What is FedNow and How Does It Impact The Clearing House’s Real-Time Payments?

Introduction

The Federal Reserve announced the development of a new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality to support faster payments for financial services in the United States, to be called FedNowSM. This service would allow real-time clearing and settlement at the time of the transaction resulting in a real-time payment. This means an immediate transfer of funds from one bank (sender) to another bank (receiver).

This may sound familiar because The Clearing House (TCH) has a real-time payments (RTP) service already in the market today, which has been live since November 2017. TCH’s RTP service is gaining traction, announcing an increase in transaction value limit to $100,000 (versus $25,000) effective February 2020.

Why Another Service?

So why another service? The Federal Reserve pointed to the comments they received in response to their Request for Comment (RFC) from the market indicating the desire for a second option for real-time settlement in the U.S. One of the major pieces of feedback from the RFC responses was the concern that only one option would create economic security issues if the singular service were ever unavailable. For these reasons, among others, The Federal Reserve decided to move forward in creating its own solution and plans to go live with this solution by 2023 or 2024.

This may seem like a threat to TCH’s RTP offering; however, current automated clearing house (ACH) operations indicate those assumptions could be unfounded.

Both TCH and The Federal Reserve operate ACH services in the U.S. today, and essentially share the market, providing a benefit for all U.S. players as well as both TCH and The Federal Reserve. Real-time payment services could see the same result. TCH does have an incumbent advantage as its RTP service is already a couple of years ahead of the Federal Reserve’s offering, and will be 6-7 years ahead by the time FedNow is launched.

There may be a market for both services in the U.S.; however, financial institutions will have to weigh speed-to-market, considering FedNow still has 3-4 years before it’s available. Other factors will also come into play for each institution considering a real-time offering, such as:

• The complexity of integrating applicable backend systems to each respective RTP services
• Third-party integration support for each service (TCH RTP currently has multiple 3rd parties that allow easier integration for smaller institutions more reliant on vendor solutions)
• Cost of each service
• Participation requirements (i.e., will there be any restrictions on bank type, activity, participation levels, etc.)
• Reporting and fraud monitoring requirements for FedNow service versus TCH RTP service

Timeline

One of the other major unanswered questions is that the FedNow service has not indicated a timeline for interoperability with TCH’s RTP offering but has said it will not be a priority for the initial launch. This will definitely affect market adoption and the drive for the ubiquity of real-time payments, which is incredibly important.

One of the biggest concerns that many institutions have with the Fed’s announcement is the expectation that it will significantly slow down the adoption of real-time payments. This will lead to significant fragmentation, as the end-consumer ultimately has to deal with the confusion over which, if any, RTP scheme is being used by the entity receiving the funds.

Conclusion

Until these systems are interoperable, there will be customer confusion. Also, now that the Fed’s plans are known, there will undoubtedly be many financial institutions waiting for the Fed, and thus not offering real-time payments to their customers for at least three years.

Given all of these factors, it will be interesting to see how each institution evaluates its decision on when and how they offer a real-time capability.

Learn more about real-time payments with Levvel’s 2021 Real-Time Payments Market Insight Report.