve move quickly to facilitate a faster retail payments system, such as through the development of a real-time settlement service, that would also allow for more
- Will the development of the FedNow Service go beyond the roles that the Federal Reserve has traditionally played in the payment system?
Operating the FedNow Service alongside private-sector real-time gross settlement services for instant payments aligns with most payment systems in the United States. Since its inception, as intended by Congress, the Federal Reserve has played a key operational role in the nation’s payment system by providing payment and settlement services between depository institutions.
- Why doesn’t the Federal Reserve use its supervisory or regulatory authority to influence the development of instant payments in the United States?
The Federal Reserve Board (Board) does not have plenary regulatory or supervisory authority over the U.S. payment system. Rather, the Board has limited authority to influence private- sector payment systems in specific circumstances. Instead, the Federal Reserve has historically exercised significant influence in the U.S. payment system through the Reserve Banks’ provision of payment and settlement services to depository institutions. This operational role has helped to promote payment systems in the United States that are ubiquitous, safe, and efficient.
- How does the Federal Reserve make decisions about developing new payment services, such as the FedNow Service, or enhancing its existing services?
The Federal Reserve Board has established a set of criteria for evaluating new or enhanced Federal Reserve payment services in its policy The Federal Reserve in the Payment System. As the Federal Reserve considers the introduction of new services or major service enhancements, the policy requires all of the following criteria to be met:
- The service should be one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity. For example, it may be necessary for the Federal Reserve to provide a payment service to ensure that an adequate level of service is provided nationwide or to avoid undue delay in the development and implementation of the service.
- The Federal Reserve must expect that it’s providing the service will yield a clear public benefit, including, for example, promoting the integrity of the payments system, improving the effectiveness of financial markets, reducing the risk associated with payments and securities-transfer services, or improving the efficiency of the payments system.
- The Federal Reserve must expect to achieve full recovery of costs over the long run.