Editor’s Note: Uh…yeah, what does this mean? I see this as opening measures for making instant “direct deposits” into bank accounts. For the complete document, please see: https://www.federalregister.gov/d/2020-17539
Please note the intended date for this is Sept. 10, 2020. Use your imagination, and BE in…
Board of Governors of the Federal Reserve System.
The Board of Governors of the Federal Reserve System (Board) has approved the FedNowSM Service as described in this announcement. The FedNow Service is a new interbank 24x7x365 real-time gross settlement service with clearing functionality to support instant payments in the United States. The new service will support banks’ provision of end-to-end instant payment services and will provide infrastructure to promote ubiquitous, safe, and efficient instant payments in the United States.
September 10, 2020.
FOR FURTHER INFORMATION CONTACT:
Kirstin Wells, Principal Economist (202-452-2962), Susan V. Foley, Senior Associate Director (202-452-3596), Division of Reserve Bank Operations and Payment Systems; Jess Cheng, Senior Counsel (202-452-2309), or Gavin Smith, Senior Counsel, Legal Division (202-452-3474), Board of Governors of the Federal Reserve System. For users of Telecommunications Device for the Deaf (TDD), contact (202-263-4869.)
The payment system is a core part of our nation’s infrastructure. For more than a century, the Federal Reserve has provided payment and settlement services to promote an accessible, safe, and efficient U.S. payment system. Throughout its history, the Federal Reserve has provided these services alongside, and in support of, private-sector service providers. The Federal Reserve Banks (Reserve Banks) fulfill this statutory role by offering services that provide core infrastructure for financial transactions, including check, automated clearinghouse (ACH), and funds transfer services. This operational role provides key public benefits, including enhanced resiliency, healthy competition, increased innovation, and more equitable access. Since the Federal Reserve does not have plenary regulatory or supervisory authority over payments, this operational role has also helped catalyze fundamental improvements in the nation’s payment system. This role in the payments system has allowed the Federal Reserve to advance its broader mission of providing the nation with a modern, safe, and effective financial system.
Consistent with this history, beginning in 2013 the Federal Reserve launched a collaborative initiative with a broad array of stakeholders to improve the speed, safety, and efficiency of the U.S. payment system. As part of this initiative, the Federal Reserve and stakeholders identified the need for instant payment capabilities in the United States that would allow individuals and businesses to conduct and complete payments almost immediately, around the clock, every day of the year and provide a receiver with access to funds in seconds (instant payments). The ability to both send and receive funds instantly allows individuals and businesses greater flexibility and control to manage their money and make time-sensitive payments. This flexibility in turn may help alleviate mismatches between the time that incoming funds are available for use and the time that such funds are needed for other purposes.
For individuals, instant payments reduces the need for high-cost borrowing and the risk of associated penalties, such as overdraft or late fees. Start Printed Page 48523Instant payments could be particularly helpful for individuals facing financial constraints or in times of crisis when there is heightened need to move money quickly and access funds almost immediately. For businesses, and in particular for small businesses, the ability to receive funds in near real time may result in better cash flow management in normal times, and this may be especially important in periods of stress. Instant payments may also provide businesses with considerable opportunity to improve efficiency and reduce costs of payments relative to paper checks and other existing payment methods.
In light of these and many other potential benefits, the Board and a broad set of stakeholders determined that a core infrastructure is essential to support the development and availability of instant payment services. In particular, stakeholders recommended that the Federal Reserve explore and assess the need for an operational role in instant payments and develop a 24x7x365 settlement service to support such payments. This sentiment was echoed by the U.S. Treasury. It was also supported by the vast majority of over 400 comments received by the Board in 2018 in response to a Board proposal of potential actions to support instant payments in the United States (the 2018 Notice).
As a result of this extensive consultation with a wide variety of stakeholders, the Board announced via public notice in August 2019 (the 2019 Notice), that the Reserve Banks would develop the FedNow Service, a new interbank 24x7x365 real-time gross settlement (RTGS) service with integrated clearing functionality to support instant payments in the United States. In making its decision, the Board concluded that the Federal Reserve’s operation of such a 24x7x365 RTGS service would be the most effective approach to advance the Federal Reserve’s and industry’s objective of ubiquitous, safe, and efficient instant payments in the United States.
Consistent with the Federal Reserve’s historical role in supporting payment system improvements, the Board concluded that the Reserve Banks’ operation of the FedNow Service would support broader modernization of the nation’s payment system as the industry moves towards instant payments. Serving as an operator would also be consistent with the Federal Reserve’s historical role as a provider of payment services alongside the private sector, which is currently the established model for almost every major payment system in the United States.
An operational role for the Federal Reserve would also help ensure competition in the market—an outcome that the U.S. Government Accountability Office concluded benefits consumers in other payment systems. Notably, over the course of the Federal Reserve’s multiyear engagement with the industry on instant payments, only one private-sector RTGS service for instant payments has been established in the United States (the existing private-sector service). The Board’s analysis supporting the decision to develop the FedNow Service indicated that the existing private-sector service was likely to remain the sole private-sector provider of RTGS services for instant payments in the United States. The Board explained in the 2019 Notice that no traditional payment system in the United States has only a single private-sector provider, and that such an outcome would create significant risks to the safety and efficiency of the nation’s payment system. In particular, the Board explained that a single private-sector service would face significant challenges in establishing an accessible infrastructure for instant payments with nationwide reach, would result in limited competition that could have negative effects on pricing and innovation, and could create a single point of failure in the nation’s instant payments infrastructure.
In light of these significant risks, the Board determined that an operational role would allow the Federal Reserve to advance a number of important objectives, including establishing an accessible nationwide infrastructure, fostering stability in times of crisis, supporting resiliency through redundancy, and stimulating healthy competition for clearing and settling instant payments.
Given their operational role in providing payment and settlement services, the Reserve Banks have established broad reach and invested in connections and customer service relationships with more than 10,000 diverse financial institutions, both small and large, across the country. This reach, in turn, will support the Federal Reserve’s ability to provide a nationwide infrastructure for instant payments through the FedNow Service, furthering the goal of ubiquitous instant payments in the United States by connecting banks across the nation. As a result, banks of every size, in every community will have the ability to offer instant payment services to their customers, which is essential to their ability to meet evolving customer demands effectively. This, in turn, will ensure that individuals and businesses across the country have the ability to use such services regardless of geography.
The Federal Reserve has also historically played an important role in promoting the safety of the U.S. payment system by providing liquidity and operational continuity in times of crisis. Serving in an operational role in instant payments will allow the Federal Reserve additional capacity in the future to respond to financial turmoil, natural disasters, and other crises, as it has done in the past. In addition, providing access to more than one RTGS service for instant payments for backup purposes will enhance resiliency by reducing the risks caused by a single point of failure.
The FedNow Service will also promote competition by providing choice of instant payment services in the market. Competition exists in nearly every payment system in the United States today, including funds transfers, ACH, checks, and card transactions. The Board’s analysis indicated that choice in Start Printed Page 48524RTGS services for instant payments would likely result in efficiencies related to pricing, service quality, and innovation. Moreover, it will give banks and third-party service providers a neutral infrastructure to build on, allowing them to offer a variety of innovative and convenient instant payment services to individuals and businesses.
A. An Overview of the FedNow Service
The FedNow Service will be available to banks in the United States and will enable individuals and businesses to send instant payments any time of day, any day of the year through their bank accounts. An instant payment facilitated by the FedNow Service begins when a sender (that is, an individual or business) initiates a payment using a service provided by their bank, such as a banking application accessed on a computer, tablet, or mobile device. After the sender’s bank receives this request, it will send a message through the FedNow Service to the receiver’s bank, with information about the payment. Upon receipt of this message, the receiver’s bank will indicate whether it intends to accept the payment. If it intends to accept the payment, the receiver’s bank will send a positive confirmation back, and upon receipt the FedNow Service will transfer the funds between the Federal Reserve accounts associated with the banks. Each bank will debit and credit their customer’s account accordingly. The entire process is intended to take place in a matter of seconds, so the receiver will have funds available to use in near real time. Completed payments will be final, meaning they are irrevocable.
From a technical perspective, the FedNow Service will be designed to maintain uninterrupted 24x7x365 processing with security features to support payment integrity and data security. The FedNow Service will enable credit transfers that support a range of different types of payments for individuals and businesses, and will also support the transfer of supplemental information, such as invoices, related to a payment. The service will have a 24-hour business day each day of the week, including weekends and holidays. End-of-day balances will be reported on Federal Reserve accounting records for each participating bank on each FedNow Service business day. Access to intraday credit will be provided to participants in the FedNow Service.
Because instant payment services such as the FedNow Service process and settle each payment separately and continuously on a 24x7x365 basis, participants will need adequate funds or available credit (liquidity) in their accounts at all times in order to settle each payment. In some circumstances, banks with account balances beyond their current needs may supply liquidity to those facing a shortfall. Typically, banks can use a service like the Fedwire® Funds Service to conduct such liquidity transfers. However, when those services are closed, participants in the FedNow Service or the existing private-sector service may need an alternative method to transfer liquidity.
To facilitate such transfers, the FedNow Service will provide a liquidity management tool to support instant payment services that will be a critical enabler not only of the FedNow service but also the existing private-sector service. The tool will enable participants in the FedNow Service to transfer funds to one another to support liquidity needs related to payment activity in the FedNow Service. The tool will also support participants in a private-sector instant payment service backed by a joint account at a Reserve Bank by enabling transfers between the master accounts of participants and a joint account. Access to the tool would be available to users regardless of whether they are full participants using the FedNow Service to send instant payments between end users or if they use the FedNow Service only to make liquidity transfers. The tool will be available during specific hours, for example, when such transfers are not currently possible through other Federal Reserve services.
The Federal Reserve is committed to using widely accepted standards in designing the FedNow Service to aid in accomplishing the key goals of achieving nationwide reach for instant payments and promoting interoperability with the existing private-sector service. To support these goals, the service will use the widely accepted ISO 20022 standard and adopt other industry best practices, that would remove barriers to interoperability, in order to avoid unnecessary and burdensome incompatibilities, to the extent the existing private-sector service also uses publicly available, widely accepted standards.
The Federal Reserve intends to launch the FedNow Service as soon as practicably possible. Although the target release date remains 2023 or 2024, the Federal Reserve intends to announce a more specific time frame for launch, as well as earlier pilot programs, through established Reserve Bank channels once additional work is completed. This and other work related to the implementation of the FedNow Service is ongoing and includes development of the necessary infrastructure, integration with existing Federal Reserve systems, and continued engagement with industry stakeholders on features and design.
The Federal Reserve will take a phased approach to providing additional features and functionality over time. Although this may result in the introduction of certain desirable features after the initial release, this approach will ensure the core features Start Printed Page 48525and functionality are delivered as quickly as possible. The Board believes this approach most appropriately balances the competing demands for the Federal Reserve to launch the FedNow service quickly and to provide enhanced features beyond core capabilities.
Specifically, the first release of the FedNow Service will provide baseline functionality that will support market needs and help banks manage the transition to a 24x7x365 service. The first release will also offer additional optional features where there is high demand, such as fraud prevention tools, the ability to join initially as a receive-only participant, request for payment capability, and tools to support participants in their handling of payment inquiries, reconcilements, and certain exceptions. Other aspects of the service, such as fee structures and governing terms, will be announced prior to the launch of the service through established Reserve Bank communication channels.
The Federal Reserve also recognizes that market needs and technology related to instant payments are constantly evolving and intends to continue engaging with stakeholders and remain flexible in its approach when building out additional features and functionality of the FedNow Service. Based on ongoing stakeholder engagement, additional features and service enhancements will be introduced over time. For example, the service will endeavor to offer additional features in the initial period following launch to support alias-based payments such as directories, as well as fraud prevention, error resolution, or case management tools. Other features in the future might include support for bulk payments or enhanced remittance information. The Federal Reserve will continue to engage with stakeholders on these and other, more complex considerations, such as cross-border capability.
B. Organization of Notice
This notice provides a high-level discussion of the comments received by the Board in response to the 2019 Notice (Section II). The notice details the core features and functionality of the FedNow Service at launch and related comments considered by the Board (Section III). Section III also outlines the Federal Reserve’s approach to the introduction of additional features and service enhancements that may be offered in subsequent phases. Lastly, this notice provides a final competitive impact analysis of the FedNow Service (Section IV). Future communications about the FedNow Service, including but not limited to technical specifications, detailed product offerings, pricing, and implementation timeline, will be provided through established channels, such as FRBservices.org.
II. Comment Summary
The Board received 182 comments in response to the 2019 Notice. Of those comment letters, 3 included signatures from multiple parties, for a total of 353 entities responding to the 2019 Notice. Comments were submitted by a wide variety of stakeholders from the following segments: Small and midsize banks, large banks, individuals, consumer organizations, merchants, service providers, private-sector operators, financial technology companies (fintechs), trade organizations, and other interested parties. Overall, small and midsize banks were the largest group of respondents, providing more than 40 percent of the total comment letters and representing institutions from 25 states. Trade organizations submitted letters representing several commenter segments, including small and midsize banks, large banks, merchants, fintechs, and service providers. Generally, these letters aligned with comments submitted by respondents in the same segment as a trade organization’s membership. The majority of comments provided specific feedback on features and functionality of the FedNow Service. While this Section provides an overview of comments, a more detailed discussion of comments can be found in Sections III and IV.
The Board also received 2,246 form letters from individuals. These form letters argued that the Federal Reserve should not operate in competition with the private sector and viewed the decision to develop and implement the FedNow Service as an inappropriate expansion of the Federal Reserve’s role that is inconsistent with its historical purpose. Generally, these commenters stated that the introduction of the FedNow Service would lead to decreased innovation and unfair competition with the private sector. These topics were addressed by the Board as part of its analysis in the 2019 Notice. In the 2019 Notice, the Board provided the rationale for its conclusion that the Federal Reserve should offer the FedNow Service. This rationale was based on input received in response to the Board’s 2018 notice requesting comment on the Federal Reserve’s role in the payment system and whether to develop the FedNow Service.
Approximately 80 commenters, largely representing small and midsize banks, trade organizations and individuals, addressed the proposed implementation time frame for the service. Nearly all of these commenters stated that the Federal Reserve should accelerate development and bring the FedNow Service to market sooner than the anticipated implementation date of 2023 or 2024. In general, these commenters indicated that the FedNow Service should be made available as soon as possible. These commenters generally believed that market needs and technology for instant payments are rapidly evolving and that an earlier implementation would better support innovation and widespread adoption of the FedNow Service and instant payments more broadly.
Approximately 75 commenters, largely representing small and midsize banks, trade organizations, and service providers, recommended that the FedNow Service offer enhanced functionality that participants can use to mitigate fraud. While a majority of these commenters agreed that banks are primarily responsible for combatting fraud related to the accounts of their customers, most suggested that the Reserve Banks should nevertheless provide enhanced fraud prevention tools for FedNow Service participants. Most of these commenters offered Start Printed Page 48526specific recommendations as to how fraud prevention tools should be designed and implemented. Two commenters, however, stated that fraud prevention tools for the FedNow Service should be provided by the private sector and not the Reserve Banks.
Approximately 80 commenters, largely representing small and midsize banks, trade organizations, and fintechs, addressed the inclusion of directory services to support alias-based payments as part of the FedNow Service. Nearly all these commenters noted that availability of a directory, whether provided by the Reserve Banks or the private sector, would support widespread adoption of the service for person-to-person (P2P) payments and reduce payment routing errors. Approximately 40 commenters, largely representing small and midsize banks, trade organizations, and individuals, described potential approaches to the development of directory services, with most of these commenters recommending that the FedNow Service provide either a centralized link to existing directories or build its own directory. Several commenters raised various other considerations with respect to directory services and highlighted potential complexities with day-to-day management of a directory service, such as protecting data privacy and security.
Approximately 100 commenters, representing all commenter segments, expressed views related to interoperability. Nearly all 100 commenters highlighted the benefits of interoperability between the FedNow Service and the existing private-sector service. Approximately 40 commenters, representing small and midsize banks, trade organizations and service providers, expressed the view that interoperability would promote ubiquitous access to instant payments in the United States and support widespread usage and adoption of instant payments. Approximately 35 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, noted that interoperability would streamline operations for banks and service providers, allow for a consistent end-user experience with respect to funds availability, and generally promote efficiencies and savings. Very few commenters expressed views on how interoperability should be achieved, and many commenters appeared to use varying operational definitions of interoperability.
Commenters also addressed considerations related to participant and service provider preparedness for FedNow Service onboarding and, more broadly, the transition to 24x7x365 real-time operations for instant payments. Approximately 40 commenters, largely representing small and midsize banks, trade organizations, and individuals, noted that successful integration of existing core service-provider systems is critical to achieving widespread adoption of the FedNow Service. These commenters noted that small and midsize banks rely on core service providers and that the Reserve Banks should share technical and operational requirements with such service providers well in advance of service implementation so that small and midsize banks are not disadvantaged. More generally, approximately 15 commenters highlighted various challenges related to transitioning to 24x7x365 real-time processing of instant payments. The majority of these commenters raised concerns that increased staffing costs and upgrades to technology required to maintain continuous operations may limit adoption of the service.
Other groups of commenters raised relevant topics beyond specific features and functionality of the FedNow Service. For example, approximately 35 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, emphasized the importance of effective governance for the FedNow Service and suggested, more generally, that the Reserve Banks take part in any future industry efforts that may arise to develop common rules and standards for instant payments. Another 8 commenters noted that introduction of the FedNow Service may necessitate revisions of existing regulations. These commenters cited a wide range of rules and regulations that may need to be adjusted, including regulations related to funds availability and funds transfers through Federal Reserve services. Another 6 commenters emphasized that the FedNow Service design should incorporate robust cybersecurity controls (for example, endpoint security requirements). Finally, approximately 10 commenters suggested that the Reserve Banks design the FedNow Service to minimize the possibility that the service might be used in a way that can cause consumer harm. Additionally, these commenters recommended that the Reserve Banks develop industry standards for disputing payments in the event of a fraudulent or erroneous transfer.
III. The FedNow Service
In the 2019 Notice, the Board proposed potential features and functionality for the FedNow Service. Based on additional analysis informed by the comments received in response to the 2019 Notice, the Board has approved the FedNow Service as described in this notice. Recognizing that market needs and technology for instant payments are rapidly evolving, the Board also expects that additional service modifications or features, other than those described here, could be included in the service at launch and in the future. The Federal Reserve intends to take a phased approach to developing and enhancing the FedNow Service, with flexibility to adjust features and functionality in response to available technology, industry developments, and evolving needs of banks and their customers. Additions or changes to the features described in this notice will be announced through established Reserve Bank communication channels. Consistent with the Board’s pricing principles, the Board will request public comment when changes in fees and service arrangements are proposed that would have significant longer-run effects on the nation’s payment system.
A. General Description of the FedNow Service
In the 2019 Notice, the Board explained that the FedNow Service would be designed to process individual payments continuously, 24 hours a day, Start Printed Page 485277 days a week, 365 days a year. The Board did not receive comments related to modifying the hours or days over which the service would be available, and the 24x7x365 functionality of the service will be adopted as proposed.
In the 2019 Notice, the Board indicated the service would support credit transfers, where a sender initiates a payment to an intended receiver. Three commenters suggested that the Board also consider inclusion of debit transfer functionality, such that a receiver would be able to initiate a transfer that “pulls” funds from a sender’s account. These commenters expressed the view that debit transfers would facilitate certain types of payments (for example, recurring bill payments) and support broader adoption of the service.
Although debit transfer functionality may facilitate some increased adoption of the FedNow Service and instant payments more broadly based on specific use cases, the Board believes that the risks of the FedNow Service supporting debit transfers outweigh the potential benefits, at least at the outset. Credit transfers require the sender to authorize and initiate each payment, which can decrease the risk of fraudulent or otherwise unauthorized payments and enhance the safety of the payment system. In addition, recurring bill payments and other payments that are typically made by debit transfer can also be supported by a “request for payment” functionality that builds on credit transfer functionality (see the Request for Payment section). Therefore, the FedNow Service will only support credit transfers as proposed.