Tuesday, October 9, 2018
"Consumers and businesses increasingly expect to be able to send and immediately receive payments at any time of the day, any day of the year," said Lael Brainard, a member of the Fed's Board of Governors. "A 24/7 economy with 24/7 real-time payments needs 24/7 real-time settlement. That is where we believe the Federal Reserve and the private sector together need to make investments in the future."
The Fed has emerged in recent years as a champion of faster payments. In 2015 it published a set of strategies it would undertake with the private sector to identify and pursue faster payments capabilities. It also convened the Faster Payments Task Force comprising representatives from hundreds of banks, nonbank providers of payment services, business and government end users, consumer groups, and government entities. A key recommendation that came out of the task force was the need for the Reserve Banks to support universal real-time clearing and settlement, 24 hours-a-day, 365 days a year.
While faster payments initiatives have emerged in the United States, only one actually is a real-time payment network: the RTP system launched in 2017 by The Clearing House. RTP supports real-time clearing and settlement between TCH member banks. Although only a handful of banks currently participate, TCH has said it expects RTP to be used by banks holding half of all U.S. bank deposits by the end of this year.
All other systems built in recent years to support faster payments (like Zelle, the bank-owned person-to-person payment network) settle funds between banks on a deferred basis. This can be cumbersome, however, if the bank used by the individual/business initiating a payment and the bank serving the recipient are not both on the network. These situations typically require initiating payments across a secondary network (such as the ACH) and settlement through the Fed.
For real-time payments to become universally available to all banks and end-users the Fed has to get in the game. As the nation's central bank, the Fed, among other tasks, must make available clearing and net-settlement services to all federally insured banks and credit unions. At present, the Fed supports clearing and settlement of inter-bank ACH items, checks and wire transfers. But those services are only available 7:30 a.m. to 5:30 .pm. Eastern, Mondays through Fridays, and not on national holidays. Interbank transactions submitted to the Reserve Banks after 5:30 p.m. Eastern go into queues for clearing and settlement on the next business day.
"To fully deliver on the promise of faster payments into the future, we need an infrastructure that can support continued growth and innovation, with a goal of settlement on a 24/7 basis in real time," Governor Brainard said in a speech earlier this month at a Chicago Fed payments forum. "To ensure the robustness of the payment system into the future, banks and other providers acting as their agents should have access to a settlement system that operates 24/7 and settles each payment as soon as an individual sends it."
Brainard added that moving to real-time payments could be a boon to consumers as well as merchants and other small businesses that closely manage cash. "If a small business could count on its customers' payments being immediately accessible to its bank account, it could reduce its need for short-term financing to cover the costs of ordering materials and goods well in advance," she said.
The Fed Board's request for comment offers up several actions that would support faster interbank settlement of payments, with an eye toward real-time settlement. Potential actions include developing a new Reserve Bank service that supports 24/7/365 real-time interbank settlement of payments and a liquidity management tool that supports real-time interbank settlement. The Fed said it "is not committing to any specific actions" and posed dozens of questions it hopes will help shape its thinking and planning. Responses are due by Dec. 14.
A summary of those responses will be published next year, and new proposed new service offerings will follow. The Fed's rulemaking process, however, is often protracted. It's not uncommon for two or three years to pass between initial proposals and final decisions, and in this case, any final decisions would need to be followed by technology investments and implementation.
Editor's Note:
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