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FedNow and Fedwire

Summary:
The Federal Reserve Banks will develop a round-the-clock real-time payment and settlement service, FedNow. The objective is to support faster payments in the United States. From the FAQs (my emphasis): … there are some faster payment services offered by banks and fintech companies in the United States, their functionality can be limited. In particular, due to the lack of a universal infrastructure to conduct faster payments, most of these services rely on “closed-loop” approaches, meaning that users signed up to one service cannot exchange payments with users signed up to other services. Other services target ubiquity by relying on users’ bank accounts, but they may face challenges reaching enough banks to allow any two users to exchange payments. Moreover, these services typically use

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The Federal Reserve Banks will develop a round-the-clock real-time payment and settlement service, FedNow. The objective is to support faster payments in the United States.

From the FAQs (my emphasis):

… there are some faster payment services offered by banks and fintech companies in the United States, their functionality can be limited. In particular, due to the lack of a universal infrastructure to conduct faster payments, most of these services rely on “closed-loop” approaches, meaning that users signed up to one service cannot exchange payments with users signed up to other services. Other services target ubiquity by relying on users’ bank accounts, but they may face challenges reaching enough banks to allow any two users to exchange payments. Moreover, these services typically use traditional retail payment methods to move funds between accounts. These methods result in a build-up of financial obligations between banks

… fragmented market for end-user faster payment services, with services that may provide faster payment functionality in some circumstances and for some specific uses, like person-to-person payments, but that do not have sufficient reach to advance the U.S. payment system as a whole. The Federal Reserve’s goal in announcing the planned actions is to provide a much broader scope of access to safe and efficient faster payments throughout the country.

… the European Central Bank, Banco de México, and the Reserve Bank of Australia have looked to support the development of faster payments in their jurisdictions by providing services that enable payment-by-payment, real-time settlement of retail payments at any time …

First, the Federal Reserve Banks (the Reserve Banks) will develop the FedNowSM Service, a new interbank 24x7x365 real-time gross settlement (RTGS) service with integrated clearing functionality, to directly support the provision of end-to-end faster payment services by banks (or their agents). Second, the Federal Reserve will explore the expansion of hours for the Fedwire® Funds Service and the National Settlement Service (NSS), up to 24x7x365, subject to further analysis of relevant operational, risk, and policy considerations, to support liquidity management in private-sector RTGS services for faster payments, as well as provide additional benefits to financial markets beyond faster payments.

… Board has concluded that private-sector real-time gross settlement (RTGS) services for faster payments alone cannot be expected to provide an infrastructure for faster payments with reasonable effectiveness, scope, and equity. In particular, private-sector services are likely to face significant challenges in extending equitable access to the more than 10,000 diverse banks across the country.

the service will settle obligations between banks through adjustments to balances in banks’ master accounts at the Reserve Banks; these funds will be eligible to earn interest and count toward banks’ reserve requirements. Consistent with the goal of supporting faster payments, use of the FedNow Service will require participating banks to make the funds associated with individual payments available to their end-user customers immediately after receiving notification of settlement from the service. The service will support values initially limited to $25,000

… the FedNow Service will be available to banks eligible to hold accounts at the Reserve Banks

By expanding Fedwire Funds Service and NSS hours, the Federal Reserve would provide further support to private-sector RTGS services for faster payments based on a joint account.

Some decision makers at the Fed believed that the Fed lacks authority to regulate banks operating payment systems in order to coerce them to offer access also to smaller banks.

Dirk Niepelt
Dirk Niepelt is Director of the Study Center Gerzensee and Professor at the University of Bern. A research fellow at the Centre for Economic Policy Research (CEPR, London), CESifo (Munich) research network member and member of the macroeconomic committee of the Verein für Socialpolitik, he served on the board of the Swiss Society of Economics and Statistics and was an invited professor at the University of Lausanne as well as a visiting professor at the Institute for International Economic Studies (IIES) at Stockholm University.

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