The Federal Reserve is preparing to launch a new service to compete in the real-time payments space
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The service, dubbed "FedNow," comes following a 2018 request for public comment that found support for a "round-the-clock" real-time payment (RTP) and settlement solution, per a press release.
The Fed's board is now looking for public comment on how FedNow should be designed, and "anticipates" a 2023 or 2024 launch, though a 4-5 year wait could impact FedNow's eventual positioning, since "existing schemes from TCH and EWS (Zelle) will have been operating for several years by then," Craig Ramsey, head of real-time payments at ACI Worldwide, said in commentary sent to Business Insider Intelligence.
Here's what it means: FedNow is being created in part to compete with The Clearing House (TCH), which already works with a number of major banks, and the Fed's system could impact TCH well before it launches.
The Fed expected that TCH's system would be unopposed in the market if it didn't launch its own service, per The Wall Street Journal. As a competitor, the Fed can push prices in the market down.
This is especially true as the Fed, by law, aims to break even rather than make a profit. And the Fed's plans could hurt TCH's adoption and volume well before they're finalized: "There may be financial institutions that wait for the Fed," TCH SVP Steve Ledford said, per The WSJ.
The bigger picture: The eventual introduction of FedNow will have a significant impact on a number of payments stakeholders.
- For consumers, FedNow will provide greater access to RTP payments, enabling them to receive funds faster. This could prove particularly important for paychecks, and potentially limit the importance of payday loans as a result. And it could make other services more accessible too: FedNow could also boost consumers' usage of peer-to-peer (P2P) platforms, as an example, as they may be able to access their funds faster or at a lower cost.
- For banks, this impacts access to TCH - that's a win for small banks and a loss for bigger players. Major banks, like Citigroup and JPMorgan Chase, have invested approximately $1 billion in the payments system operated by TCH, per The WSJ. With the Fed adding its own offering, they'll no longer have as much control of the RTP market in the US. But for smaller banks, who may have otherwise had to work with TCH, which is controlled by bigger competitors, the Fed offers a public option that could be more attractive.
- The advent of FedNow may boost the development of alternate payment methods, benefitting merchants and hurting card networks. With instant access to funds, direct-to-bank transactions may gain popularity in the US as they have in China and the UK. This would allow firms, including merchants, to bypass card networks and their transaction fees, bolstering their business while hurting card networks' volume.
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