The Federal Reserve’s new FedNow real-time payments system, launched July 20, represents the most significant improvement to the Fed’s payments services since the introduction of the automated clearing house system in the 1970s. By introducing FedNow, the Federal Reserve has finally met the goal it set out to accomplish back in 2015, when it started the US Faster Payments Task Force. Our national payments system will reap immediate gains when FedNow brings new banks and credit unions online.
Nonetheless, we should view this milestone as a significant step forward on an as-yet unfinished journey. To go from good to great, two conditions must be met. First, FedNow must become interoperable with The Clearing House’s RTP real-time network. Second, the Consumer Financial Protection Bureau (CFPB) should protect users from scammers who trick people into sending them money. If those things happen, we’ll have a system that is at once faster and safer, which could help reduce the number of people who are unbanked.
FedNow is a new piece of banking infrastructure that enables fund transfers to execute in under a minute at any time of day or night. Consumers won’t know they’re using FedNow when they pay their bills instantly with a few taps on their phone – but they will know the money got where it needed to be on time.
Such services are wildly popular among consumers, but until now have been inaccessible for depositors at many smaller banks. FedNow, which fulfills a goal the Fed first set for itself in 2015, should help close that service gap.
Rapid consumer uptake of Zelle – a consumer payment service that rides over the Clearing House’s Real Time Payments (RTP) network – shows widespread pent-up demand for a way to send “good funds” immediately. Already, consumers and businesses send more money through Zelle than with Venmo and Cash App combined. Unless they pay a fee, consumers have to wait a day (or three) to cash out funds they have received from one of those longer-standing P2P apps.
But to realize the full potential of the faster payments system, more needs to be done. We need FedNow’s pipes to connect with the Clearing House’s Real-Time Payments (RTP) network. The value of being a part of a payment network depends on how widely it has been adopted. The benefit derived by any single user of a networked system increases incrementally with each additional participant. With each new bank that joins the network, gains accrue to new and existing users. FedNow promises to help broaden and accelerate adoption of this technology, especially for smaller banks that historically struggle to design effective consumer-facing technology services.
To understand why this is important, consider how we rely on interoperability in other technologies. Imagine if people could only call other individuals who had the same phone carrier or if some hotels had wi-fi systems that worked for PCs but not for Macs.
Of course, that highlights a second aspect of true interoperability. It isn’t just that all banks need to have access to one set of pipes. Rather, until everyone can pay everyone, regardless of where they bank, the system has unfulfilled potential. In some way, the pipes must connect.
To that end, the “public infrastructure” of FedNow must become interoperable with the privately operated Real-Time Payments Network (RTP) infrastructure. Created six years ago by Early Warning Services, a firm owned by a consortium of large US banks, RTP now connects with 65% of US depositories. Those financial institutions have 90% of US transaction accounts.
The hope is that FedNow will get the remaining depositories to join. That would be a win. But success will hinge on creating connections between all banks. At its launch, FedNow will not connect with RTP. If left unaddressed, that problem will undermine the consumer benefit of the systems.
The second condition to get to full adoption is that consumers must feel that their money is safe. In the US as well as in other parts of the world, faster payments have led to faster fraud. US consumers have lost hundreds of millions of dollars on scams perpetrated through the largest consumer-facing faster payment service, and until regulators intervene, banks will rarely reimburse victims. Neither the Clearing House nor the Federal Reserve have the authority to make this happen. The CFPB, under their authority over the Electronic Funds Transfer Act, should act. It should require banks to have the responsibility to make consumers whole when scammers trick them into sending money over a faster payments service.
When interoperability and safety have been addressed, everyone in the banking system will benefit. This is true for financial institutions, businesses, governments, retailers and consumers.
In fact, success could even make a difference for people outside of the banking system. I am talking about the 4% to 5% of Americans who do not currently have a bank account. Optimists hold the belief that the opportunity to receive funds immediately may compel unbanked households to get bank accounts. A faster payment can help a struggling consumer better manage their cash flows, giving them access to their funds sooner and more time to make a payment. For cash-strapped households that would otherwise risk being late on rent while waiting for their paychecks to clear, for example, a faster payment can help them avoid late fees. Today, too many people feel that a bank account does not serve their needs. If faster payments change that personal calculus for currently unbanked households, more people will gain access to the wealth-building opportunities that a relationship with a bank can provide.
The launch of FedNow marks a great accomplishment. The Federal Reserve has delivered on a big goal. It’s a dramatic improvement to their payments services and one that brings us closer to having the world’s best payment system. But we still have some homework. We need interoperability and safety. That will stimulate greater adoption, leading to more return on public and private investment, with gains inside and outside our current ecosystem.
Adam Rust is a Senior Policy Advisor at NCRC.
Photo of Jerome Powell via Flickr.