Federal Reserve to Launch FedNow℠

Amy Donaghue

By: Brian Laverdure, AAP, Director, Emerging Payments Education

On August 5, Dr. Lael Brainard, member of the Federal Reserve Board of Governors, announced the Federal Reserve Banks’ intent to develop a new, real-time payment system. The system, termed FedNow℠, will bring faster payments to financial institutions of all sizes across the country, and will lay the foundation for the next generation of payments.

The announcement is the latest step in the push to evolve America’s payments infrastructure to meet the demands of our country’s on-demand economy propelled by internet commerce, mobile technology and a growing consumer demand for money that moves quickly. The Federal Reserve recognized the need for faster payments years ago when it organized a collaborative process to identify ways to address inefficiencies and gaps called the Strategies for Improving the U.S. Payment Systems (SIPS) effort in 2013. In 2015, the Federal Reserve brought together stakeholders from across the payments industry to join the Faster Payments Task Force, a group charged with evaluating how the United States could implement safe and ubiquitous faster payments. In the group’s final report issued in 2017, it recommended for the Federal Reserve to create a 24x7x365 settlement service to support real-time payments.

The Federal Reserve moved swiftly to act on the FPTF’s recommendations with a 2018 Federal Register notice, asking for feedback on two possible services to support faster payments: 1) the development of a 24x7x365 real-time gross settlement (RTGS) system and 2) a liquidity management tool to permit 24x7x365 transfers between Federal Reserve accounts. However, the Federal Reserve also clearly stated in the 2018 Notice that it considered an RTGS service as the best foundation for the future, and it expressed doubts about the private sector’s ability to achieve ubiquitous faster payments. The Board of Governors received hundreds of responses to the 2018 Notice, including one from EPCOR that conveyed our members’ support for the Federal Reserve maintaining an active role in providing settlement mechanisms and payment services for community financial institutions. After reviewing all the comments, the Board of Governors decided to establish a new interbank 24x7x365 RTGS service to support the goal of safe and ubiquitous faster payments.

The Federal Reserve provided a description of the service and its potential details in the Federal Register notice that accompanied Governor Brainard’s speech. What follows are the proposed basic elements of the new service:

  • Individual payments processed within seconds, 24 hours a day, 7 days a week, 365 days a year
  • Service will only support credit transfers—there will be no debit functionality
  • It will support a wide variety of use cases, including P2P transfers, bill payment and B2B payments
  • Interbank settlement will occur in real-time through credit/debit entries to master accounts at Reserve Banks (or possibly a correspondent bank)
  • Service will launch with individual payments limited to $25,000 or less
    Although much about FedNow℠ currently remains uncertain, the Federal Reserve anticipates introducing the system in 2023 or 2024.

Ken Montgomery Named Leader of FedNow℠

The Federal Reserve System recently announced that First Vice President Kenneth C. Montgomery will lead the development of a new FedNow℠SM Service to support faster payments in the United States with interbank real-time gross settlement (RTGS) and integrated clearing.

“Ken brings deep financial services insights and technical expertise to his new role,” said Esther George, president and chief executive officer, Federal Reserve Bank of Kansas City, and sponsor of the Federal Reserve’s payments improvement initiative. “He is a natural fit to lead FedNow℠ given his success in previous Federal Reserve technology and business management roles, and his leadership of our payments security efforts.”

The development of FedNow℠ is a multi-year effort that will be informed by public comments on the current Federal Register notice. A product description that more fully defines the FedNow℠ offering will be published in a subsequent Federal Register notice. Once in place, FedNow℠ will provide critical infrastructure to enable financial institutions of all sizes to offer real-time payments services to their retail and commercial customers.

“This is an exciting milestone in U.S. payments modernization, as the Federal Reserve works toward fulfilling the payments industry’s request for a service that will support safe and efficient faster payments for all financial institutions – and by extension, provide the benefits of real-time payments to all Americans,” Montgomery said. “The FedNow℠ team is gathering industry input on desired features and functionality so we can solidify FedNow℠’s product design and further define the pathway to launch.”

Montgomery will retain his current position as Federal Reserve Bank of Boston first vice president and chief operating officer, where his responsibilities include financial and treasury services, information technology and strategic planning. Earlier, as executive vice president and Federal Reserve System chief technology officer, Montgomery headed the National Information Technology Architecture and Standards Division. This included Federal Reserve System-wide responsibility for business consulting, technology and strategic planning, standards development, information security policy, risk management and high-intensity solutions engineering.

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