In an effort to facilitate real-time interbank settlement of faster payments, the Federal Reserve Board (FRB) is asking for input from industry stakeholders on the best options.

In a request for comment, the FRB outlines potential approaches it could take to promote safe and efficient faster payments in the United States.

What happened

In the past several years, public demand for real-time payments has escalated and a gap has developed between the expectations of business and consumers and the ability of banks to meet their needs. We’ve all seen the commercials featuring the woman sitting on her couch who needs to send an immediate payment to her sister via her phone. Consumers and businesses want two things—speed and continuous availability. They want to send payments immediately, at any time of the day or night. But in the United States, due to the absence of an interbank clearing and settlement system with continuous accessibility, banks and other payment providers are struggling to remain competitive.

As far back as 2013, the FRB started to collaborate with members of the payment industry and other stakeholders to assess methods of developing ubiquitous, nationwide access to safe, secure and efficient faster payments in the United States.

That initiative, Strategies for Improving the U.S. Payment System (SIPS), led to the FRB’s publication of a set of strategies it would pursue collaboratively with the various industry stakeholders, including identifying approaches for implementing safe and ubiquitous faster payments. The FRB also created the Faster Payments Task Force (FPTF), which developed a set of effectiveness criteria for the various features of a faster payment service.

In 2017, the FPTF published its final report, which contained a set of consensus recommendations to implement faster payments. In addition to establishing a framework of governance, rules and regulations, the report recommended that the FRB immediately start to develop a 24/7/365 settlement service to support faster payments.

The FRB’s current request for comment focuses on two potential faster payment initiatives—first, developing a service for real-time gross settlement (RTGS) of payments that would be available to conduct settlement on a 24/7/365 basis, and second, developing a liquidity management tool to help banks support their funding needs outside standard business hours.

An RTGS “service would involve interbank settlement of faster payments using banks’ balances in accounts at the Reserve Banks,” the FRB explained. “Reflecting the characteristics of faster payments, the service would provide payment-by-payment interbank settlement in real time and at any time, on any day, including weekends and holidays.”

Faster payment services in operation today generally are forced to rely on a deferred net settlement (DNS) model, where the funds are made available to the end-user recipient before interbank settlement occurs. This results in inherent risk to the recipient’s receiving bank, which has paid out the funds before receiving them from the sender’s bank.

The DNS model could also create liquidity risks, according to the FRB. A troubled bank could face rapid withdrawals outside standard business hours, resulting in credit exposure and liquidity needs; during a period of financial stress, these risks could further aggravate financial stability concerns.

While open to considering other approaches, the FRB stated its belief that the 24/7/365 real-time settlement approach is the preferable model for faster payments, as it “aligns the speed and 24/7/365 availability of interbank settlement with the speed and 24/7/365 availability of faster payments for end users,” avoiding the settlement risk of the DNS model.

Noting that there are benefits and drawbacks to both approaches, the FRB—in considering long-term prospects for the faster payments market—stated that it preferred the RTGS approach over DNS from a risk and efficiency perspective. However, it specifically asked for comment on this conceptual approach from industry participants.

In the request for comment, the FRB acknowledged that its introduction of a 24/7/365 settlement service could disrupt the existing faster payments market and add to market fragmentation, especially in the short run. Further, moving to a 24/7/365 settlement environment “may take a number of years of technical and operational adjustment for all stakeholders,” the agency recognized.

While making no commitment on whether, and in what manner, it would proceed to implement a faster payments infrastructure, the FRB asked for comments on several questions relating to a structure for faster payments, including whether RTGS is the appropriate approach for interbank settlement of faster payments, whether the FRB should develop the liquidity management tool, how a 24/7/365 service should be developed, the ideal timeline for implementation, what adjustments banks would need to make to accommodate the changes and whether fraud prevention services are needed. It also asked whether other approaches not currently under consideration might better achieve the goal of nationwide access to faster payments. Comments will be accepted until December 14.

To read the FRB’s request for comment, click here.

Why it matters

“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,” FRB governor Lael Brainard said in a statement. “A 24/7 economy with 24/7 real-time payments needs 24/7 real-time settlement. That is where we believe that the Federal Reserve and the private sector together need to make investments for the future.” The United States lags behind other countries, both advanced and emerging, in the speed of payments. Banks also face increased competition from privately developed, bank-owned proprietary clearing networks and nonbank payment services providers. The request for comment is the next step in the FRB’s deliberative process of considering the most advantageous model for faster payments. Nevertheless, the FRB noted that it was not “committing to any further actions at this time or in the future, but is committed to transparent communication with the public after analyzing the responses to this notice and determining further steps, should any be taken.”