Federal Reserve Actions To Support Interbank Settlement of Faster Payments, 39297-39322 [2019-17027]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 84, Number 154 (Friday, August 9, 2019)]
[Notices]
[Pages 39297-39322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17027]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1670]


Federal Reserve Actions To Support Interbank Settlement of Faster 
Payments

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice and request for comment.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
has determined that the Federal Reserve Banks (Reserve Banks) should 
develop a new interbank 24x7x365 real-time gross settlement service 
with integrated clearing functionality to support faster payments in 
the United States. The new service would support depository 
institutions' provision of end-to-end faster payment services and would 
provide infrastructure to promote ubiquitous, safe, and efficient 
faster payments in the United States. In addition, the Federal Reserve 
intends to explore expanded hours for the Fedwire[supreg] Funds Service 
and the National Settlement Service, up to 24x7x365, to support a wide 
range of payment activities, including liquidity management in private-
sector real-time gross settlement services for faster payments. Subject 
to the outcome of additional analysis of relevant operational, risk, 
and policy considerations, the Board will seek public comment 
separately on plans to expand hours for the Fedwire Funds Service and 
the National Settlement Service.

DATES: Comments on the proposed actions must be received on or before 
November 7, 2019.

ADDRESSES: You may submit comments, identified by Docket No. OP-1670, 
by any of the following methods:
     Agency website: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Ann Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments will be made available on the Board's website 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Kirstin Wells, Principal Economist 
(202-452-2962), Mark Manuszak, Assistant Director and Chief (202-721-
4509), Susan V. Foley, Senior Associate Director (202-452-3596), 
Division of Reserve Bank Operations and Payment

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Systems; or Gavin Smith, Senior Counsel, Legal Division (202 452-3474), 
Board of Governors of the Federal Reserve System. For users of 
Telecommunications Device for the Deaf (TDD), contact (202-263-4869.)

SUPPLEMENTARY INFORMATION: 

I. Introduction

    The U.S. payment system faces a critical juncture in its evolution. 
Advances in technology have created an opportunity for significant 
improvements to the way individuals and businesses make payments in 
today's economy. Smartphones, high-speed computing and cloud 
capabilities, extensive communication networks, and other innovations 
allow individuals and businesses to send and receive messages, post and 
consume content online, search for and obtain information, and conduct 
myriad other activities almost immediately and at any time. Similarly, 
today's technology presents a pivotal opportunity for the Federal 
Reserve and the payment industry to modernize the nation's payment 
system to establish a safe and efficient foundation for the future.

A. Background

    Services to conduct ``faster payments'' have begun to emerge to 
address shortcomings of traditional payment methods. Faster payments 
allow individuals and businesses to send and receive payments within 
seconds at any time of the day, on any day of the year, such that the 
receiver can use the funds almost instantly.\1\ Faster payment services 
are growing in popularity, but typically require users to all 
participate in the same specific service to exchange payments. However, 
there is broad consensus within the U.S. payment community that, just 
as immediate services available around the clock have become standard 
for other everyday activities, faster payment services have the 
potential to become widely used, resulting in a significant and 
positive impact on the U.S. economy.
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    \1\ Consistent with the concept of a faster payment in this 
notice, and reflecting improvements to retail payment systems around 
the world, the Committee on Payments and Market Infrastructures 
(CPMI) has defined a ``fast payment'' as ``a payment in which the 
transmission of the payment message and the availability of `final' 
funds to the payee occur in real time or near-real time on as near 
to a 24-hour and seven-day (24/7) basis as possible.'' Final funds 
are funds received such that the receiver has unconditional and 
irrevocable access to them, meaning that the receiver can use the 
funds without the risk that they will be recalled. See Committee on 
Payments and Market Infrastructures, Bank for International 
Settlements, ``Fast payments--Enhancing the speed and availability 
of retail payments,'' (November 2016). Available at https://www.bis.org/cpmi/publ/d154.pdf.
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    Faster payments can yield real economic benefits beyond speed and 
convenience. Through faster payments, individuals and businesses can 
have more flexibility to manage their money and can make time-sensitive 
payments whenever needed. For a small business, the ability to receive 
payments immediately may result in better cash flow management. More 
broadly, faster payments may provide businesses with considerable 
opportunity to improve efficiency and reduce costs of payments relative 
to paper checks and other existing payment methods. For individuals, 
the ability to both send and receive payments more quickly may help 
alleviate mismatches between the time that incoming funds are received 
and the time that spending needs to occur. This improved ability to 
manage their money can enable some individuals to avoid high-cost 
borrowing and penalties, such as overdraft or late fees.
    In light of these potential benefits, an appropriate foundation is 
essential to support the development of faster payment services that 
are safe, efficient, and broadly accessible to the public. This 
foundation involves creating an infrastructure that connects banks 
across the country, paving the way for innovative faster payment 
services.\2\ This infrastructure would allow individuals and businesses 
to exchange funds in their accounts almost instantly to make payments 
for goods, services, or other purposes. A key function of this 
infrastructure is the movement of information and funds between banks, 
also known as interbank clearing and settlement.\3\
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    \2\ Throughout this notice, the term ``bank'' will be used to 
refer to any type of depository institution. Depository institutions 
include commercial banks, savings banks, savings and loan 
associations, and credit unions.
    \3\ Three types of services are typically required to complete a 
payment between two individual or business bank accounts: End-user 
services, clearing services, and interbank settlement services. End-
user services support the exchange of information between a bank and 
its customer (that is, an individual or business). Clearing services 
directly or indirectly support the exchange of payment information 
between banks. Interbank settlement services discharge financial 
obligations between and among banks arising from payments by 
adjusting balances in settlement accounts. Depending on the 
arrangement, some or all of these levels can be provided by distinct 
entities or integrated in a single entity.
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    Since its founding, the Federal Reserve has played a key 
operational role in the nation's payment system by providing such 
infrastructure.\4\ The importance of this role has been broadly 
recognized, with independent reviewers concluding that the payment 
system and its users have benefited over the long run from the Federal 
Reserve's operational involvement.\5\ This key role, given by Congress, 
stems from the Federal Reserve's unique ability, as the nation's 
central bank, to provide interbank settlement without introducing 
liquidity or credit risks.\6\ In fulfilling this role, the Reserve 
Banks operate services, including check, automated clearinghouse (ACH), 
and funds transfer services, that provide core infrastructure for 
financial transactions.\7\ Throughout its history, the Federal Reserve 
has provided these services alongside, and in support of, similar 
services offered by the private sector.
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    \4\ Additional information about the Federal Reserve's role in 
the payment system is available in ``The Federal Reserve System 
Purposes & Functions: 6. Fostering Payment and Settlement System 
Safety and Efficiency,'' (October 2016). Available at https://www.federalreserve.gov/aboutthefed/pf.htm.
    \5\ See e.g., U.S. Gov't Accountability Off., GAO-16-614, 
``Federal Reserve's Competition with Other Providers Benefits 
Customers, but Additional Reviews Could Increase Assurance of Cost 
Accuracy'' (2016). Available at https://www.gao.gov/products/GAO-16-614.
    \6\ In particular, settlement through the Federal Reserve does 
not involve liquidity or credit risk with respect to the Federal 
Reserve as the settlement institution. See Committee on Payment and 
Settlement Systems, Bank for International Settlements, ``The Role 
of Central Bank Money in Payment Systems'' (August 2003). Available 
at https://www.bis.org/cpmi/publ/d55.pdf.
    \7\ As authorized by the Federal Reserve Act, these payment and 
settlement services involve transferring funds between and among 
accounts held at the Reserve Banks. Specific services offered by the 
Reserve Banks include the Fedwire Funds Service, the National 
Settlement Service, and FedACH[supreg] services. Throughout this 
notice, these services operated by the Reserve Banks will generally 
be referred to as Federal Reserve services.
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    In the past, the Federal Reserve's provision of payment and 
settlement services has helped to advance fundamental improvements in 
the nation's payment system.\8\ The potential exists today to achieve 
once again such improvements through upgrades to the payment 
capabilities of both the Federal Reserve and the private sector. In 
terms of current Federal Reserve services supporting the U.S. payment 
system, those services have served the nation's economy well but were 
not designed to support 24x7x365 real-time retail payments.\9\ Advances 
in technology

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provide the ability to develop Federal Reserve services with the 
operating hours, processing capacity, and overall functionality needed 
to support 24x7x365 real-time capabilities for the payment system. 
Similar considerations have led central banks in various countries to 
develop improved infrastructure to support faster payments.\10\
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    \8\ Improvements achieved through these operational roles 
include facilitating efficient nationwide clearing of checks, 
supporting the development of the ACH system, encouraging the 
nation's transition to a virtually all-electronic check-processing 
environment, and establishing a real-time interbank funds transfer 
system for wholesale payments.
    \9\ Retail payments typically involve lower-value transfers, 
such as those among individuals or between an individual and a 
business, that yield a large number of payments. See Committee on 
Payments and Market Infrastructures, Bank for International 
Settlements, ``A Glossary of Terms Used in Payments and Settlement 
Systems,'' (October 2016). Available at https://www.bis.org/cpmi/publ/d00b.htm.
    \10\ For a discussion of global developments related to faster 
payments, see ``Fast payments--Enhancing the speed and availability 
of retail payments,'' supra note 1.
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    The Board views support for faster payments as requiring 
modernization of, and upgrades to, Federal Reserve services alongside 
broader modernization of the payment industry as a whole. Beginning in 
2013, the Federal Reserve launched the Strategies for Improving the 
U.S. Payment System (SIPS) initiative, a collaborative effort with 
stakeholders to foster improvements to the nation's payment system. As 
part of the SIPS initiative, the Federal Reserve convened the Faster 
Payments Task Force (FPTF), comprising a wide range of industry 
stakeholders, to identify and evaluate alternative approaches for 
implementing safe and ubiquitous faster payment capabilities in the 
United States.
    The FPTF published in 2017 a set of consensus recommendations 
focused on actions to support improvements to the nation's payment 
system.\11\ These recommendations were intended to help achieve the 
FPTF's vision of ubiquitous faster payment capabilities in the United 
States that would allow any end user (that is, an individual or 
business) to safely, efficiently, and seamlessly send a faster payment 
to any other end user, no matter which banks or payment services they 
use. Among the FPTF's consensus recommendations were requests for the 
Federal Reserve (i) to develop a 24x7x365 settlement service to support 
faster payments and (ii) to explore and assess the need for other 
Federal Reserve operational role(s) in faster payments. The U.S. 
Treasury subsequently recommended that ``the Federal Reserve move 
quickly to facilitate a faster retail payments system, such as through 
the development of a real-time settlement service, that would also 
allow for more efficient and ubiquitous access to innovative payment 
capabilities.''\12\
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    \11\ See Faster Payments Task Force, ``Final Report Part Two: A 
Call to Action,'' (July 2017). Available at https://fedpaymentsimprovement.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf.
    \12\ The U.S. Treasury also noted that ``[i]n particular, 
smaller financial institutions, like community banks and credit 
unions, should also have the ability to access the most-innovative 
technologies and payment services. While Treasury believes that a 
payment system led by the private sector has the potential to be at 
the forefront of innovation and allow for the most advanced payments 
system in the world, back-end Federal Reserve payment services must 
also be appropriately enhanced to enable innovations.'' U.S. 
Treasury, ``A Financial System That Creates Economic Opportunity: 
Nonbank Financials, Fintech, and Innovation,'' (July 2018) at 156. 
Available at https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities-Nonbank-Financi.pdf.
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    Following publication of the FPTF's final report, the Federal 
Reserve began to pursue the FPTF's recommendations in considering 
settlement and broader operational support to facilitate the 
advancement of faster payments in the United States.\13\ In addition, 
the Board approved in 2017 final guidelines for evaluating requests for 
joint accounts at the Reserve Banks intended to facilitate settlement 
between and among banks participating in private-sector payment systems 
for faster payments.\14\ The impetus for allowing broader use of joint 
accounts was to facilitate private-sector developments in faster 
payments. In an arrangement using a joint account, real-time settlement 
occurs on an internal ledger maintained by a private-sector operator, 
supported by funds that are held in an account at a Reserve Bank for 
the joint benefit of the service's participants. To support settlement 
through such a service, each participant bank ensures sufficient 
funding in the joint account to cover its payment obligations on a 
24x7x365 basis. Without the Federal Reserve's actions related to joint 
accounts, other providers alone would be unable to provide real-time 
interbank settlement services for faster payments supported by a joint 
account at a Reserve Bank.
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    \13\ See The Federal Reserve System, ``Federal Reserve Next 
Steps in the Payments Improvement Journey,'' (September 6, 2017). 
Available at https://fedpaymentsimprovement.org/wp-content/uploads/next-step-payments-journey.pdf.
    \14\ Board of Governors of the Federal Reserve System, 
``Guidelines for Evaluating Joint Account Requests,'' (Issued 2017). 
Available at https://www.federalreserve.gov/paymentsystems/joint_requests.htm. In 2016, Federal Reserve staff received a 
request from a private-sector service provider to open a new joint 
account for that organization's proposed faster payment system. The 
use of a joint account at a Reserve Bank to support settlement 
mitigates certain risks by reproducing, as closely as possible, the 
risk-free nature of settlement in central bank money.
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B. 2018 Federal Register Notice on Potential Federal Reserve Actions

    In November 2018, the Board published a Federal Register notice 
(2018 Notice) seeking public comment on potential actions that the 
Federal Reserve could take to advance the development of faster 
payments and support the modernization of payment services in the 
United States.\15\ In considering the goal of ubiquitous, safe, and 
efficient faster payments, the Board proposed that a real-time gross 
settlement (RTGS) infrastructure would provide the safest and most 
efficient method for interbank settlement of faster payments and, 
therefore, would be the most appropriate strategic foundation for 
faster payments in the United States.\16\ Further, the Board expressed 
the view that the private sector alone may face significant challenges 
in providing equitable access to an RTGS infrastructure with nationwide 
reach, which in turn would jeopardize the development of ubiquitous, 
safe, and efficient end-user faster payment services.\17\
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    \15\ ``Potential Federal Reserve Actions To Support Interbank 
Settlement of Faster Payments, Request for Comments,'' 83 FR 57351 
(Nov. 15, 2018). Available at https://www.federalregister.gov/d/2018-24667. The comment period ended on December 14, 2018.
    \16\ RTGS involves interbank settlement occurring in real time 
on a payment-by-payment basis. As described in the 2018 Notice, RTGS 
for faster payments implies that settlement occurs prior to the 
provision of final funds to the receiver with settlement of 
individual payments possible at any time, on any day. In the 2018 
Notice, the Board noted that certain end-user services currently 
rely on deferred interbank settlement to complete a payment. In 
deferred settlement arrangements, interbank settlement information 
is collected, stored, and sometimes netted before interbank 
settlement occurs. Because faster payments involve the immediate 
provision of final funds to the receiver, deferred interbank 
settlement of faster payments inherently involves interbank 
settlement risk. Although faster payment systems that rely on 
deferred settlement can incorporate certain measures to mitigate 
this risk, those measures may be complex and costly to implement. By 
contrast, RTGS structurally removes interbank settlement risk 
because the receiver only receives final funds after interbank 
settlement has occurred.
    \17\ Throughout this notice, the terms ``nationwide reach'' and 
``nationwide scope'' will be used to refer to a payment service or 
infrastructure that is accessible to virtually all banks nationwide. 
In this context, the term ``nationwide'' reflects various dimensions 
of accessibility, including geography and institution size and type.
    At present, one RTGS service for faster payments, operated since 
November 2017 by a private-sector entity, exists in the United 
States. Section III presents a full analysis of the landscape of 
RTGS services for faster payments in the United States.
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    The Board specifically discussed two potential services that could 
be developed by the Reserve Banks: (i) An interbank 24x7x365 RTGS 
service with integrated clearing functionality to support faster 
payments and (ii) a liquidity management tool that would enable 
transfers between accounts held at the Reserve Banks on a 24x7x365 
basis to support services for real-time interbank settlement of faster 
payments.

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    The Board explained that a Federal Reserve RTGS service for faster 
payments, alongside private-sector RTGS services, would provide the 
infrastructure needed to achieve ubiquitous, safe, and efficient faster 
payments in the United States. Other parties, such as banks, payment 
processors, and providers of payment services, could develop end-user 
and auxiliary services that build upon the core functionality of an 
interbank settlement service provided by the Federal Reserve. The Board 
further explained that a liquidity management tool, in turn, could help 
alleviate liquidity management issues for banks engaged in RTGS-based 
faster payments. In particular, such a tool would enable movement of 
funds between accounts at the Reserve Banks during hours when 
traditional payment and settlement services are currently not open to 
allow liquidity to be moved, when needed, to an account or accounts 
used to support real-time settlement of faster payments. The 2018 
Notice proposed that the tool could be provided by expanding operating 
hours of current Federal Reserve services or through a new service.
    In the 2018 Notice, the Board requested comment on the 
appropriateness of real-time gross settlement as the strategic 
foundation for faster payments in the United States and the public 
benefits, implications, and challenges of the Federal Reserve taking 
either, both, or neither of the potential actions. The Board also 
sought feedback on other specific topics to inform these potential 
actions, such as potential demand for faster payment services and 
adjustments that the payment industry would need to make in a 24x7x365 
real-time settlement environment.

C. Planned Actions

1. The FedNow\SM\ Service
    After considering the comments received in response to the 2018 
Notice and analyzing the implications of the potential actions, the 
Board has determined that the Reserve Banks should develop a new 
interbank 24x7x365 real-time gross settlement service with integrated 
clearing functionality, called the FedNow Service, to support faster 
payments. The Board's determination is based on the public benefits 
that the service would provide and the Board's assessment that such a 
service would meet the requirements of the Depository Institutions 
Deregulation and Monetary Control Act of 1980 (MCA), as well as the 
Board's criteria for new or enhanced Federal Reserve payment 
services.\18\
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    \18\ ``Depository Institutions Deregulation and Monetary Control 
Act of 1980,'' Public Law 96-221 (Mar. 31, 1980), available at 
https://fraser.stlouisfed.org/title/1032; Board of Governors of the 
Federal Reserve System, ``The Federal Reserve in the Payments 
System,'' (Issued 1984; revised 1990). Available at https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
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    The planned service would conduct real-time, payment-by-payment, 
final settlement of interbank obligations through debits and credits to 
banks' balances in accounts at the Reserve Banks. The service would 
incorporate clearing functionality, allowing banks, in the process of 
settling each payment, to exchange information needed to make debits 
and credits to the accounts of their customers. The service's 
functionality would support banks' (or their agents') provision of end-
to-end faster payments to their customers.
    The Federal Reserve's provision of the FedNow Service would provide 
core infrastructure to promote ubiquitous, safe, and efficient faster 
payments in the United States. Historical experience with the 
development of other payment systems in the United States indicates 
that other providers alone will face significant challenges 
establishing such infrastructure, in part because of the complexity of 
the nation's banking system.\19\ A landscape where the Federal Reserve 
operates a 24x7x365 RTGS service alongside private-sector services, 
which aligns with most payment systems in the United States, is most 
likely to create an RTGS infrastructure with nationwide reach for 
faster payment services.
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    \19\ The United States has more than 10,000 depository 
institutions that vary greatly in terms of size, level of technical 
capabilities, operational practices, and customers and communities 
served.
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    Significantly, the Board expects that the recently established 
private-sector RTGS service is likely to remain the sole private-sector 
provider of RTGS services for faster payments in the United States. 
Such an outcome would have significant implications for the Board's 
policy objectives regarding the accessibility, safety, and efficiency 
of the nation's payment system.
    Based on its analysis and comments received in response to the 2018 
Notice, the Board expects that a single private-sector provider of such 
services is unlikely to connect to the thousands of small and midsize 
banks necessary to yield nationwide reach, even in the long term. No 
traditional payment system, including checks, ACH, funds transfers, or 
payment cards, has ever achieved nationwide reach through a single 
private-sector provider. The Federal Reserve, however, has long-
standing relationships with, and has built a nationwide infrastructure 
to provide service to, more than 10,000 depository institutions (or 
their agents) across the country, which would provide a key channel to 
reach thousands of smaller institutions in the United States that might 
otherwise not have access to an RTGS infrastructure for faster 
payments.
    Additionally, a single provider of RTGS services for faster 
payments without competition is likely to create undesirable outcomes 
for pricing, innovation, service quality, and reach. Conversely, 
provision of the FedNow Service alongside private-sector RTGS service 
would give banks the option of choosing a service or connecting to more 
than one service, a choice they have today for all existing payment 
services. Indeed, Federal Reserve and private-sector payment services 
operating alongside one another would be consistent with the structure 
of other existing payment systems. The presence of multiple RTGS 
services for faster payments could yield efficiency benefits such as 
lower prices, higher service quality, and increased innovation.
    A market outcome with a single RTGS service for faster payments 
would also create a single point of failure. An additional RTGS service 
for faster payments would promote resiliency through redundancy, a 
common solution in many retail payment systems. Serving an operational 
role in the payment system also allows the Federal Reserve to provide 
stability and support to the banking system and the broader economy in 
normal times and in times of stress.
    Finally, the Federal Reserve does not have plenary regulatory or 
supervisory authority over the U.S. payment system and instead has 
traditionally influenced retail payment markets through its role as an 
operator.\20\ Therefore, as has been the case with other retail payment 
systems, the Federal Reserve's operational role as a provider of 
interbank settlement is the most effective approach to improve the

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prospects of ubiquitous, safe, and efficient faster payments in the 
United States. Serving such an operational role would be consistent 
with the Federal Reserve's historical role as a provider of payment 
services alongside the private sector.
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    \20\ To the extent that the current private-sector RTGS service 
for faster payments could be considered subject to the Bank Service 
Company Act (BSCA) by providing services to federally supervised 
depository institutions, the Board and other federal banking 
agencies would have authority to examine the performance of those 
services as if the depository institution were performing the 
service itself on its own premises. 12 U.S.C. 1867. The BSCA, 
however, does not grant enforcement authority to the Board or other 
federal banking agencies over the third party service providers. In 
addition, that authority does not appear applicable to public 
benefit, competitive equity, effectiveness, or scope--key criteria 
that the Board considers with regard to Federal Reserve payment 
services.
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    Recognizing that time-to-market is an important consideration for 
industry participants related to faster payment services, the Federal 
Reserve is committed to launching the FedNow Service as soon as 
practicably possible. Pending engagement with the industry, the Board 
anticipates the FedNow Service will be available in 2023 or 2024. 
However, the Board believes that achievement of true nationwide reach, 
as opposed to initial availability of a service, is a critical measure 
of success for faster payments. The Board expects that it will take 
longer for any service, including the FedNow Service or a private-
sector service, to achieve nationwide reach regardless of when the 
service is initially available. The Federal Reserve will engage quickly 
with industry participants to gather input for finalizing the initial 
design and features of the service. Once specific design and features 
of the FedNow Service have been finalized, the Board will publish a 
final service description in a subsequent Federal Register notice, with 
additional information provided through existing Reserve Bank 
communication channels.
2. Expanded Operating Hours for Current Services
    The Board has further determined that the Federal Reserve should 
explore the expansion of hours for the Fedwire Funds Service and the 
National Settlement Service (NSS), up to 24x7x365, subject to 
additional analysis of relevant operational, risk, and policy 
considerations. The Board believes that expanded hours for the Fedwire 
Funds Service and NSS would be the most effective way to provide the 
liquidity management functionality described in the 2018 Notice and 
could provide additional benefits to financial markets broadly, beyond 
support for faster payments. Subject to the outcome of analyzing the 
relevant operational, risk, and policy considerations, the Board will 
seek public comment separately on plans to expand hours for the Fedwire 
Funds Service and NSS.

D. Organization of This Notice

    This notice is organized in two parts. Part One contains a high-
level discussion of the comments received by the Board in response to 
the 2018 Notice (Section II), an assessment of the planned FedNow 
Service pursuant to the requirements of the MCA and the Board's 
criteria for new services and major service enhancements (Section III), 
and a discussion of potential benefits of expanded service hours for 
the Fedwire Funds Service and NSS (Section IV).
    Part Two contains a service description of the planned FedNow 
Service, outlining the proposed features and functionality (Section V) 
and the Board's initial competitive impact analysis of the service 
(Section VI). The Board is seeking public comment on all aspects of 
this service.

Part One

II. Summary of Comments

    The Board received 405 comment letters in response to the 2018 
Notice.\21\ Several comment letters were signed by multiple parties, 
bringing the total number of entities responding to the 2018 Notice to 
812.\22\ Comments were submitted by a wide variety of stakeholders in 
the U.S. payment system corresponding to the following segments: small 
and midsize banks, large banks, individuals, consumer organizations, 
merchants, service providers, private-sector operators, fintech 
companies, trade organizations, and other interested parties.\23\ 
Overall, banks were the largest group of respondents, with small and 
midsize banks comprising approximately 60 percent of the total 
comments--the largest individual segment--and representing institutions 
from 34 states. Trade organizations submitted letters representing 
several commenter segments, including small and midsize banks, large 
banks, merchants, fintech companies, and service providers. Trade 
organization comments often aligned with those submitted individually 
by their members. However, some trade organization comments presented 
varied opinions based on disparate views within their membership, such 
as contrasting views among banks of different sizes.
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    \21\ The Board also received over 150 additional comment letters 
that suggested the Board should select a specific service or 
business as the provider of Federal Reserve services. The Board 
considered these comments to be outside the scope of its request for 
comment.
    \22\ Many of the comment letters signed by multiple parties 
represented small and midsize banks. The Board considered comment 
letters signed by multiple parties as a single response for the 
purposes of this notice, but the additional signatures are 
noteworthy in evaluating the commenters' perspectives and overall 
industry engagement on the Board's request for comment.
    \23\ ``Banks'' include any type of depository institution, such 
as commercial banks, savings banks, savings and loan associations, 
and credit unions. ``Service providers'' are entities, such as core 
payment processors, that provide payment services, processing, or 
operational and technical support to financial institutions. 
``Private-sector operators'' are entities that operate payment 
systems, such as the operator of the current private-sector RTGS 
service for faster payments and payment card networks. ``Other 
interested parties'' include payment standards organizations, a 
congressional member organization, research and academic groups, and 
a foreign central bank. For the purposes of this notice, a ``small 
bank'' is defined as having assets of less than $10 billion and a 
``large bank'' is defined as having assets of more than $50 billion, 
while a ``midsize bank'' is defined as having assets between $10 
billion and $50 billion.
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    The following subsections provide a summary of general themes from 
comments received in response to the 2018 Notice. A detailed discussion 
of specific themes raised by the commenters can be found in Sections 
III, IV, and V.\24\
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    \24\ In addition to addressing the potential actions raised by 
the Board, commenters addressed a number of other topics, for 
example, encouraging the Federal Reserve to review the applicability 
of existing regulations to faster payments and to continue serving 
as a leader for industry collaboration.
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A. Faster Payments

    Commenters provided feedback on topics broadly related to faster 
payments, in addition to the specific questions posed by the Board. A 
number of commenters noted that faster payments are likely to become a 
significant part of the nation's payment system in the future. Some 
commenters argued that the United States is lagging behind other 
nations with respect to payment innovation, noting that several 
countries have already implemented faster payment services. Other 
commenters, particularly small and midsize banks, noted that customer 
expectations are shifting towards the real-time capabilities of faster 
payments and that the ability to implement faster payment services for 
customers will affect the long-term viability of small and midsize 
banks. Several commenters also argued that widespread adoption of 
faster payments could improve financial inclusion, in addition to 
helping reduce fees that lower income households often face, such as 
overdraft and late fees.
    Approximately 90 commenters, from most commenter segments, 
addressed topics related to demand for faster payments in the United 
States, often focusing on whether demand would be sufficient to support 
the Federal Reserve's development of a 24x7x365 RTGS service.\25\ More 
than 70 of these commenters identified potential sources for such 
demand, with most expecting the greatest initial demand to come from 
low-dollar person-to-person payments

[[Page 39302]]

or consumer-to-business payments. Some of these commenters also noted 
the possibility of demand related to business payments, such as 
payroll, vendor payments, or benefit disbursement, with some noting 
that demand could vary across businesses of different sizes or types.
---------------------------------------------------------------------------

    \25\ These commenters included small and midsize banks, large 
banks, individuals, consumer organizations, merchants, service 
providers, fintech companies, trade organizations, and other 
interested parties.
---------------------------------------------------------------------------

B. Real-Time Gross Settlement of Interbank Obligations

    Nearly 150 commenters addressed whether RTGS is the appropriate 
strategic foundation for interbank settlement of faster payments.\26\ 
Of these, approximately 140 commenters from all segments agreed that 
RTGS is the appropriate strategic foundation for interbank settlement 
of faster payments. Approximately 10 commenters, from a number of 
segments, did not support RTGS as the strategic foundation for 
interbank settlement of faster payments.\27\
---------------------------------------------------------------------------

    \26\ Some commenters addressed RTGS as the appropriate strategic 
foundation for interbank settlement of faster payments without 
taking a position, typically citing a lack of consensus among their 
membership.
    \27\ These commenters were from the following segments: small 
and midsize banks, large banks, individuals, service providers, 
private-sector operators, and trade organizations.
---------------------------------------------------------------------------

    Of those commenters supporting RTGS as the appropriate strategic 
foundation, many echoed the considerations outlined in the 2018 Notice. 
Most notably, many of these commenters stated that, by matching the 
speed of settlement with the speed of payment, RTGS better mitigates 
interbank settlement risk compared with other settlement arrangements. 
A number of commenters further stated that the use of RTGS for 
interbank settlement of faster payments is consistent with industry 
expectations and aligns with the FPTF's criteria for an effective 
faster payment solution.\28\ Some commenters also noted that RTGS is 
the approach taken by other countries for interbank settlement of 
faster payments.
---------------------------------------------------------------------------

    \28\ In order to evaluate possible faster payment services, the 
FPTF developed a set of effectiveness criteria that addressed 
various features of a faster payment service. With respect to 
interbank settlement, the FPTF considered a faster payment service 
to be ``very effective'' if, among other things, interbank 
settlement occurs within 30 minutes of the completion of a faster 
payment for end users. See Faster Payments Task Force, ``Faster 
Payments Effectiveness Criteria,'' (January 26, 2016). Available at 
https://fedpaymentsimprovement.org/wp-content/uploads/fptf-payment-criteria.pdf.
---------------------------------------------------------------------------

    Commenters not supporting RTGS as the appropriate strategic 
foundation for faster payments argued that deferred settlement can 
similarly serve as an appropriate foundation for such payments. These 
commenters stated that, compared with an RTGS arrangement for faster 
payments, a deferred settlement arrangement has lower costs, is less 
complex for participating banks, and requires less liquidity.
    A few commenters, although supportive of RTGS as the appropriate 
strategic foundation for faster payments, expressed concern about the 
need for increased liquidity to conduct immediate settlement and avoid 
payments failing because of insufficient liquidity. Some commenters 
also stressed the importance of resiliency to mitigate RTGS service 
disruptions.

C. Federal Reserve RTGS Service and Liquidity Management Tool

    More than 350 commenters addressed whether the Federal Reserve 
should develop an RTGS service for faster payments.\29\ Approximately 
320 commenters, from all segments, supported the Federal Reserve 
developing an RTGS service for faster payments. Approximately 30 
commenters, mostly comprising large banks and private-sector operators, 
including many that have been involved in the recent development of a 
private-sector RTGS service for faster payments, were not supportive of 
the Federal Reserve's development of such a service.
---------------------------------------------------------------------------

    \29\ Approximately 50 additional commenters raised issues 
related to the Federal Reserve's development of an RTGS service for 
faster payments but did not take a position on whether the Federal 
Reserve should offer such a service. Many of these commenters cited 
a lack of consensus among their membership, while others advocated 
for enhancement of current Federal Reserve payment services but did 
not take a position on the provision of an RTGS service for faster 
payments.
---------------------------------------------------------------------------

    Commenters that supported the Federal Reserve's provision of an 
RTGS service for faster payments pointed to a number of factors 
underlying their support. Many commenters argued that the Federal 
Reserve would provide equitable access to banks of all sizes and 
facilitate nationwide reach for faster payments. Many commenters also 
discussed the importance of safety for faster payments, stating that 
the Federal Reserve is a trusted entity with a record of stability 
during periods of crisis and that a Federal Reserve RTGS service for 
faster payments could enhance resiliency and reduce risks in the 
payment system. Some commenters discussed the potential efficiency 
benefits of such a service, including increased competition, decreased 
market concentration, lower costs, and greater innovation.
    Commenters not supportive of the Federal Reserve developing an RTGS 
service for faster payments argued that such a service was unnecessary 
given actions taken by the private sector, including the recent 
development of a private-sector RTGS service for faster payments. 
Several of these commenters specifically questioned whether the Federal 
Reserve could meet the Board's criteria for the provision of new 
services.\30\ Other commenters argued that the Federal Reserve's 
decision to consider an RTGS service for faster payments is slowing the 
adoption of faster payments. These commenters argued that some industry 
participants may decide not to offer faster payments until after a 
final decision from the Federal Reserve or may further wait until after 
implementation of a Federal Reserve service, in the event of such a 
decision.
---------------------------------------------------------------------------

    \30\ See ``The Federal Reserve in the Payments System,'' supra 
note 18. The Board's criteria for new services and related comments 
are discussed in Section III.
---------------------------------------------------------------------------

    Approximately 230 commenters addressed whether the Federal Reserve 
should develop a liquidity management tool.\31\ Approximately 225 
commenters, from all segments, supported the Federal Reserve developing 
such a tool. Fewer than 5 commenters were not supportive of the Federal 
Reserve developing a liquidity management tool.\32\
---------------------------------------------------------------------------

    \31\ At least one additional commenter raised issues related to 
a liquidity management tool but did not express a view about whether 
the Federal Reserve should offer such a tool.
    \32\ These commenters were from the following segments: private-
sector operators, fintech companies, and other interested parties.
---------------------------------------------------------------------------

    Commenters that supported development of a liquidity management 
tool discussed the importance of liquidity management in RTGS services 
for faster payments. Several commenters indicated that such a tool 
could help with managing liquidity in the recently introduced private-
sector RTGS service. Commenters that did not support the Federal 
Reserve developing a liquidity management tool indicated that the 
private sector could develop methods on its own to manage liquidity for 
faster payments.

III. Assessment of the FedNow Service

    In 1984, the Board established criteria for the consideration of 
new or enhanced Federal Reserve payment services in its policy ``The 
Federal Reserve in the Payments System.'' \33\ The policy incorporates 
the cost recovery requirements of the MCA and the MCA's objective of 
achieving an adequate level of service nationwide. In expressing the 
Board's overall

[[Page 39303]]

expectations for the Federal Reserve's provision of payment services, 
the policy takes into account longstanding public policy objectives to 
promote the safety and efficiency of the payment system and to ensure 
the provision of payment services to banks nationwide on an equitable 
basis, and the importance of achieving these objectives in an 
atmosphere of competitive fairness.
---------------------------------------------------------------------------

    \33\ See ``The Federal Reserve in the Payments System,'' supra 
note 18. As stated in the policy, the Board, in its sole discretion, 
determines when the process outlined in the policy is applicable and 
makes all decisions related to the process.
---------------------------------------------------------------------------

    The policy specifically addresses the introduction of new services 
or major service enhancements in light of the Board's overall 
expectations and requires all of the following criteria to be met:
     The service should be one that other providers alone 
cannot be expected to provide with reasonable effectiveness, scope, and 
equity. For example, it may be necessary for the Federal Reserve to 
provide a payment service to ensure that an adequate level of service 
is provided nationwide or to avoid undue delay in the development and 
implementation of the service. (Other Providers Criterion)
     The Federal Reserve must expect that its providing the 
service will yield a clear public benefit, including, for example, 
promoting the integrity of the payments system, improving the 
effectiveness of financial markets, reducing the risk associated with 
payments and securities-transfer services, or improving the efficiency 
of the payments system. (Public Benefits Criterion)
     The Federal Reserve must expect to achieve full recovery 
of costs over the long run. (Cost Recovery Criterion)
    The following sections provide a detailed assessment of the FedNow 
Service under these three criteria. The assessment uses a similar set 
of measures to evaluate each criterion. In particular, the Other 
Providers Criterion and the Public Benefits Criterion both consider 
measures related to the Federal Reserve's broader objectives of 
promoting the accessibility, safety, and efficiency of the nation's 
payment system. However, the Board's policy requires considering 
whether public policy goals would be achieved according to these 
measures in two different situations: one where a service may be 
provided by other providers alone (Other Providers Criterion), and a 
second where the Federal Reserve develops a new service or major 
service enhancement (Public Benefits Criterion).
    In the assessment that follows, the Board applies the common set of 
measures first in evaluating the Other Providers Criterion and then 
again in evaluating the Public Benefits Criterion. Such an approach 
creates overlap and some repetition in the analysis of each criterion. 
The Board believes that this approach is necessary to ensure a 
comprehensive assessment. Specifically, this approach allows a more 
systematic assessment of whether, relative to other providers, the 
Federal Reserve's provision of a service can be expected to advance 
desirable outcomes in the payment system that are consistent with 
public policy goals and might otherwise not be achieved by other 
providers alone.
    The Board's policy also requires a forward-looking evaluation of 
the probable or likely future state of the payment system over the long 
run, with or without Federal Reserve action.\34\ Therefore, when 
assessing new services or major service enhancements, the Board focuses 
on expected long-term outcomes and does not require a determination 
that each of the criteria is satisfied at present or will be with 
certainty in the future. Requiring such certainty would prevent the 
Federal Reserve from acting until after negative consequences occur, 
making any detrimental effects more difficult, if not impossible, to 
remedy. For example, as noted in the Board's policy, it may be 
necessary for the Federal Reserve to provide a payment service to avoid 
an undue delay in the development and implementation of the service. 
Waiting until undue delay had already occurred, however, would render 
ineffective the Federal Reserve's objective of providing such a service 
to facilitate its timely development and implementation.
---------------------------------------------------------------------------

    \34\ The Board's focus on expected long-term outcomes predates 
both the MCA and the Board's policy for assessing new services or 
major service enhancements. For example, the Federal Reserve 
undertook efforts to pilot ACH services in the late 1960's because 
of the expected long-term potential of those services for improving 
the payment system. These services were fully operational in the 
early 1970s and were intended, in part, to address growing paper 
check volumes, which the Board expected would eventually exceed 50 
billion items 15 years later, in the mid-1980s.
---------------------------------------------------------------------------

    A. Other Providers Criterion: The service should be one that other 
providers alone cannot be expected to provide with reasonable 
effectiveness, scope, and equity. For example, it may be necessary for 
the Federal Reserve to provide a payment service to ensure that an 
adequate level of service is provided nationwide or to avoid undue 
delay in the development and implementation of the service.
    The Board's Other Providers Criterion balances the important role 
that the private sector plays in providing payment services to the 
public with the Federal Reserve's overall mission to promote the 
accessibility, safety, and efficiency of the nation's payment system. 
Therefore, the Board first considers whether the payment services that 
other providers alone can be expected to offer sufficiently advance the 
Federal Reserve's overall objectives in the payment system absent any 
Federal Reserve action.\35\ In the context of the FedNow Service, the 
Board's assessment of this criterion involves consideration of whether 
other providers alone can be expected to offer RTGS services for faster 
payments that advance the Federal Reserve's objectives according to the 
measures outlined below.
---------------------------------------------------------------------------

    \35\ As noted previously, the Federal Reserve has already taken 
actions to support the ability of other providers to offer RTGS 
services for faster payments. In particular, the Board approved in 
2017 guidelines for evaluating requests for joint accounts at the 
Reserve Banks intended to facilitate settlement between and among 
banks participating in private-sector payment systems for faster 
payments. One such account has been provided to a private-sector 
operator. Without these actions, other providers alone would be 
unable to provide RTGS services for faster payments, supported by a 
joint account at a Reserve Bank, that reproduce, as closely as 
possible, the risk-free nature of settlement in central bank money.
---------------------------------------------------------------------------

1. Relevant Measures
    The Board's policy for assessing new services or major service 
enhancements considers three measures to evaluate expected outcomes 
under the Other Providers Criterion: Scope, equity, and effectiveness.
a. Scope and Equity
    The measures of scope and equity in the Board's Other Providers 
Criterion reflect the Federal Reserve's objective of ensuring the 
adequate provision of payment services nationwide on an equitable 
basis. Taken together, these measures reflect the Federal Reserve's 
broader mission of promoting accessibility in the nation's payment 
system, as also considered in the Public Benefits Criterion.
    The measure of scope takes into account the Federal Reserve's 
policy goal, and an objective of the MCA, to achieve an adequate level 
of payment services nationwide. Providing payment services that are 
accessible to virtually all U.S. banks benefits all payment system 
participants by facilitating ubiquitous payment services and allowing 
the full realization of network effects.\36\ Therefore, the Other 
Providers Criterion includes consideration of whether other providers 
alone can be expected to provide a service that is accessible to banks 
nationwide and on

[[Page 39304]]

terms that are equitable and facilitate broad participation.
---------------------------------------------------------------------------

    \36\ When network effects are present, the value of a service to 
each user increases as the total number of users grows.
---------------------------------------------------------------------------

    The measure of equity reflects the Federal Reserve's objective to 
ensure the provision of payment services to banks on an equitable 
basis. The availability of payment services to banks on an equitable 
basis promotes competition and a level playing field in the payment 
industry overall. Equity comprises a number of elements, including 
whether a service is broadly accessible to banks on reasonable terms 
and in comparable quality, whether a service is provided in a 
transparent manner, and whether a service has adequate measures in 
place to take into account the interests and needs of virtually all 
industry stakeholders. Moreover, equity considerations can affect 
banks' decisions to join a payment service, which can feed back into 
the measure of scope.
b. Effectiveness
    The measure of effectiveness addresses the extent to which other 
providers alone can be expected to advance desirable outcomes in the 
U.S. payment system. In the context of the Other Providers Criterion, 
effectiveness can be viewed through the elements of safety and 
efficiency, key objectives that the Federal Reserve seeks to promote in 
the U.S. payment system.
    The element of safety reflects the Federal Reserve's objective to 
promote the safe functioning of the U.S. payment system.\37\ The safety 
of a payment system depends on many factors, including the security of 
individual transactions, the general resiliency of end-user services, 
and resiliency mechanisms for addressing specific events, such as bank 
failures, operational outages, or natural disasters and other systemic 
events. A safe payment system is crucial to economic growth and 
financial stability because the effective operation of markets for 
virtually every good and service is dependent on the smooth functioning 
of the nation's banking and payment systems.
---------------------------------------------------------------------------

    \37\ The element of safety may be referred to as integrity in 
other contexts.
---------------------------------------------------------------------------

    The element of efficiency reflects the Federal Reserve's objective 
to promote the efficient functioning of the U.S. payment system.\38\ 
Efficiency encompasses a number of factors, including whether a service 
is provided in a cost-efficient manner, whether it results in 
efficiency gains brought about by competition and innovation, and 
whether it achieves sufficient scope to realize the efficiency benefits 
of network effects. An efficient payment system facilitates and 
encourages economic activity, whereas an inefficient payment system can 
result in frictions and costs that could hinder economic activity and 
dampen growth.
---------------------------------------------------------------------------

    \38\ Improvements in the efficiency of the payment system were a 
central motivation when Congress originally established an 
operational role in the payment system for the Federal Reserve. 
Congress's decision to make the Federal Reserve an active 
participant in the payment system when it passed the Federal Reserve 
Act in 1913 was, in part, a response to inefficiencies that resulted 
from the circuitous routing of checks in the early 1900s to avoid 
presentment fees.
---------------------------------------------------------------------------

2. Public Comments
a. Scope and Equity
    More than 200 commenters expressed views on whether other providers 
alone will provide RTGS services for faster payments with reasonable 
scope and equity.\39\ Approximately 175 commenters, representing a wide 
variety of distinct interests, raised concerns that other providers 
alone will not be able to implement services that can achieve 
nationwide scope or to provide broadly accessible RTGS services for 
faster payments on an equitable basis.\40\ In contrast, approximately 
30 commenters, mostly comprising large banks and private-sector 
operators, expressed views indicating that the private sector can 
provide RTGS services for faster payments built for banks of all sizes 
in the United States with reasonable scope and equity.
---------------------------------------------------------------------------

    \39\ Approximately 35 additional commenters raised issues 
related to scope and equity but did not express a view about whether 
the other providers alone will be able to achieve nationwide scope 
or provide services with reasonable equity.
    \40\ These commenters included small and midsize banks, 
individuals, consumer organizations, merchants, fintech companies, 
service providers, and trade organizations.
---------------------------------------------------------------------------

    Many commenters focused on the private-sector RTGS service for 
faster payments, established in November 2017 and owned by the largest 
banks in the United States. Commenters that expressed a critical view 
of this service argued that a private-sector operator without the 
experience or infrastructure necessary for working with the majority of 
banks in the United States would face substantial challenges in 
establishing new connections and relationships with such banks. Some of 
these commenters argued that the process of doing so could take many 
years, with a few commenters suggesting it could take at least a decade 
or more, and others questioning whether such connections and 
relationships would ever be possible. These commenters frequently 
argued that a private-sector service, particularly one provided by an 
operator that they believe has been historically focused on serving 
large banks, will not adequately account for the unique challenges 
facing smaller banks and may struggle to scale its services to allow 
access for the nation's more than 10,000 banks. Some commenters also 
expressed doubt that use of service providers, acting as agents for 
banks that do not wish to connect to the service directly, will allow 
private-sector services to achieve nationwide reach.
    Some commenters also indicated that perceived equity concerns may 
further affect the ability of private-sector RTGS services to achieve 
reasonable scope. In particular, as described later, approximately 100 
commenters, mostly from small and midsize banks and trade 
organizations, raised equity concerns related to private-sector RTGS 
services, indicating they may avoid joining such services in light of 
those concerns.
    Other commenters, comprising private-sector operators and large 
banks, argued that the existing private-sector RTGS service for faster 
payments was on course to reach almost half of U.S. deposit accounts by 
the end of 2018. These commenters further stated that the service has a 
credible plan for reaching near ubiquity at the end of 2020 by, among 
other things, using service providers to facilitate participation of 
small and midsize banks. These commenters also argued that the service 
should have time to demonstrate its ability to achieve nationwide 
scope. These commenters further argued that, by publicly announcing the 
possibility of developing an RTGS service for faster payments, the 
Federal Reserve has stalled progress that the service could otherwise 
make towards achieving ubiquity.
    Finally, some commenters expressed the view that, if a single 
private-sector operator were the only provider of a nationwide RTGS 
service in the United States, this outcome could adversely affect the 
environment for private-sector innovation and the development of new 
use cases. These commenters argued that an RTGS operator with a 
dominant market position would have substantial impact on the emergence 
of potentially innovative uses of faster payments through its policies 
and prices, such that it could limit uses of faster payments that were 
not in its business interest or the interest of its owners. In 
contrast, other commenters argued that the existing private-sector RTGS 
service for faster payments has the ability to support a wide variety 
of use cases and can serve as a platform for innovation in end-user 
payment services.
    With respect to equity, many small and midsize banks, as well as 
commenters that would be end users of

[[Page 39305]]

faster payment services settled via RTGS, such as individuals and 
merchants, expressed concern that the private-sector RTGS service is 
unlikely to be delivered in an equitable manner. Small and midsize 
banks in particular argued that it is likely that smaller banks, which 
are not owners of the private-sector service, will be unable to gain 
access to the service on reasonable terms and in a transparent manner 
over the long run. Some commenters noted the stated commitment of the 
service's operator to address equity concerns through its pricing and 
access policies but questioned whether it will maintain these 
commitments in the future, arguing that doing so may not be in the 
long-term business interest of the operator's owner banks. In 
particular, commenters questioned whether the operator would maintain a 
uniform pricing structure, especially if it achieves a dominant market 
position.
    Several small and midsize banks expressed further concerns, 
unrelated to pricing, that an RTGS service for faster payments 
established by competitors with a business profile different than their 
own will not provide them with equitable service. Many smaller banks 
argued that the service's operator will not understand their business 
needs and will be unlikely to take into account their interests, 
particularly if they are excluded from its governance processes. For 
example, some commenters argued that non-owner banks have no meaningful 
role in the service's rulemaking or pricing decisions compared with the 
service's owner banks. In addition, several commenters expressed 
concerns that joining the service could grant their competitors a 
competitive advantage by allowing them access to detailed information 
about their payment operations and customer base.
    Other commenters, mostly private-sector operators and large banks, 
argued that the operator of the private-sector RTGS service for faster 
payments has demonstrated its willingness to accommodate the interests 
and needs of a wide variety of prospective participants and has taken 
concrete steps to facilitate near-universal access on equitable terms. 
In particular, these commenters emphasized that the service's pricing 
terms, including a uniform pricing structure without minimum volume 
requirements or volume discounts common in other payment systems, do 
not favor any particular type of bank and demonstrate the equitable and 
impartial provision of the service. These commenters also argued that 
the service's use of service providers facilitates access for banks of 
all sizes and promotes equitable access to the service. Several of 
these commenters also stated that the service operates in a transparent 
manner, for example, by making its rules publicly available. Finally, 
these commenters noted that the service's operator plans to incorporate 
input from small and midsize banks, as well as other stakeholders, 
through advisory panels and other types of engagement, and argued that 
such measures should be sufficient to assure non-owner banks that they 
will receive access to the service on an equitable basis, today and in 
the future.\41\
---------------------------------------------------------------------------

    \41\ As discussed in detail later, the service's operator 
announced changes in early 2019 intended to reinforce its intention 
to be inclusive and equitable.
---------------------------------------------------------------------------

b. Effectiveness
    Overall, more than 200 commenters raised issues related to the 
safety and efficiency of settlement arrangements for faster payments. 
Approximately 180 commenters, representing a wide variety of distinct 
interests, raised topics that indicate safety or efficiency concerns 
may result from other providers alone providing settlement arrangements 
for faster payments.\42\ In contrast, around 30 commenters, comprising 
large banks, trade organizations, and private-sector operators, 
indicated that the provision of such services by other providers alone 
would promote a safe and efficient payment system.
---------------------------------------------------------------------------

    \42\ These commenters included small and midsize banks, 
individuals, consumer organizations, merchants, fintech companies, 
service providers, trade organizations, and other interested 
parties.
---------------------------------------------------------------------------

    Whether RTGS services for faster payments offered by other 
providers alone will be reasonably effective in promoting the 
efficiency of the U.S. payment system depends in large part on whether 
such services achieve nationwide reach. As discussed in the context of 
scope, many commenters expressed concerns about the ability of private-
sector RTGS services for faster payments to achieve nationwide reach, 
which commenters suggested would prevent an RTGS infrastructure from 
fully realizing potential efficiency benefits.\43\
---------------------------------------------------------------------------

    \43\ Such benefits would stem primarily from the full 
realization of network effects with virtually all banks 
participating in the RTGS infrastructure for faster payments.
---------------------------------------------------------------------------

    Many commenters also addressed potential efficiency concerns if an 
RTGS infrastructure for faster payments attains nationwide reach but is 
provided by a single dominant private-sector operator. In particular, 
approximately 120 commenters, representing a wide variety of distinct 
interests, noted various ways in which a dominant private-sector RTGS 
operator could use its market power to harm efficiency.\44\ Many 
commenters noted that payment markets with either limited competition 
or a dominant private-sector operator often exhibit monopolistic 
pricing. Other commenters expressed concerns that, in the long term, 
evolution of such a service could be driven primarily by the desire of 
the dominant operator to retain its position in the market and 
forestall entry of other potential providers, to the detriment of 
competition and efficiency gains that might result from competition. 
Some commenters, particularly individuals and merchants, specifically 
pointed to issues with payment cards as examples of challenges that the 
market may face with a dominant operator. For example, these commenters 
raised concerns about high prices and impediments to competition and 
innovation that they believe occur in the payment card market.
---------------------------------------------------------------------------

    \44\ These commenters included small and midsize banks, 
individuals, consumer organizations, merchants, fintech companies, 
service providers, and trade organizations.
---------------------------------------------------------------------------

    Approximately 30 commenters, mostly large banks and private-sector 
operators, argued that a single provider of RTGS services for faster 
payments would be able to serve the market adequately and that the 
presence of multiple RTGS services could lead to market inefficiencies 
such as fragmentation and increased connection costs. As discussed in 
the context of scope, these commenters argued that the private-sector 
RTGS service for faster payments is on course to achieve nationwide 
reach, which would allow it to realize efficiency gains through 
participants' ability to exchange payments with a wide range of 
counterparties. A few of these commenters argued that, should the 
service achieve nationwide reach, additional entrants would not be able 
to generate incremental benefits to justify their setup and operational 
costs from an efficiency perspective. Many of these commenters further 
expressed concerns that should multiple RTGS services for faster 
payments enter the market, but not be able to interoperate, banks would 
either need to incur high costs of connecting to multiple RTGS services 
or would need to choose to connect to just one of multiple RTGS 
services, resulting in an inefficient, fragmented faster payment 
market. These commenters argued that, as a result, a single provider is 
the most efficient way to provide RTGS services for faster payments.
    With respect to innovation in a market with a single dominant 
private-

[[Page 39306]]

sector RTGS service for faster payments, some commenters argued that a 
lack of competition would curtail innovation in the nascent market for 
faster payments, resulting in higher costs and an inferior product. 
These commenters expressed the view that the provider would innovate to 
meet the needs of a narrow group of banks at the expense of smaller 
banks or certain end users. In contrast, other commenters expressed the 
view that the private sector is best positioned to foster innovation in 
faster payments, arguing that the private sector can quickly respond to 
market demand, in contrast to public-sector entities that need to 
follow a formal process to propose and implement certain types of 
operational changes. These commenters pointed to the clearing 
capabilities of the private-sector RTGS service for faster payments and 
its ability to support a variety of payment types, such as business-to-
business or consumer-to-business payments, arguing that the service is 
a platform for innovation.
    Many commenters expressed safety and resiliency concerns about the 
potential outcome of a nationwide RTGS infrastructure for faster 
payments being provided by just one private-sector operator, 
particularly as the prominence of faster payments grows over the long 
term. Many commenters specifically expressed concerns about the market 
being served by a single private-sector provider in the event of a 
systemic event or natural disaster. Several commenters argued that such 
an operator would be ineffective at providing resiliency and stability 
to the faster payment ecosystem in times of crisis, particularly if the 
operator did not have previous experience managing disruptions that may 
occur across a wide range of banks or geographic areas. Some commenters 
expressed concern that a single private-sector operator would serve as 
a single point of failure in the faster payment market. Finally, some 
commenters expressed concerns that, if private-sector RTGS services for 
faster payments are unable to achieve nationwide reach, some banks may 
be unable to offer faster payment services to their customers 
altogether. The commenters further expressed concern that such a result 
would lead customers to adopt services provided outside of the banking 
industry, involving institutions that the commenters viewed as 
insufficiently regulated and potentially unsafe.
    A few commenters, mostly from large banks and private-sector 
operators, noted that the operator of the private-sector RTGS service 
provides other payment services that have proven to be resilient in 
times of stress, including the financial crisis and natural disasters. 
These commenters stated that the operator has similarly designed its 
RTGS service for faster payments to be highly resilient.
3. Board Analysis
    The Board finds that substantial uncertainty exists about the long-
term success of RTGS services for faster payments, despite actions 
already taken by the private sector. As articulated in the 2018 Notice, 
the Board continues to believe that RTGS is the appropriate strategic 
foundation for interbank settlement of faster payments. However, 
certain challenges may prevent other providers alone from implementing 
a nationwide RTGS infrastructure for faster payments that provides a 
basis for ubiquitous, safe, and efficient faster payments in the United 
States.
    The magnitude of the task involved in achieving any large-scale 
improvement in the U.S. payment system, such as establishing a new 
foundational infrastructure for faster payments, is significant. The 
banking industry plays a key role in the U.S. payment system, which 
necessitates the industry's involvement in payment system 
improvements.\45\ However, the United States has a highly complex 
banking system with more than 10,000 depository institutions, including 
commercial banks, savings banks, savings and loan associations, and 
credit unions.\46\ As a result, the U.S. banking system (and, by 
extension, the payment ecosystem) is extremely diverse, with a wide 
variety of market participants and stakeholders that have heterogeneous 
circumstances, interests, and needs.
---------------------------------------------------------------------------

    \45\ In the United States, deposits in accounts with banks 
comprise the monetary asset that is most widely held by the public 
to conduct payments. As of June 2019, the value of transferable 
deposits held by the public, including demand deposits and other 
checkable deposits, was $2.17 trillion, while the value of currency 
in circulation outside banks was $1.66 trillion. See Board of 
Governors of the Federal Reserve System, ``Money Stock and Debt 
Measures--H.6 Release, Table 5,'' (July 11, 2019). Available at 
https://www.federalreserve.gov/releases/h6/current/default.htm.
    \46\ As noted previously, these institutions vary greatly in 
terms of size, level of technical sophistication, and operational 
practices, as well as the customers and communities served. 
Institutions also vary with respect to the connections and 
relationships that they have with payment operators, service 
providers, and other intermediaries, such as bankers' banks and 
corporate credit unions.
---------------------------------------------------------------------------

    This diversity inherently creates significant coordination 
challenges that, along with the high fixed costs necessary to develop 
RTGS services for faster payments, are likely to limit the number and 
type of entrants in the market.\47\ Indeed, only one private-sector 
RTGS service for faster payments has been established in the nearly six 
years since the Federal Reserve launched the SIPS initiative and 
articulated the goal of a ubiquitous, safe, and efficient faster 
payment system.\48\ Comments received by the Board support the 
expectation that this service is likely to remain the sole private-
sector provider of RTGS services for faster payments in the United 
States.
---------------------------------------------------------------------------

    \47\ Specifically, with respect to coordination challenges, the 
diverse nature of the nation's banking system results in disparate 
operational and use-case needs, which can be difficult to 
accommodate. These disparate views and the large number of parties 
holding them make coordination challenging for any single entity 
attempting to establish a service that represents the interests and 
needs of diverse institutions. As a result, new services are likely 
to be developed by small groups of institutions with closely aligned 
interests, which may make such services less attractive to other 
types of institutions. Coordination between numerous institutions is 
also necessary to obtain funding because of the high fixed costs 
typically involved in the development of a new payment service. Such 
coordination is especially challenging when numerous institutions 
with limited resources try to assemble sufficient funds to develop 
their own services. As a result, new services are likely to be 
developed by small groups of institutions with significant 
resources.
    \48\ Faster payment services were established even earlier in 
some jurisdictions internationally. For example, the Faster Payment 
Service in the United Kingdom began operating in 2008, nearly 10 
years before the U.S. payment industry began attempting to establish 
broadly accessible faster payment services. See ``Fast payments--
Enhancing the speed and availability of retail payments,'' supra 
note 1.
---------------------------------------------------------------------------

    Given this likely outcome, and in light of the comments received, 
historical context, and economic analysis, the Board does not expect 
that other providers alone will provide an RTGS infrastructure for 
faster payments with reasonable effectiveness, scope, and equity. Two 
issues in particular present significant obstacles: Achieving 
nationwide scope on an equitable basis, and efficiency and safety 
issues likely to arise in a single-provider market.
a. Scope and Equity
    Achieving nationwide scope has been a recurring challenge for the 
U.S. payment system, and, to date, no single private-sector payment 
service provider of traditional payment services, such as check, ACH, 
funds transfer, or payment card services, has done so alone. Although 
the importance of network effects may give operators an incentive to 
pursue broad reach for new payment services, the cost and difficulty of 
reaching virtually all banks in an environment as complex as the U.S. 
banking industry means that many operators are unlikely to invest the 
resources and effort necessary to achieve true nationwide scope. 
Extending access to a few thousand

[[Page 39307]]

banks, let alone the more than 10,000 diverse depository institutions 
necessary to achieve true nationwide scope, is especially costly and 
time-consuming for operators with limited relationships with and 
connections to these institutions. For this reason, private-sector 
operators have historically tended to concentrate on providing payment 
services to a subset of institutions, and existing payment systems, 
such as those for checks, ACH payments, funds transfers, and payment 
cards, all achieved nationwide reach with multiple providers of payment 
and settlement services.
    A single operator of a new service aiming to achieve nationwide 
reach is likely to find that establishing costly new connections and 
providing adequate support to the significant number of smaller banks 
in the U.S. market is much harder than doing so for the few hundred 
largest banks or even a few thousand institutions. The benefit to a 
private-sector operator of ensuring access to the ``long tail'' of 
small banks in the United States is unlikely to outweigh the cost that 
it would incur to reach them. Given the small number of deposit 
accounts that each additional small bank would bring to the service, 
the diminishing returns generated by onboarding and supporting these 
banks are unlikely to offset the cost of doing so. Ultimately, the 
cost-benefit calculation of a single private-sector operator could lead 
it to forgo pursuing true nationwide scope, particularly if 
establishing new relationships with and connections to the large number 
of small banks proves more challenging or costly than anticipated.
    The recently established private-sector RTGS service endeavors to 
achieve nationwide reach by extending access to banks of all sizes. 
Although the service can attain substantial reach across deposit 
accounts simply through connections with all of its large owner banks, 
measuring reach in terms of deposit accounts does not accurately 
reflect true reach across the nation's substantial number of smaller 
banks. Attaining such reach across deposit accounts through a small 
number of large banks would still leave the vast majority of the 
nation's 10,000 banks without access to the service. In fact, by the 
middle of 2019, banks that had joined the service represented less than 
one percent of the institutions in U.S. banking system.
    For a number of reasons, it is unlikely that the private-sector 
RTGS service for faster payments alone will reach the thousands of 
small banks necessary to yield nationwide scope, even in the long term. 
Given its traditional focus on providing services primarily to a small 
number of large banks in the United States, the operator of the 
private-sector RTGS service would need to develop significant expertise 
to handle the large number and substantial diversity of U.S. banks. It 
would further need to expand and adapt its logistical support, 
currently geared towards its existing bank customers, for smaller and 
more diverse banks. Although the service plans to use service providers 
to extend reach to small and midsize banks, many commenters expressed 
concerns that building such connections to the service will 
nevertheless take many years. This problem may be exacerbated by the 
fact that many small and midsize banks do not currently have 
relationships with the service providers that work with the private-
sector RTGS service or any relevant service provider.
    The challenge of achieving nationwide scope for an RTGS 
infrastructure is likely to be further exacerbated by concerns of 
numerous commenters, representing large segments of the U.S. payment 
market, about whether access extended by the private-sector RTGS 
service for faster payments will be equitable. The operator of the 
service has looked to address these concerns by taking concrete steps 
to assure market participants of equitable treatment, now and in the 
future. In particular, it has publicly stated its commitment to a 
transparent and uniform pricing regime. In addition, the private-sector 
operator has taken measures to incorporate perspectives from non-owner 
stakeholders in its governance processes, including recent measures 
that involved adding seats for community banks and credit unions to the 
service's business committee and announcing business principles 
intended to guide the operation and maintenance of the service.\49\
---------------------------------------------------------------------------

    \49\ On March 28, 2019, the service's operator announced that it 
had added four seats for community banks and credit unions to the 
service's business committee in an effort to expand the type and 
number of banks providing input to the service. At the same time, 
the service's operator also announced a set of business principles 
intended to guide the operation and maintenance of the service as 
long as the service remains the nation's sole provider of faster 
real-time interbank clearing and settlement.
    The principles include, for example, making rules publicly 
available, periodically soliciting input on rules, disclosing major 
decisions to relevant stakeholders, maintaining flat fees that do 
not include volume discounts, and making the service available to 
all institutions that meet the service's eligibility requirements. 
Available at https://www.theclearinghouse.org/payment-systems/articles/2019/03/-/media/080a875636784eec87bfc13ddf0ef6a4.ashx.
---------------------------------------------------------------------------

    Despite these steps, equity concerns may persist for a number of 
reasons. First, although the operator has stated its commitment to 
equitable pricing, nonprice measures can be equally important in 
determining whether services are provided equitably. For instance, an 
RTGS service for faster payments designed with a focus on large, 
technologically sophisticated banks may not be easily adopted by 
smaller banks, regardless of pricing structure.\50\ Second, a service 
owned by a small group of institutions with closely aligned interests 
will confront persistent concerns from other market participants that 
the service will not equitably represent the interests and needs of the 
broader payment industry. In particular, potential participants in the 
service may have concerns, as expressed by commenters, that its 
operator will have incentives to take actions that favor its owner 
banks at the expense of non-owner banks.\51\
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    \50\ Examples of RTGS design features that could disadvantage 
smaller, less sophisticated banks with standard operating hours 
include the need to prefund separate settlement accounts on a 
24x7x365 basis, as well as reliance on 24x7x365 computer-to-computer 
connections that are commonly used by larger banks with significant 
payment volume.
    \51\ Such a possibility could reflect what is known as 
``vertical foreclosure.'' Under vertical foreclosure, the operator 
of an RTGS service for faster payments, as the provider of a key 
input into banks' provision of payment services to their customers, 
may have an incentive to limit access to non-owner banks in order to 
allow its owner banks to attract customers and gain market share. 
Although such an operator has countervailing incentives, 
particularly early on, to allow broad access to the service in order 
to increase its value through network size, a more established 
service may be more likely to limit equitable access to non-owner 
banks, especially if the service does not face direct competition 
from other service providers.
---------------------------------------------------------------------------

    Concerns about future treatment may be particularly pronounced if 
it is perceived that the operator could alter its current commitments 
to equitable access in response to changing market conditions, such as 
the operator achieving a dominant position in the market for RTGS 
services for faster payments or, alternatively, facing the increased 
prospect of competition from other parties. These concerns may be 
especially persistent if such commitments can be changed unilaterally 
and are not subject to a public and transparent process whereby all 
interested parties have the opportunity to provide input.
    Ultimately, these concerns about the ability to access the private-
sector RTGS service for faster payments on an equitable basis over the 
long run are likely to cause significant uncertainty among small and 
midsize banks about the value of connecting to the service. This 
uncertainty may cause small and midsize banks to choose not to join the

[[Page 39308]]

service and to consider instead alternative non-RTGS-based arrangements 
for faster payments. The result would only further complicate the 
challenges that the private-sector RTGS service will face in achieving 
nationwide reach.
b. Effectiveness
    Economic analysis, historical context, and the comments received 
all identify market structure, the number of providers in the market, 
and the nature of competition between those providers as key drivers of 
effectiveness, as viewed through the lens of safety and efficiency. 
Competition generates incentives for firms to offer products that 
broadly appeal to customers, at prices close to the cost of making 
those products, and to continually innovate and improve their products 
in the hope of attracting customers from their competitors. Compared 
with firms facing competition, a monopoly firm can charge higher 
prices, causing customers to pay more than the actual cost and to buy 
less than is socially desirable. Without competitors, a monopoly firm 
can also limit supply to certain segments of the market. Finally, 
customers who can only buy a product from one firm may have no choice 
but to accept products, even if they are lower quality. Economic theory 
and real-world experience both demonstrate that, although setting up 
and operating additional firms is often costly, the resulting 
competition leads to societal efficiency gains that outweigh such 
costs, generating outcomes that are better for the public than if a 
single firm serves a market.\52\
---------------------------------------------------------------------------

    \52\ For example, in its 2016 report, the GAO found that 
competition by the Federal Reserve in payment markets has generally 
had a positive impact, with benefits that include lowered cost of 
processing payments for end users. See ``Federal Reserve's 
Competition with Other Providers Benefits Customers, but Additional 
Reviews Could Increase Assurance of Cost Accuracy,'' supra note 5.
    From an economic perspective, an exception to the efficiency-
through-competition argument is a ``natural monopoly.'' In this 
situation, the cost of setting up and operating a firm is so high 
that it can be more efficient for a single firm to supply the whole 
market, although achieving efficiency usually requires that the 
natural monopolist be regulated. With respect to such regulation of 
payment systems, as described previously, the Federal Reserve does 
not have plenary regulatory or supervisory authority over the U.S. 
payment system.
---------------------------------------------------------------------------

    These considerations are important in the context of the market for 
RTGS services for faster payments, which is likely to involve a single 
private-sector provider, for reasons discussed previously. Although a 
single-provider market structure avoids duplicating the substantial 
development and operating costs of additional RTGS services, it is 
likely to have a detrimental effect on the efficiency and safety of the 
faster payment market. As described earlier, a likely market outcome is 
that only a portion of banks in the United States would actually 
connect to the sole private-sector RTGS service. In such a scenario, 
the remaining, likely smaller, banks would either not join any faster 
payment services or would explore alternative arrangements, such as 
services based on a deferred settlement model.\53\ The resulting 
fragmentation of the end-user faster payment market between those end 
users with access to RTGS-based faster payment services, those with 
access to faster payment services based on deferred settlement, and 
those without any access to faster payment services through their banks 
could prevent end users and the U.S. payment industry as a whole from 
realizing fully the benefits associated with nationwide RTGS-based 
faster payments.
---------------------------------------------------------------------------

    \53\ The widespread availability of traditional payment systems, 
which can enable deferred settlement for faster payments, may make 
faster payment services based on deferred settlement an appealing 
alternative to RTGS-based services. A number of commenters, mostly 
small banks, voiced concerns that if they were unable to meet 
customer demand for faster payment services, they would be placed at 
a significant competitive disadvantage, which could eventually 
jeopardize their continued operation. Should such banks expect that 
they would not be able to gain equitable access to private-sector 
RTGS services, they could instead adopt faster payment services 
based on deferred settlement in an effort to remain competitive, 
undermining an RTGS infrastructure's ability to reach nationwide 
scope and potentially increasing risk in the payment system.
---------------------------------------------------------------------------

    Furthermore, a single provider of RTGS services for faster payments 
may not advance other desirable outcomes in the U.S. payment system 
with respect to competition, innovation, and efficiency. As described 
earlier, a single service provider without competition can yield 
undesirable outcomes for faster payments, such as lower service quality 
or higher prices, which may result in reduced adoption rates of RTGS 
services for faster payments by banks. Such undesirable outcomes could 
limit adoption of faster payments by end users, which could in turn 
curtail efficiency benefits to the broader economy.
    Notably, a single provider of RTGS services for faster payments may 
not provide a neutral foundation for innovative, competitive end-user 
faster payment services. Instead, a single provider may focus on 
specific use cases that do not promote the potential for faster 
payments to be used in a wide variety of ways. For example, an RTGS 
service could eschew innovation in use cases that undermine its owners' 
existing interests and profits from traditional payment methods. 
Moreover, the RTGS service's owners could favor their end-user products 
at the expense of other competing products by inhibiting the ability of 
competing products to use the RTGS service. Such limitations on access 
to the RTGS service could further reduce potential competition and 
innovation for end-user services.
    With respect to payment system safety, a market outcome with a 
single RTGS service for faster payments would make it difficult and 
costly for faster payment services to achieve resiliency through 
redundancy. Such redundant connections have been a common solution in 
many retail payment markets, suggesting that many banks find the 
resiliency benefits outweigh the cost of connecting to multiple 
services. For example, a number of banks connect to two ACH services in 
pursuit of resiliency, despite the fact that achieving nationwide reach 
requires connecting to just a single ACH service. In a market without 
redundancy, a sole provider may serve as a single point of failure for 
RTGS-based faster payments.
    There exist alternative retail payment methods with nationwide 
reach, such as the ACH or payment card systems. However, those payment 
methods differ from RTGS-based faster payments in important ways, such 
as speed, message types, and technology. As a result, substitution 
between those payment methods and RTGS-based faster payments could 
create significant operational, technical, cost, and timing challenges 
for banks seeking to use such substitutes as a backup for faster 
payments. These challenges may make such alternative payment methods 
inadequate for resiliency purposes related to faster payments.
    All of the challenges described above regarding scope, equity, and 
effectiveness are likely to pose significant obstacles to other 
providers that might attempt to implement an RTGS infrastructure that 
would provide the foundation for ubiquitous, safe, and efficient faster 
payments in the United States. Therefore, the Board believes that, on 
balance, other providers alone cannot be expected to provide the 
service with reasonable effectiveness, scope, and equity.
    Furthermore, as described previously, the Federal Reserve does not 
have plenary regulatory or supervisory authority over the U.S. payment 
system and instead has traditionally influenced retail payment markets 
through its role as an operator. As a result, the Federal Reserve 
having an operational role in the settlement of faster payments would

[[Page 39309]]

be the most effective approach to address the challenges faced by other 
providers alone and would yield a clear public benefit.
    B. Public Benefits Criterion: The Federal Reserve must expect that 
its providing the service will yield a clear public benefit, including, 
for example, promoting the integrity of the payments system, improving 
the effectiveness of financial markets, reducing the risk associated 
with payments and securities-transfer services, or improving the 
efficiency of the payments system.
    The Board's Public Benefits Criterion requires that a new service 
yield long-term benefits to the public and the economy as a whole. 
Therefore, in determining whether the Federal Reserve should develop 
the FedNow Service, the Board has considered the expected public 
benefits and potential offsetting costs of the service.
1. Relevant Measures
    The Public Benefits Criterion focuses on whether the service is 
expected to provide a clear public benefit. In the context of payments, 
public benefits result from a payment system that is accessible, safe, 
and efficient. Such a payment system is a key component of commerce and 
economic activity. The criterion also provides specific examples of 
potential public benefits related to safety (promoting the integrity of 
the payment system, reducing the risk associated with payments and 
securities-transfer services) and efficiency (improving the efficiency 
of the payment system).
    Therefore, in evaluating a new service under the Public Benefits 
Criterion, the Board considers three measures consistent with the 
Federal Reserve's longstanding public policy objectives: accessibility, 
safety, and efficiency. The measure of accessibility is closely related 
to those of scope and equity, as considered in the context of the Other 
Providers Criterion. In particular, a payment service is generally more 
accessible if it is available to banks on equitable terms. Moreover, a 
service that is broadly accessible should more easily achieve 
nationwide scope in the long term. The measures of safety and 
efficiency are identical to those considered in the context of the 
effectiveness measure in the Board's Other Providers Criterion.
2. Public Comments
a. Accessibility
    Approximately 130 commenters addressed whether a Federal Reserve 
RTGS service would affect accessibility in the faster payment 
market.\54\ Approximately 110 commenters, from most commenter segments, 
expressed the view that the Federal Reserve developing an RTGS service 
for faster payments would help ensure equal access for banks 
nationwide.\55\ In contrast, around 20 commenters, comprising large 
banks and private-sector operators, expressed the view that the Federal 
Reserve's involvement would hinder development of faster payments in 
the United States in the short term.
---------------------------------------------------------------------------

    \54\ Approximately 15 additional commenters raised issues 
related to accessibility but did not express a view about whether a 
Federal Reserve RTGS service would affect accessibility in the 
faster payment market.
    \55\ These commenters included small and midsize banks, 
individuals, merchants, service providers, fintech companies, and 
trade organizations.
---------------------------------------------------------------------------

    Many commenters, in particular small and midsize banks, stated that 
a Federal Reserve RTGS service would provide banks of all sizes the 
ability to access an RTGS infrastructure for faster payments. Some of 
these commenters noted that most banks already have relationships with 
the Federal Reserve, including access to Federal Reserve accounts, 
either directly or through a correspondent banking relationship, that 
could be used for faster payments and would lower barriers to 
participation compared to other services without such existing 
relationships. Commenters, comprising small and midsize banks, 
merchants, service providers, fintech companies, and trade 
organizations, noted that the Federal Reserve's history of providing 
services to banks on fair and equitable terms would facilitate similar 
access to RTGS services for faster payments. Many of these commenters 
argued that, unlike the private sector, the Federal Reserve has a 
unique mission and demonstrated history of providing nationwide access 
to payment services, noting the Federal Reserve's check and ACH 
services as specific examples.
    Other commenters, comprising private-sector operators and large 
banks, argued that a Federal Reserve RTGS service is unnecessary to 
ensure access for all banks because industry participants are already 
in the process of implementing the private-sector RTGS service for 
faster payments. These commenters argued that the private-sector RTGS 
service has mechanisms in place to allow all banks to access the 
service and that the service's operator has already committed to 
providing access on equitable and impartial terms.
    Commenters also argued that the Federal Reserve's existing 
connections and relationship would not necessarily facilitate 
accessibility of RTGS services for faster payments, noting that such 
connections are not easily extended to handle faster payments, as they 
are not equipped to support the volumes, speeds, and redundancies 
required for an RTGS service. In addition, many of these commenters 
expressed concern that a Federal Reserve RTGS service could be 
detrimental to achieving nationwide reach of an RTGS infrastructure. 
Several commenters argued it would take the Federal Reserve too long to 
build such a service. Other commenters stated that a market with 
multiple RTGS services may require banks to connect to multiple 
services to achieve nationwide reach and that only the largest banks 
would do so because of the significant costs of additional connections.
    Finally, more than 130 commenters, from all commenter segments, 
discussed the importance of interoperability for achieving nationwide 
access to an RTGS infrastructure for faster payments.\56\
---------------------------------------------------------------------------

    \56\ Topics related to interoperability are further discussed in 
the Board's analysis of accessibility.
---------------------------------------------------------------------------

b. Safety
    More than 80 commenters expressed views on whether a Federal 
Reserve RTGS service would promote the safety of faster payments.\57\ 
Nearly all of these commenters argued that the Federal Reserve would 
improve the safety of faster payment through the development of an RTGS 
service for faster payments.\58\ A few commenters expressed doubt that 
a Federal Reserve RTGS service would have any significant impact on the 
safety of faster payments.\59\
---------------------------------------------------------------------------

    \57\ Approximately 60 additional commenters raised issues 
related to safety but did not express a view about whether a Federal 
Reserve RTGS service would promote the safety of faster payments.
    \58\ These commenters included small and midsize banks, 
individuals, consumer organizations, merchants, service providers, 
fintech companies, trade organizations, and other interested 
parties.
    \59\ Commenters expressing this view included those from the 
following segments: Large banks, private-sector operators, and 
individuals.
---------------------------------------------------------------------------

    Commenters that expressed views on safety emphasized the importance 
of resiliency for RTGS services. Many of these commenters, especially 
small and midsize banks, argued that development of a Federal Reserve 
RTGS service for faster payments would be consistent with the Federal 
Reserve's role in promoting the safety of the payment system. 
Commenters argued that because of this role, the Federal Reserve would 
be committed to a higher level of safety than private-sector service 
providers. A few commenters specifically argued that, unlike private-

[[Page 39310]]

sector service providers, the Federal Reserve would focus on broader 
public policy objectives rather than returns on investment when 
considering the safety of faster payments. Many small and midsize banks 
argued that the Federal Reserve's operational role provides stability 
in the financial system during a time of crisis, citing the Federal 
Reserve's role following the terrorist attack on September 11, 2001, as 
an example. Some commenters also suggested that having multiple RTGS 
services for faster payments in the market could increase faster 
payment resiliency through redundancy, similar to other retail payment 
systems for which there are multiple operators.
    A few commenters expressed doubts about whether a Federal Reserve 
RTGS service for faster payments would improve safety and resiliency. 
Large banks in particular argued that, although integration with a 
second RTGS service may bring marginal improvements to the safety of 
faster payments, these improvements would come at a high cost. Finally, 
at least one commenter expressed concerns that adopting a second RTGS 
service would divert bank resources, which could instead be used to 
improve resiliency and security of the private-sector RTGS service.
c. Efficiency
    Approximately 120 commenters expressed views about whether a 
Federal Reserve RTGS service would promote efficiency in the faster 
payment market.\60\ Approximately 100 commenters, from nearly all 
segments, argued that a Federal Reserve RTGS service would promote 
efficiency in the faster payment market.\61\ In contrast, approximately 
20 commenters, mostly comprising large banks and private-sector 
operators, argued that such a service would not improve efficiency and 
could create additional burdens for banks with limited resources.
---------------------------------------------------------------------------

    \60\ Approximately 20 additional commenters raised issues 
related to efficiency but did not express a view on whether a 
Federal Reserve RTGS service would promote efficiency.
    \61\ These commenters included small and midsize banks, 
individuals, consumer organizations, merchants, service providers, 
fintech companies, trade organizations, and other interested 
parties.
---------------------------------------------------------------------------

    Commenters that argued a Federal Reserve RTGS service for faster 
payments would promote efficiency generally discussed how such a 
service would enhance competition, promote innovation, or reduce costs. 
These commenters, comprising merchants and small and midsize banks, 
argued that historically, the Federal Reserve's presence as an operator 
has improved competition and efficiency, leading to lower prices and 
accelerated payment system improvements, such as the shift from paper 
to electronic payments. Some commenters further cited the payment card 
market as an example where concentration of market power in the absence 
of the Federal Reserve having an operational role led to inefficiencies 
in the market, such as high fees and restrictive rules that limit 
competition and innovation. At least one commenter argued that by the 
time such inefficiencies began to emerge in the early 2000s, it was too 
late for the Federal Reserve to provide a service to the market as an 
operator. Many small and midsize banks also stated that a Federal 
Reserve RTGS service would enhance competition in the broader banking 
market by allowing small and midsize banks to remain competitive with 
large banks and new entrants like fintech companies.
    Other commenters argued that a Federal Reserve RTGS service for 
faster payments would not offer any measurable efficiency benefits over 
the current private-sector service and could distort the market. Many 
of these commenters argued that a Federal Reserve RTGS service would be 
costly to develop and that banks would need to expend additional 
resources to connect to multiple RTGS services for faster payments. A 
few of these commenters also suggested that the Federal Reserve's long-
run cost recovery mandate is less demanding than the challenges facing 
the private sector, including scrutiny from shareholders and auditors, 
and may discourage private-sector entities from developing competing 
services. Finally, a few commenters also argued that cost-based pricing 
could stifle innovation by forcing RTGS service providers to divert 
resources away from developing new features.
3. Board Analysis
    The Board expects that the Reserve Banks providing the FedNow 
Service would yield a clear public benefit. In particular, the Board's 
analysis suggests that, by serving an operational role, the Federal 
Reserve can help to create an accessible, safe, and efficient RTGS 
infrastructure for faster payments. This role would align with the 
Federal Reserve's history of providing services for most other payment 
systems alongside, and in support of, similar services offered by the 
private sector. The expected public benefit stems in large part from 
contributions the FedNow Service would make towards achieving 
nationwide reach of an RTGS infrastructure for faster payments, 
promoting the safety and resiliency of that infrastructure, and 
encouraging competition between payment services.
a. Accessibility
    Enabling virtually all banks to gain access to a nationwide RTGS 
infrastructure for faster payments would support the core objective of 
ubiquitous faster payment services for individuals and businesses in 
the United States. However, as discussed with respect to the Board's 
Other Providers Criterion, the breadth and diversity of the U.S. 
banking system makes it difficult to implement an RTGS infrastructure 
that connects virtually all banks in the United States. The Board 
expects that the Federal Reserve's provision of the FedNow Service 
would help address this challenge in a number of ways, enhancing the 
accessibility of an RTGS infrastructure for faster payments and 
allowing that infrastructure to achieve nationwide reach.
    In light of the significant heterogeneity in the nation's banking 
system, achieving nationwide reach will inevitably be challenging for 
any provider of RTGS services for faster payments, including the 
Federal Reserve. However, since its inception, an underlying public 
policy rationale for the Federal Reserve's involvement in the payment 
system has been to provide services in a safe and efficient manner to 
banks nationwide. Because of this long-standing policy commitment to 
promoting nationwide access, the Federal Reserve has historically 
extended access to banks of all sizes, including smaller banks in rural 
and remote areas of the country. Applied to the FedNow Service, this 
longstanding policy commitment would result in a service that is 
similarly accessible to banks of all sizes, ultimately increasing the 
long-term likelihood of such banks both accessing an RTGS 
infrastructure and implementing faster payment services.
    As a provider of payment services to thousands of banks today, the 
Federal Reserve is in a unique strategic position to promote 
accessibility of an RTGS infrastructure for faster payments.\62\ For 
small and midsize banks seeking to implement faster payment services, 
an RTGS service provided by the Federal Reserve is likely to be 
particularly important. The relatively high cost and difficulty of 
onboarding such institutions to an RTGS service is likely to constitute 
a significant obstacle for

[[Page 39311]]

private-sector operators. Regardless of any investments in developing 
clearing and settlement technology, a private-sector operator without 
existing relationships would nevertheless have to incur substantial 
costs to build connections and customer service capabilities before it 
could onboard the significant number of smaller banks needed to achieve 
true nationwide reach.\63\ The Federal Reserve, however, has already 
made substantial investments in such capabilities, including 
connections and customer support systems, and have significant 
experience and expertise in providing services to smaller banks. The 
associated long-standing relationships with and connections to 
thousands of banks across the country provide a solid foundation for 
the FedNow Service to facilitate those banks gaining access to an RTGS 
infrastructure for faster payments. The FedNow Service therefore can 
reasonably be expected to reach thousands of smaller banks in the 
United States that might otherwise not have access to an RTGS 
infrastructure. The resulting widespread access to an RTGS 
infrastructure for faster payments would benefit small and midsize 
banks and the communities they serve.
---------------------------------------------------------------------------

    \62\ The payment services that the Federal Reserve provides to 
banks today allow for settlement directly in banks' accounts held at 
the Reserve Banks or in settlement accounts held by other banks 
through a correspondent relationship.
    \63\ The use of service providers is unlikely to resolve this 
obstacle fully because some banks may prefer to use a direct 
connection or may already have relationships with service providers 
that are not connected to a private-sector RTGS service.
---------------------------------------------------------------------------

    Furthermore, the FedNow Service may serve as an impetus for many 
small and midsize banks to implement faster payment services. Although 
small and midsize banks responding to the 2018 Notice generally 
indicated an interest in adopting faster payment services, thousands of 
other banks may face significant uncertainty about the overall benefits 
of offering such services and the appropriateness of RTGS-based 
settlement arrangements for smaller institutions. The Federal Reserve's 
commitment to promoting payment system improvements through its 
provision of modernized infrastructure may decrease such uncertainty 
for those banks. With more certainty about the benefits of joining an 
RTGS infrastructure for faster payments, small and midsize banks may be 
more likely than they otherwise would have been to upgrade their 
capabilities and offer RTGS-based faster payment services to their 
customers.
    Finally, the Board has also considered as part of its analysis the 
possible relationships between the FedNow Service and the private-
sector RTGS service, and the resulting effect on nationwide reach. In a 
payment system with multiple operators, banks would have a choice 
whether to join a single service or multiple services such that an RTGS 
infrastructure for faster payments could achieve nationwide reach in 
two main ways.
    First, interoperability via direct exchange of payments between 
RTGS infrastructure operators could allow payments originated by a 
participant of one service to be received by a participant of another 
service. If multiple services are interoperable in such a way, no 
single service needs to achieve nationwide reach on its own. This 
situation exists today with the nation's ACH system.
    Second, banks could participate in multiple services that are not 
interoperable, but nationwide reach could still be achieved through at 
least one service achieving nationwide reach on its own. This situation 
exists today with large-value funds transfer systems. In this 
environment, banks could benefit from the existence of multiple 
services despite the lack of interoperability. A bank that participates 
in multiple services could choose which service to use for 
transactions, depending on any number of factors, such as fees, 
functionality, and the counterparties that a particular service can 
reach.
    Many commenters described interoperability as important in the case 
of RTGS services for faster payments, with some commenters noting that 
interoperability could be developed in incremental steps. Commenters 
also expressed the view that the Federal Reserve would be well 
positioned to facilitate interoperability between RTGS services for 
faster payments. Commenters comprising large banks and private-sector 
operators, however, expressed significant concerns that 
interoperability poses potentially insurmountable technical and 
operational challenges.
    The Board agrees with commenters that interoperability between RTGS 
services for faster payment services is a desirable outcome but also 
recognizes that it may be difficult to achieve, especially early on. As 
opposed to interoperability in and of itself, the Board views 
nationwide reach as a key objective for an RTGS infrastructure. Such 
reach does not inherently depend on interoperability between RTGS 
services, because there are other paths to achieving this objective.
    During its engagement with the industry, the Federal Reserve 
intends to explore both interoperability and other paths to achieving 
nationwide reach. Although direct exchange of payments between RTGS 
infrastructure operators may not be an initial element of the FedNow 
Service, as standards, technology, and industry practices change over 
time and the relationship between RTGS services for faster payments 
evolves, interoperability will continue to be a desirable outcome that 
the Board pursues.
b. Safety
    As the use of faster payment services increases in the future, the 
safety of such services will be crucial to the long-term safety of the 
overall payment system. The Federal Reserve has a long-standing focus 
on promoting the safety of the U.S. payment system. Recognizing that a 
safe payment system is crucial to the nation's economic growth and 
financial stability, the Federal Reserve has historically played an 
important role in promoting the safety of the U.S. payment system by 
providing liquidity and operational continuity in times of crisis. 
Serving an operational role in the payment system has allowed the 
Federal Reserve to take action in response to financial turmoil, 
terrorist attacks, natural disasters, and other crises. Indeed, 
comments in response to the 2018 Notice indicate that industry 
stakeholders and the public look to the Federal Reserve to use the 
tools at its disposal to provide support when needed, actions that 
might not be possible if the Federal Reserve were not in an operational 
role. As the prominence of faster payments in the United States grows, 
the development of the FedNow Service would allow the Federal Reserve 
to retain its ability to provide stability and support to the banking 
system and the broader economy in times of crisis.
    Providing the FedNow Service would also allow the Federal Reserve 
to facilitate the safety of faster payments in the United States. 
Because of their irrevocable, real-time nature, the overall safety of 
faster payments depends in part on how well fraud can be detected and 
prevented. As the operator of the FedNow Service, the Federal Reserve 
would be in a position to promote the development and implementation of 
industry-wide standards, as has been the case in other payment systems 
where the Federal Reserve has played an operational role.\64\ This 
ability to

[[Page 39312]]

promote industry-wide standards would be particularly important in the 
development and adoption of standards to mitigate fraud. Moreover, if 
the Federal Reserve were to play an operational role, competition among 
RTGS services for faster payments may increase innovation related to 
fraud prevention, contributing to a safer faster payment environment.
---------------------------------------------------------------------------

    \64\ For example, in the early 2000s, using its operational role 
in the check system, the Federal Reserve was able to support and 
encourage the industry's transition from paper to more efficient 
electronic check processing. Similarly, the Federal Reserve was able 
to improve speed and reduce risks associated with ACH payments in 
the early 1990s by facilitating electronic origination and receipt 
of ACH transactions processed by the Federal Reserve. See Federal 
Reserve Bank of New York, ``All-Electronic ACH Proposal,'' (Jan. 9, 
1991). Available at https://fraser.stlouisfed.org/files/docs/historical/ny%20circulars/nycirc_1991_10424.pdf#pdfjs.action=download.
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    Finally, the development of the FedNow Service could also enhance 
the safety of the U.S. payment system by promoting resiliency through 
redundancy. In particular, the availability of multiple RTGS services 
for faster payments would allow banks to connect to more than one such 
service, as a number do today for wire, ACH, and check services. 
Although connecting to multiple services could result in additional 
costs and operational complexity, the choice to connect would lie with 
the banks, many of which have expressed a desire historically to 
connect to multiple services for contingency purposes. These banks may 
instead look to achieve resiliency by using existing retail payment 
methods, for example ACH or payment cards. Over time, however, such 
alternatives will likely not provide adequate substitutes for RTGS-
based faster payments from a cost, technological, operational, or end-
user perspective.
c. Efficiency
    The efficiency benefits associated with the FedNow Service are 
likely to come from two sources. First, by providing banks with an 
alternative RTGS service with integrated clearing functionality and by 
improving the prospect of banks' gaining access to a nationwide RTGS 
infrastructure for faster payments, the FedNow Service could allow more 
banks and their customers to reach one another. Such enhanced ability 
to reach one another would increase the benefits to each bank 
participating in the RTGS infrastructure, with the resulting network 
effects leading to improved efficiency in the faster payment market. 
Even banks that would already have joined the private-sector RTGS 
service could benefit from the broader reach that would result from the 
FedNow Service, because they would be able to join a service that 
provides access to counterparty banks that they would otherwise be 
unable to reach. Furthermore, as discussed in the context of the 
Board's Other Providers Criterion for evaluating new services, 
competition among RTGS services for faster payments could yield 
efficiency benefits by leading to lower prices and higher service 
quality.
    Second, the development of the FedNow Service could indirectly 
generate efficiency benefits at the level of end-user faster payment 
services. A nationwide RTGS infrastructure would make the development 
of new faster payment services based on real-time settlement more 
attractive, increasing innovation and competition in the market for 
end-user faster payment services. Because the Federal Reserve seeks to 
encourage payment system improvements, the FedNow Service could serve 
as a neutral platform for private-sector entities to offer competitive 
and innovative faster payment services to end users based on transfers 
between banks.
    Finally, the Board recognizes that the FedNow Service would 
generate societal costs that may reduce the net efficiency benefit of 
the service. In particular, the FedNow Service would require societal 
resources to develop in the short term and to operate in the long term. 
Further, banks that choose to connect to multiple RTGS services for 
faster payments in pursuit of broader reach or resiliency through 
redundancy may incur additional connection costs.\65\ However, the 
Board expects that the benefits of the FedNow Service, as discussed 
earlier, would ultimately outweigh these additional costs. Therefore, 
the Board expects that overall the FedNow Service will yield a clear 
public benefit in the areas of accessibility, safety, and efficiency.
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    \65\ The need to connect to multiple RTGS services in pursuit of 
broader reach would occur if the FedNow Service and private-sector 
RTGS services were not interoperable.
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C. Cost Recovery Criterion: The Federal Reserve Must Expect to Achieve 
Full Recovery of Costs Over the Long Run

    The Board's Cost Recovery Criterion accounts for the requirements 
in the MCA. In evaluating whether a new service or major service 
enhancement can be expected to achieve full cost recovery, the Board 
further considers its policy, ``Principles for the Pricing of Federal 
Reserve Bank Services'' (pricing principles), and its previous 
application of those principles to existing services.\66\
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    \66\ Board of Governors of the Federal Reserve System, 
``Principles for the Pricing of Federal Reserve Bank Services,'' 
(Issued 1980). Available at https://www.federalreserve.gov/paymentsystems/pfs_principles.htm.
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1. Relevant Measures
a. The MCA
    The MCA required the Board to adopt a set of pricing principles for 
Federal Reserve services and a schedule of fees pursuant to those 
principles. The MCA specified certain principles on which fees must be 
based, including the principle that ``(o)ver the long run, fees shall 
be established on the basis of all direct and indirect costs actually 
incurred in providing the Federal Reserve services.'' \67\ In addition, 
the MCA provided that the pricing principles ``shall give due regard to 
competitive factors and the provision of an adequate level of such 
services nationwide.'' \68\
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    \67\ These costs include imputed costs that a private-sector 
firm would incur if it were to provide the services. See Public Law 
96-221, supra note 18. This imputed cost is referred to as the 
private-sector adjustment factor.
    \68\ See Public Law 96-221, supra note 18.
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b. The Pricing Principles
    The pricing principles incorporate the statutory requirements of 
the MCA and include additional provisions consistent with the purposes 
of the MCA.\69\ Although Congress intended the MCA to stimulate 
competition to promote the provision of services at the lowest cost to 
society, Congress was also concerned about achieving an adequate level 
of services nationwide and avoiding the reemergence of undesirable 
banking practices--such as nonpar banking or circuitous routing of 
checks--that the Federal Reserve's operational role in the payment 
system was intended to eliminate.\70\ Therefore, like the Board's 
policy for evaluating new services, the pricing principles balance the 
importance of competitive fairness in the Federal Reserve's provision 
of services with the Federal Reserve's objectives to promote the 
accessibility, safety, and efficiency of the payment

[[Page 39313]]

system.\71\ Three pricing principles are relevant in considering this 
balance.
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    \69\ For example, the Board's principles 1 and 2 mirror the 
MCA's statutory requirements that all covered Federal Reserve 
services must be explicitly priced and available to nonmember banks 
at the same price as member banks. In adopting the pricing 
principles, however, the Board noted that ``the Monetary Control Act 
and its legislative history recognize the importance of the Federal 
Reserve maintaining an operational presence in the nation's payments 
mechanism, providing an adequate level of service nationwide and 
encouraging competition.'' The Board explained that ``in the light 
of these considerations, the Federal Reserve has developed 
additional pricing principles that build on those of the Act.'' 
Therefore, other pricing principles reflect policy determinations by 
the Board intended to provide guidance on the pricing policies and 
strategies the Federal Reserve will follow, such as principle 6's 
expectation that the Federal Reserve should be sensitive to the 
changing needs for services in particular markets. See Board of 
Governors of the Federal Reserve System, ``Federal Reserve Bank 
Services; Proposed Fee Schedules and Pricing Principles,'' 45 FR 
58689, 58690-58692 (Sep. 4, 1980). Available at https://cdn.loc.gov/service/ll/fedreg/fr045/fr045173/fr045173.pdf.
    \70\ See ``Principles for the Pricing of Federal Reserve Bank 
Services,'' supra note 66.
    \71\ Specifically, in preparing the pricing principles, the 
Board stated that the principles and future fee schedules take into 
account ``the objectives of fostering competition, improving the 
efficiency of the payment mechanism, and lowering costs of these 
services to society at large. At the same time, the Board is 
cognizant of, and concerned with, the Federal Reserve's continuing 
responsibility for maintaining the integrity and reliability of the 
payment mechanism and providing an adequate level of service 
nationwide.'' ``Principles for the Pricing of Federal Reserve Bank 
Services,'' supra note 66.
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    First, pricing principle 3 directly incorporates relevant 
provisions from the MCA requiring that over the long run, fees shall be 
established on the basis of all direct and indirect costs actually 
incurred in providing the services priced. In doing so, principle 3 
includes the MCA's requirement to give due regard to competitive 
factors and the provision of an adequate level of such services 
nationwide.
    Second, although the MCA mandates cost recovery for Federal Reserve 
services as a whole, pricing principle 5 specifies that the Board 
further intends fees to be set so that revenues for major service 
categories match costs, including a private-sector adjustment factor. 
However, principle 5 also notes that, during an initial start-up 
period, new operational requirements and variation in volume may 
temporarily change unit costs for some service categories. Principle 5 
states that, in such a situation, the Federal Reserve intends to match 
revenues and costs as soon as possible.\72\
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    \72\ Principle 5 explains that the Board will monitor progress 
in meeting this goal by reviewing regular reports submitted by the 
Reserve Banks. In the event that the Board authorizes a fee schedule 
for a service below cost in the interest of providing an adequate 
level of services nationwide, principle 5 states that the Board will 
announce its decision. See ``Principles for the Pricing of Federal 
Reserve Bank Services,'' supra note 66.
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    Finally, pricing principle 7 states that fee structures may be 
designed to reflect desirable long-run improvements in the nation's 
payment system. Principle 7 also states that the Board will seek public 
comment when changes in fees and service arrangements are proposed that 
would have significant long-run effects on the nation's payment system.
2. Public Comments
    Approximately 20 commenters addressed cost recovery in response to 
the 2018 Notice.\73\ Approximately 15 commenters believed the Federal 
Reserve would be able to recover the costs of developing and operating 
an RTGS service for faster payments, pointing to the Federal Reserve's 
ability to achieve cost recovery goals in the past for other 
services.\74\ Fewer than 10 commenters argued that the Federal Reserve 
may not be able to recover costs for a new RTGS service, generally 
noting the significant cost of developing and operating such a 
service.\75\
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    \73\ Approximately 15 additional commenters raised issues 
related to cost recovery but did not express a view about whether a 
Federal Reserve RTGS service could recover its costs.
    \74\ These commenters included small and midsize banks, 
individuals, consumer organizations, and trade organizations.
    \75\ These commenters included large banks, trade organizations, 
and other interested parties.
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3. Board Analysis
    The Board believes that the provision of the FedNow Service would 
satisfy the Cost Recovery Criterion. In particular, the Board expects 
that the FedNow Service would achieve full recovery of costs over the 
long run, although the first instance of long-run cost recovery is 
expected to occur outside the 10-year period that the Board typically 
applies to existing, mature services. The Board's view that the service 
would satisfy the Cost Recovery Criterion is based on its consideration 
of the MCA's requirements regarding long-run cost recovery, the Board's 
pricing principles as they relate to new services compared with mature 
services, the Federal Reserve's public policy objectives, including the 
provision of an adequate level of service nationwide, and the previous 
application of these considerations to other Federal Reserve services.
    The MCA does not specify the ``long-run'' period over which Federal 
Reserve services must recover costs, nor does the legislative history 
of the MCA indicate that Congress intended a specific length of time 
for the cost recovery period. The Board has typically used a rolling 
ten-year period when assessing long-run cost recovery of existing 
services (10-year cost recovery).\76\ The Board views this standard 10-
year cost recovery expectation as appropriate for assessing the long-
run cost recovery of mature services, which generally have stable and 
predictable volumes, costs, and revenues.
---------------------------------------------------------------------------

    \76\ Notwithstanding the Board's standard 10-year long-run cost 
recovery period for existing services, the Board has previously 
needed to balance competing considerations in determining long-run 
cost recovery for those services. For example, efforts to modernize 
Federal Reserve check services in the early 2000s resulted in 
intermittent under-recovery of the service's costs during certain 
10-year cost recovery periods.
---------------------------------------------------------------------------

    However, a new service, such as the FedNow Service, differs from 
mature services in a number of important ways. By its nature, a new 
service generally involves high development costs. Moreover, unlike 
mature services, a new service may not initially have a critical mass 
of customer participation and, as a result, is likely to have low and 
unpredictable initial volumes. Certain specific circumstances--such as 
the length of time to develop the service, the use of the service by 
certain customer segments, or changes to the market landscape--may 
affect volumes and, thus, the costs and revenues of a new service. 
Taken together, these factors imply that, unlike mature services, a new 
service is unlikely to have stable costs and revenues when it is first 
deployed, making cost recovery challenging in the time frame that the 
Board has typically applied to mature services.
    Given these considerations, the Board believes that the 10-year 
period used to evaluate cost recovery for mature services is an 
inappropriate standard for evaluating the long-run cost recovery of a 
new service similar to the FedNow Service. Applying such a standard 
could limit the Federal Reserve's ability to develop new services or 
undertake major service enhancements that support the provision of an 
adequate level of services nationwide or induce desirable long-term 
changes in the payment system.
    The Federal Reserve's ACH service, the last new retail payment 
service developed by the Federal Reserve, provides an illustrative 
historical example of the importance of these considerations for cost 
recovery of new services. In evaluating the expected cost recovery of 
the FedACH service, the Board determined that, compared with the time 
frame for existing services, an extended cost recovery time frame was 
appropriate. It did so to encourage the development of an electronic 
funds transfer system for retail payments and to foster the development 
of efficient new technologies that would benefit the public in the long 
run.\77\ Based on the

[[Page 39314]]

service's anticipated long-term benefits, the Board determined, both 
before and after passage of the MCA, that the nascent service's fees 
should be based on the costs associated with mature volume 
estimates.\78\ As volume grew, the service first achieved annual cost 
recovery nearly 15 years after launching a pilot in 1972, and achieved 
10-year cost recovery after more than 20 years of operation.\79\
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    \77\ In partnership with the private sector, the Federal Reserve 
began piloting ACH services in the late 1960s. The Federal Reserve 
determined that ACH services had the potential to yield long-term 
improvements to the payment system because of concerns related to 
rapidly growing paper check volumes. For example, in 1971, the 
Federal Reserve's ``Statement of Policy on the Payments Mechanism'' 
explained that ``(i)ncreasing the speed and efficiency with which 
the rapidly mounting volume of checks is handled is becoming a 
matter of urgency. Until electronic facilities begin to replace 
check transfer in substantial volume, the present system is 
vulnerable to serious transportation delays and manpower 
shortages.'' Board of Governors of the Federal Reserve System, 
``Statement of Policy on the Payments Mechanism,'' (June 18, 1971). 
Available at https://fraser.stlouisfed.org/files/docs/publications/frbrichreview/rev_frbrich197107.pdf. The first ACH pilot service 
became fully operational in the early 1970s. The Federal Reserve 
worked with the industry and the U.S. Treasury to expand the service 
during the 1970s and 1980s.
    \78\ In establishing fees for the Federal Reserve's ACH service, 
the Board allowed fees to be set based on costs of operating a 
mature service instead of current costs. See Board of Governors of 
the Federal Reserve System, ``Adoption of Fee Schedules and Pricing 
Principles for Federal Reserve Bank Services,'' 46 FR 1338, 1343 
(Jan. 6, 1981). Available at https://cdn.loc.gov/service/ll/fedreg/fr046/fr046003/fr046003.pdf.
    After passage of the MCA, the Board approved a fee schedule that 
recovered 40 percent of the service's current costs and required the 
service to increase its cost recovery targets 20 percent each year 
thereafter until the service achieved 100 percent cost recovery. See 
Board of Governors of the Federal Reserve System, ``Fee Schedules 
for Federal Reserve Bank Services,'' 47 FR 53500 (Nov. 26, 1982) 
available at https://cdn.loc.gov/service/ll/fedreg/fr047/fr047228/fr047228.pdf; Board of Governors of the Federal Reserve System, 
``Fee Schedules for Federal Reserve Bank Services,'' 50 FR 47624, 
47625 (Nov. 19, 1985) available at https://cdn.loc.gov/service/ll/fedreg/fr050/fr050223/fr050223.pdf. The Board does not believe it is 
appropriate at this time to similarly set a specific year in which 
the new FedNow Service would recover costs, as was done for the ACH 
service. This is largely because the ACH service was not an entirely 
new service at the time the principles were adopted and, for a new 
service in a dynamic market, the likelihood of accurately 
forecasting when cost recovery will occur is low. The Board will 
annually review the appropriateness of setting such an expectation 
for the FedNow Service.
    \79\ The ACH service became fully operational in 1974. See ``The 
Federal Reserve System Purposes & Functions,'' supra note 4.
---------------------------------------------------------------------------

    Like the Federal Reserve's ACH service, the Board expects that the 
FedNow Service will take significant time to mature, as the industry 
takes steps to adopt the service. Ultimately, although the Board 
expects the service's first instance of long-run cost recovery to occur 
outside the 10-year cost recovery period typically applied to mature 
services, the service is nevertheless expected to achieve full recovery 
of costs over the long run in compliance with the Board's Cost Recovery 
Criterion. This expectation is based on certain conditions related to 
demand for faster payments, overall expansion of the market over the 
long term, time to market for the service, and direct or indirect 
participation in the service by banks of all sizes.
    Expected long-run cost recovery for the FedNow Service outside the 
traditional 10-year cost recovery period for mature services may also 
affect aggregate cost recovery of Federal Reserve priced services, 
which would comprise the new FedNow Service and existing mature 
services. As noted above, although the Board's pricing principles 
impose an objective of full cost recovery for each service line, the 
cost recovery objective specified in the MCA only requires overall cost 
recovery of Federal Reserve services as a whole. Combining the revenues 
and costs of the FedNow Service with those of mature services may 
create the appearance of under-recovery for Federal Reserve services 
overall. Therefore, the Board believes it would be most appropriate to 
report the FedNow Service's cost recovery independently of mature 
Federal Reserve services until the FedNow Service reaches maturity.
    The Board believes that an approach to cost recovery for the FedNow 
Service, as a new service, that does not rely on the standard applied 
to mature services is consistent with the language and purpose of the 
MCA and the Board's pricing principles for a number of reasons.
    First, this approach is consistent with the MCA's requirement, 
incorporated in pricing principle 3, for the Federal Reserve to give 
due regard to the provision of an adequate level of service nationwide. 
As described above with respect to the Board's Other Providers 
Criterion and Public Benefits Criterion, in the absence of the FedNow 
Service, the objective of achieving an adequate level of service 
nationwide to support the development of ubiquitous RTGS-based faster 
payments in the United States is unlikely to be realized.
    Second, this approach is consistent with pricing principle 5 as it 
relates to the start-up period for a service. In explaining its 
adoption of principle 5, the Board specifically noted the need for 
pricing flexibility during an initial start-up period when low and 
potentially variable volumes and high fixed costs could result in 
prohibitively high service fees, negatively affecting service usage and 
policy goals.\80\ Such issues could arise for the FedNow Service if the 
Board required cost recovery over the same period as mature services.
---------------------------------------------------------------------------

    \80\ See ``Adoption of Fee Schedules and Pricing Principles for 
Federal Reserve Bank Services,'' supra note 78.
---------------------------------------------------------------------------

    Finally, this approach is consistent with pricing principle 7. 
Specifically, in adopting principle 7, the Board explained that pricing 
flexibility may be necessary to induce desirable long-run changes in 
the payment system and to foster development of services that will 
ultimately benefit the public.\81\ Given that a nationwide RTGS 
infrastructure for new faster payments is a desirable long-run 
improvement, and in light of the benefits that would be likely to occur 
with the FedNow Service, as discussed under the Public Benefits 
Criterion, the Board believes that an expected cost recovery period of 
longer than 10 years is appropriate.
---------------------------------------------------------------------------

    \81\ See id.
---------------------------------------------------------------------------

    As part of this approach to cost recovery, the Board will regularly 
disclose the service's cost recovery beginning the year the service is 
available to participating banks and will monitor progress toward 
matching revenues and costs.\82\ The Board will regularly confirm the 
expectation that the service will meet cost recovery objectives over 
the long run. As would be applicable to any Federal Reserve service, if 
it becomes clear that the FedNow Service is no longer expected to 
achieve long-run cost recovery or that the service will challenge the 
cost recovery of Federal Reserve priced services overall, the Board 
would reassess whether to continue providing the service. Such a 
reassessment would only occur after giving time for market development 
and adoption and would take into account other objectives, including 
the provision of equitable access to payment services and an adequate 
level of services nationwide.\83\ Further information on expected 
service pricing is found in Part Two, including areas where comment is 
requested.
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    \82\ Costs would include those related to development of the 
service and ongoing operations.
    \83\ As stated in the Board's policy ``The Federal Reserve in 
the Payments System,'' ``a decision to continue to provide a service 
that could not reasonably be expected to meet cost-recovery 
objectives would be made by the Federal Reserve Board only after 
seeking public comment and only where there were clear public 
benefits to such a course of action. Similarly, any decision to 
withdraw from the service would be undertaken in an orderly way, 
giving due regard to the transition problems associated with the 
discontinuation of a service.'' ``The Federal Reserve in the 
Payments System,'' supra note 18.
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IV. Assessment of Expanded Operating Hours for the Fedwire Funds 
Service and the National Settlement Service To Support Liquidity 
Management for Faster Payments and For Other Purposes

    The second potential action in the 2018 Notice was the development 
of a liquidity management tool to support RTGS services for faster 
payments. RTGS-based faster payment services require banks to have 
sufficient liquidity to perform interbank settlement at any time, on 
any day.\84\ Without sufficient liquidity to conduct

[[Page 39315]]

settlement, a faster payment cannot be completed in an RTGS-based 
service where, by design, interbank settlement occurs before final 
funds can be made available to the receiver. This risk of payments not 
being completed highlights the need for banks to be able to manage 
their liquidity on a 24x7x365 basis in accounts that support settlement 
of faster payments.
---------------------------------------------------------------------------

    \84\ Liquidity can take various forms, including funds in an 
account at a settlement institution or extensions of credit that 
allow payments to be completed when funds in an account are not 
sufficient to cover outgoing payments.
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    At present, the Federal Reserve does not offer a service that would 
allow banks to move liquidity as needed, in particular on weekends and 
holidays, to support real-time settlement of faster payments.\85\ To 
reduce the risk of insufficient liquidity during those periods, banks 
can increase the funds in accounts that support settlement of faster 
payments to provide additional prefunding for future transactions. This 
additional prefunding, however, could be costly for banks because it 
prevents those funds from being used for other purposes. Prefunding 
also requires predicting the number and aggregate value of future 
customer payments, which has a degree of uncertainty. In consideration 
of the risk of failed transactions because of insufficient liquidity, 
the Board proposed developing a tool that would enable movement of 
funds between accounts at the Reserve Banks on a 24x7x365 basis, either 
by expanding the hours of current Federal Reserve services or through a 
new service.
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    \85\ The Fedwire Funds Service operating hours for each business 
day begin at 9:00 p.m. eastern time (ET) on the preceding calendar 
day and end at 6:30 p.m. ET, Monday through Friday, excluding 
designated holidays. Current operating hours for NSS are 7:30 a.m. 
ET to 5:30 p.m. ET, Monday through Friday, excluding designated 
holidays.
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    A liquidity management tool could support private-sector RTGS 
arrangements for faster payments that are based on a joint account at a 
Reserve Bank.\86\ Such a tool, as described in the 2018 Notice, could 
enable movement of funds between a joint account and banks' master 
accounts at any time of the day, any day of the year.\87\ This tool 
would allow funds to be transferred, as needed, to support the payment 
activity of participants in private-sector RTGS services using a joint 
account.\88\
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    \86\ In such an arrangement, real-time settlement occurs on an 
internal ledger maintained by a private-sector operator of an RTGS 
service for faster payments, supported by funds that are held in an 
account at a Reserve Bank for the joint benefit of the service's 
participants. To support settlement through such a service, each 
participant bank ensures sufficient funding in the joint account to 
cover its payment obligations on a 24x7x365 basis.
    \87\ A master account is the record of financial rights and 
obligations between an account-holding bank and a Reserve Bank. The 
account is where opening, intraday, and closing balances are 
determined.
    \88\ The private sector could develop alternative mechanisms to 
enable liquidity management for participants in a private-sector 
RTGS service for faster payments based on a joint account. For 
example, to address liquidity needs over the weekend, a private-
sector operator could allow participants with excess funds on its 
ledger to transfer those funds within the service to those with a 
shortage.
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    In the 2018 Notice, the Board requested feedback on whether the 
Federal Reserve should provide such a liquidity management tool and, if 
so, the desirable functionality of such a tool. The Board further 
requested comment on whether such a tool could be used for purposes 
other than supporting real-time settlement of faster payments.

A. Public Comments

    Approximately 230 commenters expressed views about whether the 
Federal Reserve should develop a liquidity management tool to support 
RTGS services.\89\ Approximately 225 commenters, from all segments, 
supported the Federal Reserve developing such a tool. Fewer than five 
commenters were not supportive of the Federal Reserve developing a 
liquidity management tool to support RTGS services.\90\
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    \89\ At least one additional commenter raised issues related to 
a liquidity management tool but did not express a view about whether 
the Federal Reserve should offer such a tool.
    \90\ Commenters expressing this view included those from the 
following segments: Private-sector operators and fintech companies.
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    Several large banks and other commenters indicated that the 
proposed tool could help with managing liquidity in the existing 
private-sector RTGS service for faster payments. Other commenters more 
generally discussed the importance of liquidity management in RTGS 
services for faster payments and noted the challenge of managing the 
timing of payment inflows and outflows on a 24x7x365 basis. Many 
commenters emphasized the importance of automated features for a 
liquidity management tool, such that liquidity transfers could occur 
outside standard business hours without the need for operational staff 
at participating banks during those hours. At least one commenter noted 
that functionality provided through a liquidity management tool should 
be available to all systems that could benefit from it. This comment 
was consistent with those from other commenters that emphasized the 
Federal Reserve should more generally enhance its current services to 
support a variety of payment activities.
    Most of the commenters that addressed how the Federal Reserve 
should provide a liquidity management tool expressed the view that it 
should do so through expansion of operating hours for the Fedwire Funds 
Service. Commenters noted the potential for a variety of payment 
activities to benefit from expanded operating hours for the Fedwire 
Funds Service. A few commenters stated that the Federal Reserve should 
expand operating hours for NSS. No commenters suggested that the 
Federal Reserve should develop a new service to support liquidity 
management in RTGS services for faster payments.
    The commenters that did not support the Federal Reserve developing 
a liquidity management tool indicated that liquidity management could 
be accomplished through software developed by the private sector that 
would alert a bank about balance levels in their account at the Reserve 
Banks.

B. Board Analysis

    The Board believes that expanding the operating hours of the 
Fedwire Funds Service and NSS, potentially up to 24x7x365, would be the 
most effective way to provide the liquidity management functionality 
described in the 2018 Notice and could provide additional benefits to 
financial markets broadly.
    The ability to transfer funds from master accounts to a joint 
account during nonstandard business hours would allow participants in a 
private-sector RTGS service to manage liquidity on a ``just-in-time'' 
basis. Just-in-time liquidity management would remove the need to 
increase funding in a joint account ahead of weekends, holidays, and 
other times when liquidity transfers are not currently possible. Just-
in-time liquidity management would also decrease the likelihood that a 
bank would have insufficient liquidity to settle a payment. As a 
result, the system would have less risk that an individual or business 
would experience an incomplete payment because its bank does not have 
the requisite funds available in a joint account to support settlement. 
These benefits might broaden the appeal of a private-sector RTGS 
service using a joint account, thereby potentially expanding the use of 
RTGS services for settlement of faster payments.
    Expanded hours for the Fedwire Funds Service and NSS could also 
benefit other retail payment services. For retail services that conduct 
interbank settlement on a deferred basis, including certain faster 
payment services and traditional payment card services, expanded hours 
could enable these services to settle net interbank

[[Page 39316]]

obligations at times not currently possible, including weekends and 
holidays. Expanded Fedwire Funds Service and NSS hours could also 
benefit ACH payments by enabling additional settlement windows.\91\
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    \91\ In a separate notice, the Board has requested comment on 
potential modifications to Federal Reserve payment services to 
facilitate adoption of a later same-day ACH processing and 
settlement window. Under the proposal in that notice, the Federal 
Reserve would extend the daily operating hours of the Fedwire Funds 
Service and NSS by 30 and 60 minutes, respectively, to accommodate a 
third same-day ACH settlement window at 6:00 p.m. ET. See Board of 
Governors of the Federal Reserve System, ``Potential Modifications 
to the Federal Reserve Banks' National Settlement Service and 
Fedwire Funds Service To Support Enhancements to the Same-Day ACH 
Service and Corresponding Changes to the Federal Reserve Policy on 
Payment System Risk, Request for Comments,'' 84 FR 22123, 22129 (May 
16, 2019). Available at https://www.federalregister.gov/d/2019-09949.
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    In addition, expanded Fedwire Funds Service hours would increase 
the overlap between the hours of the Fedwire Funds Service and those of 
large-value payment systems in other countries, thereby supporting 
wholesale payment activity in multiple markets. For example, expanded 
hours could allow U.S. banks that provide clearing services to global 
correspondents and multinational corporations to meet client needs 
outside standard business hours. Expanded hours could support a broad 
range of domestic wholesale payment activity as well, such as margin 
payments related to trading conducted on 24-hour platforms or payments 
related to mergers and acquisitions that close on a weekend.
    In light of these potential benefits, the Board has determined that 
the Federal Reserve should explore the expansion of Fedwire Funds 
Service and NSS hours. However, because of the systemic importance of 
the Fedwire Funds Service and the Board's risk management expectations 
for the service, additional analysis is needed to evaluate fully the 
relevant operational, risk, and policy considerations for both the 
Reserve Banks and participants. The Federal Reserve plans to engage 
with the industry on issues related to expanded Fedwire Funds Service 
and NSS operating hours, as well as potential approaches for expanding 
those hours. Implementation approaches could range from limited 
availability on weekends and holidays to full 24x7x365 availability. 
Through this engagement, the Federal Reserve intends to solicit 
additional information about the industry's specific needs and 
readiness related to these options. The Board will announce any 
decision regarding the expansion of hours for the Fedwire Funds Service 
and NSS, including issuing a request for comment if necessary, after 
further analysis is completed.

Part Two

V. FedNow Service Description

    In what follows, the Board has outlined a general description of 
the planned FedNow Service and provided additional details on the 
service's potential features and functionality. The features and 
functionality, along with related implementation considerations, 
incorporate feedback from comments received in response to the 2018 
Notice.
    The Board is seeking comment on all aspects of the FedNow Service. 
The Federal Reserve also intends to convene industry groups and 
facilitate other outreach forums to gather input on the service.\92\ 
The Federal Reserve will use the feedback gained through written 
comments and other channels to finalize the design and features of the 
FedNow Service. Once these details have been finalized, a final service 
description will be published in a subsequent Federal Register notice 
with additional information provided through existing Reserve Bank 
communication channels.
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    \92\ The Reserve Banks will communicate information about 
industry groups and forums through established channels. Industry 
engagement is expected to be a continual process as part of ongoing 
service and product development.
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A. Public Comments

    In the 2018 Notice, the Board sought input on certain issues 
related to the design and implementation of a potential RTGS service 
for faster payments. First, the Board sought comment on the ideal 
timeline for implementing such a service. Second, the Board requested 
comment on the adjustments that banks and their customers would need to 
make under an accounting regime in which the Reserve Banks would record 
and report end-of-day balances for each calendar day, including 
weekends and holidays (a seven-day accounting regime).\93\ Third, the 
Board sought input on the operational burden that banks would face if 
an RTGS service for faster payments were designed to use accounts 
separate from banks' master accounts.\94\ Fourth, the Board sought 
feedback on the need for auxiliary services, such as fraud prevention 
services that provide tools to detect fraudulent payments or a 
directory that allows faster payment services to route end-user 
payments using the receiver's public identifier, such as a phone number 
or email address, rather than bank routing and account information.\95\ 
For each question, commenters from nearly every segment provided input.
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    \93\ At present, end-of-day balances are recorded and reported 
for each banking day that Federal Reserve services operate. Normal 
banking days are Mondays through Fridays. Because Federal Reserve 
services do not currently operate over the weekend (or on holidays), 
this current practice corresponds to a five-day accounting regime.
    \94\ As described previously, a master account is the record of 
financial rights and obligations between account-holding banks and a 
Reserve Bank. The Reserve Banks typically permit a single master 
account per eligible institution, and the settlement activity for 
most Federal Reserve payment services occurs in master accounts.
    \95\ The receiver's bank routing and account information is 
generally required to deliver payments between end-user bank 
accounts. This information can be difficult for the sender of a 
payment to obtain. As a result, some payment services allow the 
sender to direct a payment using a public identifier of the intended 
receiver. For such a public identifier to be used in a payment, the 
sender's bank must be able to link the public identifier to the 
intended receiver's banking information. A directory allows a bank 
to obtain this information through a database that connects public 
identifiers with the receiver's banking information, without 
requiring the sender to have that information or the receiver to 
reveal it to the sender.
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    More than 140 commenters, from all segments, addressed the ideal 
timeline for implementing a Federal Reserve RTGS service for faster 
payments. The majority of these commenters encouraged the Federal 
Reserve to implement such a service as quickly as possible. These 
commenters noted that the market for faster payments is rapidly 
evolving and that, if the Federal Reserve were unable to provide a 
service in the near future, it would face difficulty achieving 
widespread adoption. A few commenters cautioned that, while acting 
quickly may be ideal, the timing of a new service should take into 
consideration the adjustments that banks and service providers would 
need to make to implement the service.
    Approximately 40 commenters addressed operational adjustments that 
would be required if an RTGS service for faster payments used a seven-
day accounting regime.\96\ Some of these commenters noted that, 
although certain banks may have already adopted 24x7x365 accounting for 
services such as ATM and debit card transactions, some banks and their 
business customers may need to make substantial back-office adjustments 
to implement a seven-day accounting regime. These adjustments included 
system upgrades, operational changes, and staffing outside of standard 
business hours. Approximately 10 commenters stated that the option to 
defer receipt of transaction reporting during

[[Page 39317]]

nonstandard business hours might be useful until banks are able to 
support 24x7x365 back-office operations.
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    \96\ These commenters included small and midsize banks, large 
banks, individuals, consumer organizations, service providers, 
fintech companies, trade organizations, and other interested 
parties.
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    Approximately 50 commenters expressed views on the incremental 
operational burden if an RTGS service were to settle faster payments in 
dedicated Federal Reserve accounts, separate from banks' master 
accounts.\97\ The majority of these commenters indicated that, if 
necessary, banks would likely be able to manage separate settlement 
accounts. Some of these commenters further stated that if separate 
accounts were used, the benefits of such a structure would need to 
outweigh the burden for banks of managing separate accounts. Commenters 
also noted that a liquidity management tool would be needed to move 
funds during nonstandard business hours between master accounts and 
separate accounts for settlement of faster payments. Most commenters 
that addressed the use of separate accounts stated that, if separate 
Federal Reserve accounts were used for settlement of faster payments, 
balances in those accounts should earn interest and count towards 
reserve requirements.
---------------------------------------------------------------------------

    \97\ These commenters included small and midsize banks, large 
banks, individuals, service providers, fintech companies, and trade 
organizations.
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    More than 100 commenters, from all segments, discussed whether a 
directory service is needed for an RTGS service for faster payments. 
Many of these commenters stated that directories are an important 
driver for adoption of faster payments because individuals and 
businesses value the ability to make payments based on public 
identifiers. These commenters often indicated that the Federal Reserve 
should support development of a directory service for faster payments, 
citing their views of the Federal Reserve as a trusted service provider 
with broad reach. Some of these commenters suggested the Federal 
Reserve could build and operate its own directory service whereas 
others suggested that it could serve as a centralized link to existing 
directories. A few commenters did not support the Federal Reserve 
developing its own directory service because private-sector directories 
are already available.
    More than 90 commenters addressed the importance of fraud 
prevention services.\98\ Many of these commenters suggested that an 
RTGS service for faster payments should include fraud prevention 
services, with some noting that such services could be more efficient 
and less susceptible to vulnerabilities if they were an integral part 
of an RTGS service for faster payments. Some commenters noted that 
fraud prevention services could include a database of known fraudulent 
accounts or automated fraud detection tools to identify unusual payment 
activity. Some commenters noted that a potential Federal Reserve RTGS 
service for faster payments would not require fraud prevention services 
because the private sector already offers such services. In the context 
of discussing fraud prevention services, some commenters also 
highlighted the need for tools that would assist in compliance with 
regulations to prevent money laundering and terrorist financing.
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    \98\ These commenters included small and midsize banks, 
individuals, merchants, service providers, and trade organizations.
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B. General Description of the FedNow Service

    The FedNow Service would process individual payments within 
seconds, 24 hours a day, 7 days a week, 365 days a year. The service 
would be designed to support credit transfers, where a sender initiates 
a payment to an intended receiver for a variety of use cases, such as 
person-to-person payments, bill payments, and smaller-value business-
to-business payments.\99\ The service would settle interbank 
obligations through debit and credit entries to balances in banks' 
master accounts at the Reserve Banks. All settlement entries for 
transactions through the FedNow Service would be final, meaning that 
settlement cannot be cancelled or revoked once a transaction is 
processed by the service. Consistent with the goal of supporting faster 
payments, use of the service would 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 would support values initially limited to 
$25,000.\100\ The service would have the ability to process a large 
volume of payments rapidly, including volumes that may be unusually 
large at certain times of the day or days of the year.
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    \99\ Some traditional payments, such as card payments and 
certain ACH payments, are conducted as debit transfers. In a debit 
transfer, the party that wishes to be paid provides instructions 
that allow its bank to pull funds from the account of the party that 
needs to pay for a good or service, subject to the approval of that 
party and its bank. Because credit transfers require the sender to 
authorize and initiate each individual payment, services based on 
such transfers can decrease the risk of fraudulent or otherwise 
unauthorized payments. This and other considerations have led credit 
transfers to be the basis of faster payment systems in other 
countries.
    \100\ The initial $25,000 value limit would be intended to 
restrict the size of potential fraudulent transactions, while also 
supporting payments associated with a variety of use cases. Like 
other aspects of the service, this value limit could change after 
experience with the service provides additional information about 
whether a change would be appropriate. Banks would also be able to 
establish value limits for their customers below the $25,000 limit.
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    The FedNow Service would incorporate clearing functionality with 
messages containing information required to complete end-to-end 
payments, such as account information for the sender and receiver, in 
addition to interbank settlement information. The service would also 
support the inclusion of additional descriptive information related to 
a payment, such as remittance or invoice information, and may further 
allow for nonvalue message types.\101\ Payment message format would be 
based on the ISO 20022 standard.\102\
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    \101\ For example, one possible message type is a ``request for 
payment'' in which the intended receiver submits a request for the 
sender to initiate a payment. A request-for-payment message type is 
addressed in the discussion of specific service features.
    \102\ Additional information about the ISO 20022 standard is 
provided in the discussion of specific service features.
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    In its simplest form, a completed payment through the FedNow 
Service involving two participating banks would have the following 
steps.\103\ To start, a sender would initiate a payment through its 
bank, by submitting instructions to it using an end-user interface 
outside the FedNow Service. After the sender's bank authenticates the 
sender and validates the payment, it would submit a payment message to 
a Reserve Bank using the FedNow Service. The FedNow Service would 
authenticate the sender's bank and validate the payment message, for 
example, by verifying that the message meets the FedNow format 
specifications. Before the Reserve Bank executes the payment message, 
the service would place a provisional hold on funds in the master 
account of the sender's bank and would then send an inquiry message to 
the receiver's bank seeking confirmation that the receiver's bank, 
among other things, maintains a valid account for the receiver included 
in the payment message received by the Reserve Bank. If the receiver's 
bank sends a positive response to the inquiry, the FedNow Service would 
execute the payment for the Reserve Banks by sending a payment message 
forward with an advice of credit to the receiver's bank and nearly 
simultaneously processing a final debits and final credit to the master 
accounts of the sender's bank and receiver's bank,

[[Page 39318]]

respectively.\104\ The banks are responsible for debiting and crediting 
their customers' accounts and providing further notification to their 
customers that the payment has been completed. The entire process would 
take place within seconds.
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    \103\ Other steps could occur, for example, if either bank were 
to use an agent, service provider, or correspondent or if a 
directory service were used.
    \104\ The receiver's bank would need to respond to the message 
sent to it by the service within a certain amount of time. In the 
event that the response process is not completed within the expected 
time, the transaction would not be completed. Instead, the payment 
would be rejected, with the provisional hold on funds removed from 
the master account of the sender's bank and the banks being notified 
of the rejection. A payment could also be rejected, with associated 
notifications of payment rejection, if any of the necessary steps 
were not completed. For example, a payment could be rejected because 
of invalid account information for the receiver, which would cause 
the receiver's bank to reject the payment.
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    Like current Federal Reserve services, the FedNow Service would be 
available to banks eligible to hold accounts at the Reserve Banks under 
applicable federal statutes and Federal Reserve rules, policies, and 
procedures.\105\ Participating banks would be able to designate a 
service provider or agent to submit or receive payment instructions on 
their behalf. Participating banks could also choose to settle payments 
in the account of a correspondent bank.\106\
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    \105\ Section 13(1) of the Federal Reserve Act permits Reserve 
Banks to receive deposits from member banks or other depository 
institutions. 12 U.S.C. 342. Section 19(b)(1)(A) of the act includes 
as depository institutions any federally insured bank, mutual 
savings bank, savings bank, savings association, or credit union. 12 
U.S.C. 461(b). The Reserve Banks may maintain accounts for 
additional institutions under other statutory authority.
    \106\ A correspondent bank is a bank that has authorized a 
Reserve Bank to settle debit and credit transaction activity to its 
master account for a respondent bank. Correspondent/respondent 
relationships are established under Federal Reserve Operating 
Circular 1.
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    The service would establish a ``business day'' by setting opening 
(beginning-of-day) and closing (end-of-day) times (in eastern time). 
This business day would be used to determine end-of-day balances and 
conduct associated reserve and interest calculations, as well as for 
transaction reporting and account reconciliation purposes. The 
existence of these opening and closing times would not affect the 
service's 24x7x365 continuous processing of payments. End-of-day 
balances would be calculated for master accounts on each calendar day, 
including weekends and holidays, as part of a seven-day accounting 
regime. Banks would be expected to manage their accounts to have a 
positive end-of-day account balance each day and avoid overnight 
overdrafts.
    The Board recognizes that, in a market structure with multiple 
operators of RTGS services for faster payments, the ability to achieve 
ubiquity in faster payments is advanced when customers of a bank 
participating in one RTGS service are able to reach the customers of a 
bank participating in another RTGS service. This type of reach can be 
achieved in multiple ways, such as by banks participating in multiple 
services, or through interoperability where direct exchange of payments 
across services is possible. Each of these requires some degree of 
cooperation among private-sector operators, banks, and service 
providers. During its engagement with the industry, the Federal Reserve 
intends to explore both interoperability and other paths to achieving 
nationwide reach in support of ubiquitous faster payments, recognizing 
that these approaches may change over time.

C. Discussion of Specific Features and Functionality

    The Board has considered the specific features and functionality of 
the planned FedNow Service. These features and functionality, as well 
as whether they would be part of the service initially, offered 
incrementally after the service is operational, or offered at all, may 
need to be adjusted based on the Federal Reserve's industry engagement 
efforts. In addition, industry engagement may identify other features 
and functionality not described here that may be addressed in the 
subsequent Federal Register notice as part of the final service 
description or through existing Reserve Bank customer communication 
channels.
1. Message Standard
    Payment message formats in the FedNow Service would be based on the 
ISO 20022 standard and its implementation with respect to faster 
payments in the United States.\107\ The service would support various 
message types, including payment instructions, confirmations, and 
request for payment. As part of a payment, the service would also 
support the exchange of remittance or other information related to a 
specific payment or invoice. Message specifications for the service, 
including specific message types and interpretation of ISO formats, 
would be provided to the industry prior to the initial launch of the 
service through established Reserve Bank communication channels.
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    \107\ The ISO 20022 standard is a message format standard for 
payments, securities, trade services, payment cards, and foreign 
exchange. For more information, see https://www.iso20022.org/. The 
standard is published by the International Organization for 
Standardization (ISO), an independent, non-governmental organization 
comprised of 161 national standards bodies. For more information, 
see https://www.iso.org. The ISO 20022 standard is increasingly being 
adopted around the world as part of efforts to modernize payment 
services, including those that are used for faster payments.
---------------------------------------------------------------------------

2. Settlement Account
    Like other Federal Reserve payment and settlement services, the 
FedNow Service would settle payments in master accounts.\108\ Depending 
on the services used by a participating bank, transactions from 
multiple Federal Reserve services would settle in a master account at 
any given time during standard business hours.\109\ Banks would need to 
monitor their master accounts and possibly adjust practices in managing 
those accounts because of the real-time settlement activity associated 
with the FedNow Service (see also the Liquidity and Credit discussion).
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    \108\ As discussed in the 2018 Notice, the Board contemplated a 
two-account structure, with a separate account dedicated to 
settlement of faster payments to possibly reduce the technical 
complexity of an RTGS service and reduce time-to-market. However, 
this structure would introduce significant operational complexity 
for both the Federal Reserve and participating banks. For example, a 
separate account for settlement of faster payments would require new 
balance reconciliation procedures and introduce the need for 
participating banks to make transfers between the two accounts.
    \109\ These other services are check services, the Fedwire Funds 
Service, NSS, the Fedwire Securities Service, and FedACH services.
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3. Seven-Day Accounting Regime
    After considering Financial Accounting Standards Board (FASB) 
principles, the Board believes that a seven-day accounting regime is 
appropriate for the FedNow Service.\110\ Funds associated with a 
payment made using the FedNow Service would be transferred between the 
sender's bank and the receiver's bank upon final settlement. Therefore, 
in light of the FASB principles' guidance on when transferred assets 
should be recognized on each parties' financial records, the Reserve 
Banks would record and report transactions for accounting purposes as 
they occur, each day of the week, including weekends and holidays.\111\

[[Page 39319]]

Similarly, an end-of-day balance would also be calculated for each 
participating bank at the FedNow Service's designated closing time each 
day of the week, including weekends and holidays (see also the Business 
Day discussion).
---------------------------------------------------------------------------

    \110\ FASB accounting principles are developed under the FASB 
Statements of Financial Accounting Concepts, which the FASB states 
are ``intended to serve the public interest by setting the 
objectives, qualitative characteristics, and other concepts that 
guide . . . financial reporting.'' More information on the FASB 
Statements of Financial Accounting Concepts is available at https://www.fasb.org/cs/ContentServer?c=Page&cid=1176156317989&d=&pagename=FASB%2FPage%2FPreCodSectionPage.
    \111\ The Board considered a five-day accounting regime for the 
service, which would be consistent with the Federal Reserve's 
current approach and that of many banks, but determined that, under 
the FASB principles, a seven-day regime is most appropriate for the 
FedNow Service. Specifically, the FASB principles outline that once 
control of an asset, such as balances in a Federal Reserve account, 
is transferred to a new owner, the asset should be removed from the 
original owner's financial records and recognized on the new owner's 
financial records.
---------------------------------------------------------------------------

    A seven-day accounting regime adopted by the Federal Reserve for 
the FedNow Service does not dictate or preclude use of specific other 
accounting regimes by participating banks. Based on their 
interpretation of accounting principles, participating banks may choose 
to use other accounting approaches internally; for example, banks may 
use five-day accounting in which they record and report weekend 
transactions on their financial records as occurring on Monday.\112\ 
The service would provide queries, confirmations, and reports to 
support transaction monitoring, reporting, and reconciliation by 
participating banks under their chosen internal accounting approach. 
Banks could elect either to receive daily accounting reports at the end 
of each business day to allow management of reserve balances or to 
receive reports for weekends and holidays on the next business day.
---------------------------------------------------------------------------

    \112\ Over time, participating banks could alternatively choose 
to adopt a seven-day accounting approach.
---------------------------------------------------------------------------

4. Business Day
    In considering the implications of a business day for the FedNow 
Service in light of business day practices for current Federal Reserve 
services, the Board has determined that the business day of the FedNow 
Service should align with the business day of the Fedwire Funds 
Service.\113\ Given the 24x7x365 nature of the FedNow Service, the 
opening time would be designated to occur immediately after the closing 
time, with the intention that transitions between closing and opening 
for the next business day would not disrupt continuous processing. 
Transactions completed after the FedNow Service's closing but before 
midnight each calendar day would be recorded on Federal Reserve 
accounting records as transactions occurring on the next business day.
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    \113\ Today, the Fedwire Funds Service closes at 6:30 p.m. ET 
and re-opens for the next business day at 9:00 p.m. ET on the same 
calendar day. The Board recently requested comment on moving the 
close of the Fedwire Funds Service to 7:00 p.m. ET to accommodate 
later settlement for ACH transactions. See ``Potential Modifications 
to the Federal Reserve Banks' National Settlement Service and 
Fedwire Funds Service,'' supra note 91.
    Fedwire Funds transactions between 9:00 p.m. ET and midnight ET 
are recorded as occurring on the next business day and typically 
support international markets and settlement of other domestic and 
global payment systems. The Board considered setting a midnight ET 
closing time for the FedNow Service to align across business and 
calendar days. However, such an approach would not allow balance 
calculations performed by the Federal Reserve to be measured on the 
same business day for the Fedwire Funds service and the FedNow 
Service, making calculation of balances problematic. Such a 
misalignment could have consequences for the current activity 
occurring over the Fedwire Funds Service.
---------------------------------------------------------------------------

    A business day for the FedNow Service that aligns with the Fedwire 
Funds Service, however, does not dictate that participating banks adopt 
the same convention, or preclude other conventions, for recording 
transactions in their customers' accounts. For example, banks could 
post faster payment transactions occurring after the close of the 
FedNow business day to customers' accounts in real time based on the 
calendar day in which they are received.\114\
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    \114\ This practice would be akin to banks' common practice of 
``memo posting'' for ATM withdrawals and certain other transaction 
activity. Under this practice, transactions are provisionally posted 
to customers' accounts on the date they are made but are reported on 
a later date for the purposes of monthly account statements.
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5. Liquidity and Credit
    Comments in response to the 2018 Notice indicated concerns about 
adequate liquidity being available to support faster payments, 
particularly on weekends and holidays. To support their current payment 
services, the Reserve Banks provide liquidity in the form of intraday 
credit, also known as daylight overdrafts, to eligible banks and 
subject to the Federal Reserve's Policy on Payment System Risk (PSR 
Policy).\115\ Intraday credit supports the smooth functioning of the 
payment system by supplying temporary liquidity to cover shortages that 
can result when the timing of payment inflows and outflows are not 
balanced.
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    \115\ Intraday credit is generally available to banks that are 
financially healthy and have regular access to the discount window 
(the Federal Reserve's program for overnight lending to banks). See 
Board of Governors of the Federal Reserve System, ``The Federal 
Reserve Policy on Payment System Risk,'' (As amended effective 
September 15, 2017). Available at https://www.federalreserve.gov/paymentsystems/psr_about.htm.
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    Like current services, access to intraday credit for FedNow 
transactions could support the smooth functioning of payments through 
the service. The Board is considering the impact of providing intraday 
credit on a 24x7x365 basis under the same terms and conditions as for 
current Federal Reserve services. As is the case today, participating 
banks would be expected to manage their master accounts in compliance 
with Federal Reserve policies, including avoiding overnight 
overdrafts.\116\ These expectations would apply over weekends and 
holidays given that the FedNow Service would operate 24x7x365.
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    \116\ To minimize Reserve Bank exposure to overnight overdrafts, 
policy established by the Board discourages institutions from 
incurring overnight overdrafts by charging a penalty fee. See Board 
of Governors of the Federal Reserve System, ``Policy on Overnight 
Overdrafts,'' (Effective July 12, 2012). Available at https://www.federalreserve.gov/paymentsystems/oo_policy.htm.
---------------------------------------------------------------------------

    Account balance management would become more complex in a 24x7x365 
environment where payments settle continuously in master accounts. 
Given the retail nature of payments through the FedNow Service, 
transaction values are expected to be relatively small compared with 
other activity in master accounts, such as Fedwire Funds transfers. 
Nevertheless, participating banks may need to adjust internal account 
monitoring practices to manage intraday liquidity. Liquidity management 
would be particularly important to avoid a negative balance at the 
service's closing time. Specifically, banks would need to carefully 
monitor transactions in real time or ensure that sufficient funding is 
available in their master accounts to cover payments that may arise 
shortly before the service's closing.
    The Federal Reserve is conducting analysis of when it may be 
beneficial to extend discount window operations to include weekends or 
holidays.\117\ At least initially, however, discount window loan 
originations would likely not be available on weekends and holidays. 
The discount window would continue to be available until the close of 
the Fedwire Funds Service on Fridays under the same or similar terms as 
today.
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    \117\ The discount window is a Federal Reserve lending facility 
that helps to relieve liquidity strains for individual banks and for 
the banking system as a whole by providing a reliable backup source 
of funding. Additional information on the discount window is 
available at https://www.federalreserve.gov/regreform/discount-window.htm.
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    The Board will engage with the industry to consider features and 
tools to assist institutions with the effective management of intraday 
and end-of-day account balances.\118\ The Board may

[[Page 39320]]

apply additional controls, initially or over time, in the PSR Policy as 
necessary to mitigate the credit risk incurred by the Reserve Banks in 
providing access to liquidity and credit.
---------------------------------------------------------------------------

    \118\ Today, banks use the Reserve Bank's Account Management 
Information services for a near real-time view of account balances. 
At least initially, the Federal Reserve expects that banks would 
need to monitor account balances outside standard business hours by 
reconciling payment activity against the last available closing 
balance. However, the Federal Reserve expects that the Reserve 
Bank's Account Management Information services would be available 
during the same hours as the FedNow Service shortly after the 
service becomes available.
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6. Network Access
    Participating banks would access the FedNow Service through the 
FedLine[supreg] network, which would be enhanced to support the 
service's 24x7x365 processing.\119\ Participating banks would need to 
deploy and test enhanced or upgraded FedLine components to enable the 
FedNow Service. Depending on their electronic connection with the 
FedLine network, banks also would need to maintain adequate 
telecommunications services to support the expected end-to-end speed of 
payments through the FedNow Service.
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    \119\ FedLine Solutions is a set of electronic connection 
products that over 10,000 banks (or their agents) use to access 
Federal Reserve payment and information services. More information 
is available at https://frbservices.org/fedline-solutions/.
    While not envisioned at this time, the Board may consider in the 
future whether enabling access to the FedNow Service through 
alternate messaging networks would enhance resiliency or 
interoperability for faster payments.
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7. Service Pricing
    Before the FedNow Service is launched, the Board will announce the 
service's fee structure and fee schedule.\120\ Based on prevailing 
market practices, the Board expects that the fee structure would 
include a combination of per-item fees, charged to sending and 
potentially to receiving banks, and fixed participation fees.\121\ 
Separate per-item fees could also be charged for other message types 
that may be offered in the future.
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    \120\ After announcing the initial fee schedule, consistent with 
existing practice, the Board would include the FedNow Service with 
its annual service-pricing process for all priced services.
    \121\ The ultimate fee structure and schedule would be informed 
by the Board's assessment of market practices at the time of 
implementation, which could evolve from today's practices.
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    As discussed in Section III under the Cost Recovery Criterion, the 
Board expects that the FedNow Service will take significant time to 
mature, as the industry takes steps to adopt the service. The Board 
expects the service's first instance of long-run cost recovery to occur 
outside the 10-year cost recovery period typically applied to mature 
services. The Board anticipates that, until the FedNow Service reaches 
maturity with relatively stable costs and revenues and a critical mass 
of bank participation, fees would be based on costs associated with 
mature volume estimates.\122\ The Board believes that this approach to 
cost recovery for the FedNow Service, as a new service, which would not 
rely on the standard applied to mature services, is consistent with the 
language and purpose of the MCA and the Board's pricing principles. The 
Board is requesting comment on factors that may be relevant to consider 
in evaluating the long-run cost recovery of new Federal Reserve 
services compared with mature services.
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    \122\ This approach is consistent with that used for the Federal 
Reserve's ACH service before it became a mature service.
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8. Request for Payment
    In the FedNow Service, a request for payment would be a separate 
nonvalue message type that, when received through an end-user service, 
would prompt a sender to initiate a payment to the receiver who is 
requesting funds. The request for payment functionality allows a sender 
to authorize a credit transfer in real time, based on the receiver's 
request message. This functionality may increase the use of faster 
payments by allowing end users to more easily conduct certain types of 
transactions, such as bill payments. This functionality allows a sender 
to retain control of the authorization in sending a payment in real 
time, helps avoid mistakes of sending payments to the wrong party, and 
reduces the fraud risk relative to that of debit transfers.\123\ The 
Board is seeking input on the incremental value and ideal 
implementation timing of such functionality to advance broad adoption 
of faster payments in the United States.
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    \123\ Many payments in the United States, such as electronic 
bill payments and card payments have traditionally been accomplished 
as debit transfers, in which the sender provides the receiver with 
information and authorization to debit the sender's bank account.
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9. Directory Service
    Comments received in response to the 2018 Notice indicated the 
ability to originate payments using a receiver's public identifier, 
such as an email address or cell phone number, would be beneficial to 
help drive adoption of faster payments. To send a valid payment message 
in the FedNow Service, however, the sender's bank must have the banking 
information of the receiver. Therefore, if a sender wanted to originate 
a payment using a public identifier, the sender's bank would need to be 
able to find the banking information of the intended receiver using the 
public identifier. The availability of a directory that connects public 
identifiers with receivers' banking information would provide the 
sender's bank with the needed information, without ever revealing that 
information to the sender.
    Access to a directory for purposes of payments made using the 
FedNow Service could be accomplished in multiple ways. Individually, 
banks could establish connections to existing private-sector 
directories and develop an automated mechanism for populating payment 
messages with information provided by these external directories. 
Alternatively, the Reserve Banks could establish a centralized link 
with private-sector directories on behalf of participating banks, 
rather than each participating bank needing to do so individually. A 
further option would be for the Reserve Banks to build their own 
directory, enabling a message type that would allow banks to query the 
directory as part of the FedNow Service. The Federal Reserve intends to 
engage with industry stakeholders to understand more fully the benefits 
and drawbacks of these potential approaches and to assess possible 
paths forward to advance broad adoption of faster payments in the 
United States.
10. Fraud Prevention Services
    Comments received in response to the 2018 Notice emphasized the 
heightened risk of fraud with real-time transactions and noted the 
importance of fraud-monitoring solutions to aid in mitigating fraud 
risk. The Board agrees that strong security mechanisms are necessary to 
support the overall safety of the nation's payment system. Across the 
payment system, payment security at the end-user level rests between 
end users and their banks, while at the payment system level, service 
operators may have additional layers of security.
    For the FedNow Service, participating banks would continue to serve 
as a primary line of defense against fraudulent transactions, as they 
do today, with solutions to mitigate fraud enabled as part of the end-
user services banks offer their customers. At the payment system level, 
the FedNow Service could offer additional fraud mitigation features, 
such as payment monitoring to alert participating banks of unusual 
transactions. In addition, the Federal Reserve remains committed to 
working with the industry on best practices and standards for 
mitigating fraud across these levels. The Federal Reserve intends to 
engage with industry stakeholders to better assess FedNow Service 
features that could help mitigate fraud risk and advance the safety of 
faster payments in the United States.

[[Page 39321]]

D. Implementation

    The Board acknowledges the time-to-market pressure for industry 
participants related to faster payment services and is committed to 
launching the FedNow Service as soon as practicably possible. The 
Federal Reserve will engage quickly with industry participants to 
gather input for finalizing the initial design and features of the 
service. Pending engagement with the industry, the Board anticipates 
the FedNow Service will be available in 2023 or 2024.

VI. Competitive Impact Analysis

    The Board conducts a competitive impact analysis when considering 
an operational or legal change to a new or existing service, such as 
the planned FedNow Service. The Board has considered whether the FedNow 
Service as described in Section V would have a direct and material 
adverse effect on the ability of other service providers to compete 
effectively with the Federal Reserve in providing similar services due 
to differing legal powers or constraints or due to a dominant market 
position of the Federal Reserve deriving from such legal 
differences.\124\
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    \124\ ``The Federal Reserve in the Payments System,'' supra note 
18.
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    In conducting a competitive impact analysis, the Board first 
determines whether the proposal has a direct and material adverse 
effect on the ability of other service providers to compete effectively 
with the Federal Reserve in providing similar services. In instances 
where such direct and material adverse effects on the ability of the 
private-sector provider to compete are identified, the Board then 
considers whether such effects were due to either legal differences or 
a dominant market position deriving from such legal differences. If the 
Board determines that the material adverse effects were the result of 
legal differences or the Federal Reserve's dominant market position, 
the Board then evaluates the potential public benefits of the new 
service in order to determine whether those benefits could be 
reasonably achieved with a lesser or no adverse competitive impact. 
Based on these considerations, the Board then either modifies the 
proposal to lessen or eliminate the adverse impact on competitors' 
ability to compete or determines that the payment system objectives may 
not be reasonably achieved if the proposal is modified. If reasonable 
modifications would not mitigate the material adverse effect, the Board 
then determines whether the anticipated benefits of the new service are 
significant enough to proceed with the service even though it may 
adversely affect the ability of other service providers to compete with 
the Federal Reserve in that service.
    The Board has conducted an initial competitive impact analysis for 
the FedNow Service. However, the Board will conduct a final competitive 
impact analysis after considering the comments received during the 
public comment period.

A. Relevant Private-Sector Providers of Similar Services

    In conducting its initial competitive impact analysis, the Board 
first identified relevant private-sector providers of similar services. 
At present, there is one private-sector RTGS service for faster 
payments in the United States, which has been operational since 
November 2017.\125\ Like the planned FedNow Service, the private-sector 
RTGS service conducts real-time payment-by-payment final settlement of 
interbank obligations on a 24x7x365 basis. Unlike the FedNow Service, 
which would settle in central bank money using master accounts, the 
private-sector RTGS service relies on an internal ledger kept by its 
operator to conduct settlement, which is supported by funds held in a 
joint account at a Reserve Bank.\126\
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    \125\ The Board recognizes that the FedNow Service may affect 
additional private-sector entities that may be indirect competitors 
to or users of the FedNow Service. However, because these entities 
do not provide RTGS services for faster payments, the Board does not 
view them as private-sector providers of similar services and, 
therefore, has not considered them as part of this analysis.
    \126\ A joint account enables settlement for participants in a 
private-sector arrangement to be supported by funds held for the 
joint benefit of the service's participants. Accordingly, the 
operator of a private-sector arrangement that relies on a joint 
account can perform real-time, payment-by-payment settlement by 
adjusting participant positions on its own ledger, which, in the 
aggregate, will be equal to or less than the amount held in the 
joint account. Settlement supported by a joint account can occur at 
any time or on any day at the settlement-arrangement operator's 
discretion because settlement takes place on the ledger of the 
settlement-arrangement operator.
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B. Material Adverse Effects on the Ability of Relevant Service 
Providers To Compete Effectively

    After identifying relevant private-sector providers of similar 
services, the Board then compared those providers' services with the 
FedNow Service. The purpose of this comparison is to identify 
differences between private-sector and Federal Reserve services. Such 
differences could create a direct and material adverse effect on the 
ability of the private-sector services to compete effectively with the 
Federal Reserve. Ultimately, it would be difficult to create total 
parity between the Federal Reserve and private-sector providers in 
their provision of payment services. Certain differences may provide 
advantages in the Federal Reserve's provision of priced services, while 
other differences may provide competitive advantages to private-sector 
entities.\127\
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    \127\ For example, although private-sector providers generally 
do not need to publish their fees, the Federal Reserve publishes 
fees for their priced services in a manner that is transparent to 
competitors and customers alike.
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    In this regard, certain specific differences between the FedNow 
Service and the private-sector RTGS provider are relevant. For example, 
the eligibility of funds held in master accounts to earn interest and 
count toward reserve requirements is a particularly notable difference 
between the two services. However, whether these and other differences 
between the two services will, on net, have a direct and material 
adverse effect on the ability of the private-sector RTGS service to 
compete effectively with the Federal Reserve is unclear.
    First, the FedNow Service would allow participants to use their 
master accounts at the Reserve Banks, whereas the private-sector RTGS 
provider uses a separate non-interest-bearing joint account that each 
participant must prefund. Use of master accounts may provide an 
advantage to the FedNow Service because funds remain in participants' 
Federal Reserve accounts, earning interest and counting towards reserve 
requirements, and can be used for other purposes. Unlike funds held in 
a master account, funds held in the private-sector service's joint 
account do not earn interest or count towards reserve requirements and 
are not available for other purposes that may arise, such as satisfying 
payment or liquidity needs outside the private-sector service.\128\
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    \128\ In adopting guidelines for evaluating joint account 
requests, the Board explained that the treatment of joint account 
balances depends on the nature of the private-sector arrangement, 
including the rights and obligations of the parties involved. 
Therefore, determining whether balances held in a joint account can 
be used to meet reserve requirements or are eligible for interest is 
assessed for each request individually. See Board of Governors of 
the Federal Reserve System, ``Final Guidelines for Evaluating Joint 
Account Requests,'' 82 FR 41951, 41956 (Sept. 5, 2017). Available at 
https://www.federalregister.gov/d/2017-18705.
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    Second, if the Board confirms that the FedNow Service would provide 
access to intraday credit under the same terms and conditions as for 
current Federal Reserve services, such intraday credit would lower the 
risk that payments will be rejected because of lack of funds. In such a 
scenario, the Federal Reserve would expect banks to manage their

[[Page 39322]]

master accounts at all times in compliance with Federal Reserve 
policies. Further, because the Board does not expect that the discount 
window would be available initially on weekends and holidays, 
participants in the FedNow Service would need to manage their master 
accounts more actively during those times to avoid overnight 
overdrafts.
    In the private-sector service, participants are able to use 
intraday credit available to them under the Federal Reserve's PSR 
Policy to fund the joint account. Access to intraday credit in funding 
the joint account mitigates the risk of private-sector RTGS faster 
payment transactions being rejected. However, access would be limited 
to the current operating hours of the Fedwire Funds Service, resulting 
in continued risk of rejected payments because of lack of prefunding 
outside those hours. Participants in the private-sector service, 
however, can manage this risk by establishing credit arrangements 
outside of Federal Reserve services, making the materiality of this 
possible difference unclear.
    The Board identified additional differences between the two 
services that may provide advantages or disadvantages to either 
service. The FedNow Service and the private-sector service require 
participants to manage their account positions in different ways, 
presenting different challenges for some institutions. The FedNow 
Service's use of master accounts requires consideration of the defined 
closing and opening of other Federal Reserve payment services also 
settling in the same account. Further, use of master accounts for a 
service operating 24x7x365, such as the FedNow Service, adds a layer of 
complexity to banks' management of their positions to meet reserve 
requirements and avoid overnight overdrafts and associated penalties. 
At the same time, use of a joint account requires participants to 
prefund that account, removing liquidity from their master accounts, 
and to manage their contributions to the joint account to ensure 
sufficient liquidity to avoid rejected payments.
    The Board is requesting comment on whether the differences 
identified above would have a direct and material adverse effect on the 
ability of other service providers to compete effectively with the 
Federal Reserve and whether additional differences are also relevant. 
The Board will conduct a final assessment of these differences and 
others that may be identified in light of comments received.

C. Legal Differences Between the FedNow Service and the Private-Sector 
Service

    The Board has considered whether the differences between the FedNow 
Service and the private-sector service that have potential direct and 
material adverse effects are due to legal differences or due to a 
dominant market position deriving from such legal differences. The 
Board invites comment on the following initial analysis.
    Several of the differences identified above as potentially 
advantageous to the FedNow Service would be available to a private-
sector service if it were to use an operating model other than one 
based on a joint account at a Reserve Bank. For example, the service 
could use a commercial bank to hold the prefunding that backs the 
service's internal ledger. The funds in an account at a commercial bank 
could potentially earn interest. A commercial bank may also allow 
overdrafts and extensions of credit, thereby reducing the risk of 
rejected payments. Depending on the arrangement, balances held at a 
commercial bank to settle faster payments may count towards reserve 
requirements.
    Choice of a different operating model, however, would have 
potentially negative implications for other aspects of a private-sector 
RTGS service for faster payments. Most significantly, if a commercial 
bank were used, balances would be subject to risk of loss if the 
commercial bank holding the account were to fail. The use of a joint 
account at a Reserve Bank to support settlement mitigates this risk by 
reproducing, as closely as possible, the risk-free nature of settlement 
in central bank money.
    The Board believes that the inherently risk-free nature of deposits 
at a central bank relative to deposits at a commercial bank is a unique 
legal difference between the Federal Reserve and other possible 
institutions, such as a commercial bank, that may result in a 
competitive advantage for the FedNow Service. This advantage may have a 
direct and material effect in light of the private-sector operator's 
use of a joint account.

D. Achieving Potential Benefits With a Lesser, or No, Adverse 
Competitive Impact

    As described in Section III, the Board believes the FedNow Service 
would offer clear public benefits. Specifically, the service would 
promote the Federal Reserve's objective of an accessible, safe, and 
efficient payment system by helping ensure nationwide access to an RTGS 
infrastructure for faster payments, promoting the safety of the payment 
system and reducing risks associated with faster payments, and having 
positive effects on competition and innovation in the payment industry.
    If the differences between the FedNow Service and the private-
sector service discussed above are determined to have a material 
adverse effect on the ability of the private-sector provider to compete 
effectively with the Federal Reserve as part of the Board's final 
competitive impact analysis, certain actions may help to lessen those 
effects while still advancing the Federal Reserve's objectives. 
Specifically, if the Federal Reserve were to offer expanded Fedwire 
Funds Service or NSS hours, those services could enable access to 
liquidity during nonstandard business hours, when such access is 
currently not available. With expanded Fedwire Funds Service or NSS 
hours, direct participants in the private-sector RTGS service may be 
able to reduce the amount of prefunding, in particular, on weekends and 
holidays. This reduction in prefunding could then reduce the amount of 
liquidity committed to the joint account and allow more funds to remain 
in participants' master accounts, where those funds could accrue 
interest, count towards reserve requirements, and be used for purposes 
other than faster payments. Further, an expansion of Fedwire Funds 
Service or NSS hours could eventually allow participants in the 
private-sector RTGS service to have access to intraday credit during 
times that Fedwire Funds Service and NSS are currently closed.
    The expanded functionality provided by these actions, if 
implemented, may help reduce, if not fully eliminate, the potentially 
adverse effects described earlier. The Board is requesting comment on 
modifications to the FedNow Service or other actions that would further 
reduce or eliminate potentially adverse effects without significantly 
compromising the anticipated public benefit associated with the 
service. The Board will conduct and publish its final competitive 
impact analysis of the FedNow Service as part of the subsequent Federal 
Register notice presenting the final FedNow Service description.

    By order of the Board of Governors of the Federal Reserve System 
August 2, 2019.
Ann Misback,
Secretary of the Board.
[FR Doc. 2019-17027 Filed 8-8-19; 8:45 am]
BILLING CODE P