The Federal Reserve is proposing a major overhaul of the U.S. payments infrastructure, saying it will launch a system that moves funds in real time instead of delaying their availability.
The Fed's offering, called FedNow, will challenge a competing service already offered by The Clearing House, a private company owned by many of the country's largest banks. The Fed, which expects to launch its service in 2023 or 2024, said a publicly run offering is needed to ensure the entire nation can reap the benefits of real-time payments.
The U.S. payments infrastructure lags those in other countries, where funds are moved immediately instead of being subject to dayslong delays, Fed Governor Lael Brainard said at a Kansas City Fed event announcing the regulator's action.
"With a Federal Reserve real-time retail payment infrastructure, the funds would be available immediately — to pay utility bills or split the rent with roommates, or for small business owners to pay their suppliers," Brainard said.
The move from the Fed marked a major step in the effort to develop a real-time payments system, and it was cheered by credit unions and community banks that have pressed the Fed to develop a publicly run alternative. The Independent Community Bankers of America said in a news release that the Fed announcement will "avoid a megabank monopoly" of real-time payments systems.
The National Retail Federation, a major trade group representing American retailers and restaurants, has also backed a Fed-run system, as have some Democrats on Capitol Hill.
But not all Fed officials are backing the initiative. Randal Quarles, the Fed's vice chairman for supervision, voted against the Fed's action and said in a statement that the U.S. private sector "has a long history of providing efficient payment solutions to consumers and businesses."
"The public sector should provide its own capacity only when the evidence of market failure is clear and alternative means to achieve public goals are not feasible," he said. "In this case, I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available."
The Clearing House, which operates the existing private-sector real-time payments system called the RTP network, said in a statement that it is already seeing "tremendous advances in speed, convenience, and security in how Americans receive and send funds." The company said it will continue working with banks and credit unions of all sizes to ensure widespread adoption.
"While we will stay abreast of the Fed's efforts to develop its own real-time payments system which may become available in 2023 or 2024, our focus will remain on ensuring that the RTP network has reach to all depository institutions," The Clearing House said.
The Fed, though, said in a document outlining its proposal that it thought a single private-sector system was "unlikely to connect to the thousands of small and midsize banks necessary to yield nationwide reach, even in the long term."
Officials said they already have longstanding relationships with institutions around the country and a nationwide infrastructure offering payments services to them. Providing a competitor could also lead to lower prices and more innovation in the payments system, the Fed said.
Fed Chairman Jerome Powell told reporters July 31 that comments the Fed received when it asked for feedback on the idea were "overwhelmingly favorable."
But critics of a Fed-run offering say starting a competing system would delay the widespread use of real-time payments across the country. The Fed gave a nod to such concerns, saying that "time-to-market is an important consideration" and that it will work to launch FedNow as soon as possible.
But Brainard said the question of timeliness is separate from the benefits the Fed sees of ensuring nationwide access to real-time payments, including at "harder-to-reach" institutions.
"The [Fed] Board believes that achievement of true nationwide reach, as opposed to initial availability of a service, is a critical measure of success for faster payments," the Fed said. "The Board expects that it will take longer for any service, including the FedNow Service or a private-sector service, to achieve nationwide reach regardless of when the service is initially available."
George, who also spoke at the event, said officials intend for FedNow to work alongside the preexisting private-sector system, but that the two systems may not operate together at first.
"Whether we get there right away, we'll have to see," George said.
The central bank is requesting comments on how it can design the service most efficiently.
It also said it is planning to explore expanding the service hours for its existing Fedwire Funds Service and National Settlement Service systems, which it says could help facilitate liquidity management in the private sector's real-time payments system.