The Federal Reserve debuted a new payments system designed to speed up the movement of money among banks around the U.S., the central bank’s first new network in decades.
The new system, called FedNow, will allow eligible banks with accounts at the Federal Reserve to send money instantly starting Thursday. So far, about 50 institutions have completed the formal testing and certification needed to send or receive payments on the new network, the central bank said.
The new network is a long time coming, with the Fed in 2019 announcing plans to create the system. At the time, the central bank’s move was seen as a major rebuff to an intense Wall Street lobbying campaign because the system competes with a similar, private network formed by the biggest U.S. banks.
“The Federal Reserve built the FedNow service to help make everyday payments over the coming years faster and more convenient,” Chairman Jerome Powell said in a statement Thursday. “Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid.”
Consumers and businesses won’t have direct access to the new system. Instead, they’ll have to rely on their banks and credit unions to give them access through their mobile apps or websites.
In many ways, the U.S. has long lagged behind other countries in the adoption of real-time payments. That’s despite a 2017 effort by The Clearing House — owned by financial giants including JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. — to introduce a system of its own known as the RTP network.
RTP, which now has more than 350 institutions on its network, handled about $29 billion of payments in the second quarter. While that’s an 18% increase from a year earlier, it pales in comparison to the almost $20 trillion handled by the Automated Clearing House network — another system used by banks and other financial firms for electronic funds transfers — in a given quarter.
“There was a lot of confusion in the marketplace when the Fed said, ‘We’re also going to build the exact same thing,’” Rusiru Gunasena, senior vice president of the RTP Network for The Clearing House, said in an interview. “The banks were thinking, ‘Am I going to spend another investment that’s very similar to what I would have to do with RTP? Or wait and see?’”
For the central bank, FedNow will operate alongside other networks the Fed already offers to banks. It comes more than a century after the agency helped establish Fedwire, the world’s first wire-transfer system, and almost 50 years after the Fed supported the development of ACH.
Banks pressured
The Bank Policy Institute, a trade group representing U.S. lenders, said in a post on its website this week that it’s received anecdotal reports that banks are receiving pressure through regulators’ supervisory processes to join and use FedNow. The Fed declined to comment on the post.
The Fed said that 35 banks and credit unions, as well as the U.S. Department of the Treasury’s Bureau of the Fiscal Service, are ready to support payments on FedNow. More than a dozen service providers, such as Jack Henry & Associates Inc., which provides technology to thousands of regional lenders around the country, are also ready to support the new service.
JPMorgan and Wells Fargo are among the biggest U.S. banks that have been performing final trial runs on the service in recent weeks as they readied their systems to support FedNow. While others, including Citigroup and Bank of America Corp., have been discussing the development of the network with the Fed, they won’t be among the first to join the new system, according to people with knowledge of both banks’ work on the matter.
“Expanding the reach of real time payments will give people the ability to make payments across the country in a matter of seconds,” said Takis Georgakopoulos, global head of JPMorgan’s payments business. “Given the rapid pace of innovation in this space, our participation will help us learn, grow and better serve our customers as a result.”
‘Very enthusiastic’
Bank of America is “very enthusiastic” about the future of faster payments in the U.S. and will provide clients with a “robust set” of services, a spokesman said in an emailed statement. Citigroup plans to join FedNow in the coming months, according to the people. A spokesperson for the bank declined to comment.
Retailers including Walmart Inc. and Kroger Co. have heralded the Fed’s move to develop FedNow, which they hope would one day allow them to take direct bank payments from customers, rather than relying on credit cards, as well as better handle refunds. Large merchants have long bristled at the fees they’re charged by card networks such as Visa Inc. and Mastercard Inc.
Still, it could be a long time before FedNow is used for such purposes, according to analysts, since it remains unclear if the Fed or others will develop services such as fraud detection, dispute resolution or other risk-management offerings for the system.
“It’s a mechanism by which two entities can clear and settle payments in real time using accounts at the Fed — that’s it,” Lisa Ellis, an analyst at MoffettNathanson LLC, said in an interview. “It’s bare-metal rails sitting there, waiting to be used by something. But they are not in and of themselves useful or functional.”
