The Federal Reserve’s proposed interbank 24x7x365 real-time gross settlement (RTGS) service FedNow, will be a big change to bank-to-bank payments in the US.
A series of webinars, hosted by the Federal Reserve to discuss more about the service, highlights how FedNow has been designed to establish a safe and efficient nationwide infrastructure that supports faster payment services in the United States. The initiative will be available to depository institutions eligible to hold accounts at the Reserve Banks under applicable federal statutes and Federal Reserve rules, policies and procedures, and will support credit (push) transfers and will support domestic payments between eligible US financial institutions only.
Though the service is expected to be available only after four years, what does the update on FedNow mean to corporate treasurers?
Relevance of ACH network
FedNow, according to those behind it, will usher in a golden age of universal access to real-time payments, while avoiding the risk of having only one for-profit settlement service run by the nation’s largest and riskiest banks.
The Automated Clearing House, the service that dates back to 1853 and which is owned by the world’s largest commercial banks including Bank of America, Capital One, Wells Fargo, JPMorgan Chase and about 20 others, has an existing real-time payments system known as the RTP Network. The service touts itself as ‘able to provide a ubiquitous, safe, efficient, and equitable faster payment system by 2020’.
The RTP network does provide real-time payment and settlement capabilities 24-hours a day, but is not very popular with the smaller financial institutes. Though the webinar clarified that ‘different payments systems meet different needs and ACH is a proven payment system that is ubiquitous, widely used and a very good match for many payment use cases, smaller banks could certainly be winners from a Fed-developed real-time payments system.
ACH has issued a statement that ‘it does not believe there is a need for the Fed’s real-time payment service and, therefore, does not support it’.
Corporate treasury the real winner?
The biggest winner from this move could be American corporate treasurers, since they would gain quicker access to money, regardless of the institution they bank with. They could aalso have more control of cash flow and payments. It could also potentially save money in the form of overdraft fees and working capital shortages. Banks could experience a drop in overdraft fee revenue, as companies’ funds would be available to use sooner.
Big banks could be potential losers. Most obviously, giving the same payment capabilities to all banks regardless of size helps level the playing field.
And the roughly $1 billion the big banks spent to develop Automated clearing house (ACH) service could end up being wasted money.
Who bears the risk?
The laws and regulations for retail payments differ greatly depending on the type of payment used, whether electronic transaction, paper check, credit or debit cards, or the system known as the automated clearinghouse. ACH transactions are electronic payments transferred from the deposit account of a consumer, business or government to the entity being paid. The Federal Reserve Bank of Chicago, in a 2013 study titled Clarifying liability for twenty-first-century payment fraud, noted there are also different regulations and case law governing business-to-business transactions and consumer-merchant retail transactions.
The confusion is only likely to grow worse as FedNow becomes ubiquitous.
Christopher D. Ford, an attorney with Ballard Spahr LLP commented: “Certainly because of the near instantaneous nature of the transaction, fraudsters have less time to engage in any transaction. However, the time barrier that financial institutions and others have used to verify the validity of the transaction will disappear as well, allowing the transaction to ‘settle’ before fraudulent activity can be detected.”
It is difficult to determine whether cases of fraud will increase or decrease under a real-time payments framework. Under these circumstances, the payments ecosystem will need to determine who will bear the risk.
Business can improve its cash flow
Ken Montgomery, the Program Executive of FedNow, in an interview shared his thoughts by adding: “Real-time gross settlement of faster payment transactions aligns the speed of settlement to the speed of the underlying payment. Funds will be available immediately through digital instant payment services built on the FedNow Service infrastructure. This can have a thousand uses in everyday commerce, especially where payment immediacy and irrevocability is important. The cleaning lady who is paid by a homeowner on the 30th of the month can use the money for her mortgage payment that same day. A business can improve its cash flow by immediately using a customer’s payment to quickly replenish stock or get discounts for paying its own bills earlier.”