The Federal Reserve's own real-time payments system has a big challenge ahead of it: How to communicate with a widely used private network already in operation.
Making FedNow interoperable with The Clearing House's existing offering, and any other private systems that emerge, would ensure that customers of a bank participating in one service would be able to reach the customers of a bank participating in another. The Fed will need the systems to work together if it hopes to reach its goal of making real-time payments ubiquitous in the U.S., but how soon that could happen — and if it can happen at all — is being debated across the industry.
The Fed itself recognizes that interoperability "may be difficult to achieve, at least early on," according to Kansas City Fed President Esther George. All offerings would require the complex technical functionality to exchange messages and enable settlement across the various participants.
"I don't consider it an insurmountable challenge, but it could take time to achieve," George said at the Chicago Fed payments symposium. "Thus, it may not be an initial element of the FedNow service," which the Fed hopes to launch in 2023 or 2024.
When asked about the challenge of connecting the networks, Steve Ledford, senior vice president of product and strategy at The Clearing House, said he does not know how the technology would work. Right now, the Fed and The Clearing House operate two automated clearinghouse, or ACH, systems that operate alongside each other. The networks exchange information in batches several times a day to ensure accurate settlements across the board.
The information transfers happen with several hours of time to spare before the networks settle the transactions, ensuring that there is time to fix any issues that pop up. That process, at least with existing technical capabilities, cannot apply to real-time payments processed and settled in five seconds or less.
"How do you actually do that in real time, where part of the payment is in one network [and] part's in the other?" Ledford said in an interview. "We don't know if it's even technically possible."
The executive said he is "not going to bet on" a solution emerging that connects The Clearing House's network with FedNow. The Clearing House is a private company owned by many of the country's largest banks.
One industry expert, testifying before the House Financial Services Committee in September, said that technical interoperability is the easy part of the problem. Much more challenging is developing the rules to govern real-time payments for all operators nationwide, said Carol Benson, founding partner of Glenbrook Partners LLC, an independent payments strategy consulting and research firm. Such rules already exist for ACH payments, which are overseen by the National Automated Clearing House Association.
FedNow and The Clearing House's Real Time Payments are not mutually exclusive solutions, said Jamie Armistead, head of Zelle at Early Warning Services LLC. Zelle is a peer-to-peer payment network backed by many major U.S. banks, including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co., among others. Card companies such as Visa Inc. and Mastercard Inc. have also developed real-time solutions.
"It's an ecosystem that is evolving here and evolving very rapidly," Armistead said at a recent industry conference. The appearance of the central bank's FedNow plan is putting pressure on the private network to "move even faster to gather more market share before FedNow comes into play," he said.
Interoperability between all parties — The Clearing House's Real-Time Payments network, the Fed's proposed FedNow service and other private systems that are likely to emerge — will be critical to making faster payments ubiquitous, said Rodman Reef, managing principal at Reef Karson Consulting LLC. And ubiquity will be important to everybody, Reef said.
"People in this country particularly, but in other countries, too, are not used to [hearing] that ... you can use the service, but you can only use it for this section of the population," the global payments business consultant said in an interview. Real-time solutions will not take off if payments providers cannot work together. That would leave the movement of funds in the U.S. as it is, traveling only at the speed of ACH or the wire service, he said.