FinTechFinTech-Banking PartnershipsMore hurdles for FedNow

More hurdles for FedNow

As the Fed presses ahead with its FedNow plans that will bring the US in line with technology in other jurisdictions, concerns remain from fintech and banks around the initiative.

The Federal Reserve’s proposed interbank 24x7x365 real-time gross settlement (RTGS) service FedNow has hit more than a few bumps in the road. Some stakeholders argue a body independent of the Fed should oversee the development of the proposed instant payment service, FedNow. However, despite largely backing the initiative, industry observers are worried the central bank may not be best placed to address interoperability, resulting in rising costs as banks conclude they have to join multiple networks.

On the other hand, big banks that have invested heavily in FedNow are lobbying Congress for taking the precaution of trying to ensure fintech firms can’t use the system if the Fed does go ahead. As the plan unfurls, the Fed will have to decide how much access non-banks get.

The Fed aims to have FedNow running by 2023 or 2024.

FedNow vs ACH

One effect may be new competition between FedNow and the bank-owned payment systems, such as the Automated Clearing House (ACH). ACH had 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’.

“The Fed’s decision to build an instant payments system should not slow down or divert resources from its other commitments to payments system improvement,” William Sullivan, senior director and group manager of government and industry relations at NACHA, the organisation that governs ACH.

He also added that NACHA wants the Fed to share new technology it develops — such as fraud detection and prevention, or expanded settlement during nights, weekends and holidays — with payment systems like ACH.

But it’s the inability of systems like ACH to provide instantaneous payments that is driving FedNow, according to Fed board member Lael Brainard. She said on the day the Fed announced FedNow that ACH can take days to process transactions.

The dominant payment company, The Clearing House Payments Co. LLC, which conducts the majority of transfers, established its own real-time service in 2017, and thus argues there’s no need for the Fed’s efforts. Its owners are some of the nation’s biggest financial institutions: Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co.

FinTech vs Banks

As Brad Garlinghouse, CEO of cryptocurrency firm Ripple, argues that fintech firms will bring more innovation than would be the case if banks are allowed exclusive access; merchants and fintech firms say they’re worried the banks could monopolize instantaneous payments and charge excessive fees. Access to the Fed’s infrastructure to use FedNow would address that worry.

Banks say BigTech companies should have to conform to banking regulations. That means adding protections, such as an obligation to restore funds if a third-party improperly debits a customer’s bank account. The American Bankers Association said the Fed should open its payment system only to chartered financial institutions, such as banks and credit unions.

In its comments on FedNow, the American Bankers Association cautioned that the Fed’s proposal for FedNow does not address the additional risks that nonbank agents bring to this faster payments system. They added that the Fed must do so to ensure that all participants in FedNow, direct or indirect, meet similar robust prudential, security, and consumer protection standards.

FedNow necessary, Fed digital currency not

Last month, the President of the Federal Reserve Bank of Cleveland, Loretta Mester showed 100% support of the creation of a real-time payments network. The new payments network could run side by side with the existing one with some banks choosing to stick to one or combine the two.

With regards to the questions arising as to how small and big banks will interact within the new ecosystem, she commented: “What you’ll end up seeing is … some banks will be on both, and others will stick with one. But if we make make sure that the message sending is standardized, they’ll be able to switch if they want to switch, so there’s going to be room for both systems to be very robust systems.”

She quashed the idea of a Fed digital currency right away: “There’s no active group working towards Fed digital currency. Obviously, we are monitoring the private-sector currencies … and also other central banks around the world. Some of them are starting to move in a digital currency, at least some experimentation with it. So we’re definitely talking to them so that we understand the issues.” According to a paper by IMF, central banks may issue digital currencies in the future and CBDCs could become reality. However, work is in the early stages.

The biggest winner from FedNow move could be American corporate treasurers, since they would gain quicker access to money, regardless of the institution they bank with.

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