Service Details on Federal Reserve Actions To Support Interbank Settlement of Instant Payments, 48522-48538 [2020-17539]

Download as PDF 48522 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices case of states with Indian country within their borders) for allocation to certain units that would not otherwise receive allowance allocations. The procedures for identifying the eligible units for each control period and for allocating allowances from the NUSAs and Indian country NUSAs to these units are set forth in the CSAPR trading program regulations at 40 CFR 97.411(b) and 97.412 (NOX Annual), 97.511(b) and 97.512 (NOX Ozone Season Group 1), 97.611(b) and 97.612 (SO2 Group 1), 97.711(b) and 97.712 (SO2 Group 2), and 97.811(b) and 97.812 (NOX Ozone Season Group 2). Each NUSA allowance allocation process involves up to two rounds of allocations to eligible units, termed ‘‘new’’ units, followed by the allocation to ‘‘existing’’ units of any allowances not allocated to new units. In a notice of data availability (NODA) published in the Federal Register on May 18, 2020 (85 FR 29711), EPA provided notice of preliminary calculations for the first-round 2020 NUSA allowance allocations and described the process for submitting any objections. EPA received no objections in response to the May 18, 2020 NODA. This NODA concerns EPA’s final calculations for the first round of 2020 NUSA allocations, which are unchanged from the preliminary calculations. The detailed unit-by-unit data and final allowance allocation calculations are set forth in Excel spreadsheets titled ‘‘CSAPR_NUSA_2020_NOX_Annual_ 1st_Round_Final_Data’’, ‘‘CSAPR_ NUSA_2020_NOX_OS_1st_Round_ Final_Data’’, and ‘‘CSAPR_NUSA_2020_ SO2_1st_Round_Final_Data’’, available on EPA’s website at https:// www.epa.gov/csapr/csapr-complianceyear-2020-nusa-nodas. EPA notes that an allocation or lack of allocation of allowances to a given unit does not constitute a determination that CSAPR does or does not apply to the unit. EPA also notes that, under 40 CFR 97.411(c), 97.511(c), 97.611(c), 97.711(c), and 97.811(c), allocations are subject to potential correction if a unit to which allowances have been allocated for a given control period is not actually an affected unit as of the start of that control period. (Authority: 40 CFR 97.411(b), 97.511(b), 97.611(b), 97.711(b), and 97.811(b)) Reid P. Harvey, Director, Clean Air Markets Division, Office of Atmospheric Programs, Office of Air and Radiation. [FR Doc. 2020–17538 Filed 8–10–20; 8:45 am] BILLING CODE 6560–50–P VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 FEDERAL RESERVE SYSTEM [Docket No. OP–1670] Service Details on Federal Reserve Actions To Support Interbank Settlement of Instant Payments Board of Governors of the Federal Reserve System. ACTION: Service Announcement. AGENCY: The Board of Governors of the Federal Reserve System (Board) has approved the FedNowSM Service as described in this announcement. The FedNow Service is a new interbank 24x7x365 real-time gross settlement service with clearing functionality to support instant payments in the United States. The new service will support banks’ provision of end-to-end instant payment services and will provide infrastructure to promote ubiquitous, safe, and efficient instant payments in the United States. DATES: September 10, 2020. FOR FURTHER INFORMATION CONTACT: Kirstin Wells, Principal Economist (202–452–2962), Susan V. Foley, Senior Associate Director (202–452–3596), Division of Reserve Bank Operations and Payment Systems; Jess Cheng, Senior Counsel (202–452–2309), 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: SUMMARY: I. Introduction The payment system is a core part of our nation’s infrastructure. For more than a century, the Federal Reserve has provided payment and settlement services to promote an accessible, safe, and efficient U.S. payment system.1 Throughout its history, the Federal Reserve has provided these services alongside, and in support of, privatesector service providers. The Federal Reserve Banks (Reserve Banks) fulfill this statutory role by offering services that provide core infrastructure for financial transactions, including check, automated clearinghouse (ACH), and funds transfer services.2 This 1 Additional information about the Federal Reserve’s role in the payment system is available in The Federal Reserve System Purposes & Functions: Chapter 6, ‘‘Fostering Payment and Settlement System Safety and Efficiency,’’ (October 2016). Available at https://www.federalreserve.gov/ aboutthefed/pf.htm. 2 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 PO 00000 Frm 00023 Fmt 4703 Sfmt 4703 operational role provides key public benefits, including enhanced resiliency, healthy competition, increased innovation, and more equitable access. Since the Federal Reserve does not have plenary regulatory or supervisory authority over payments, this operational role has also helped catalyze fundamental improvements in the nation’s payment system.3 This role in the payments system has allowed the Federal Reserve to advance its broader mission of providing the nation with a modern, safe, and effective financial system. Consistent with this history, beginning in 2013 the Federal Reserve launched a collaborative initiative with a broad array of stakeholders to improve the speed, safety, and efficiency of the U.S. payment system. As part of this initiative, the Federal Reserve and stakeholders identified the need for instant payment capabilities in the United States that would allow individuals and businesses to conduct and complete payments almost immediately, around the clock, every day of the year and provide a receiver with access to funds in seconds (instant payments).4 The ability to both send and receive funds instantly allows individuals and businesses greater flexibility and control to manage their money and make time-sensitive payments. This flexibility in turn may help alleviate mismatches between the time that incoming funds are available for use and the time that such funds are needed for other purposes. For individuals, instant payments reduces the need for high-cost borrowing and the risk of associated penalties, such as overdraft or late fees. by the Reserve Banks include the Fedwire® Funds Service, the National Settlement Service, and FedACH® services. Throughout this notice, these services operated by the Reserve Banks will be referred to as Federal Reserve services. 3 For a more detailed discussion related to the Federal Reserve’s role in the payment system, including discussion related to regulatory and supervisory authorities, see ‘‘Federal Reserve Actions To Support Interbank Settlement of Faster Payments, Request for Comments,’’ 84 FR 39297 (Aug. 9, 2019). Available at https://www.federal register.gov/d/2019-17027. 4 See Faster Payments Task Force, ‘‘Final Report Part Two: A Call to Action,’’ (July 2, 017). Available at https://fedpaymentsimprovement.org/wpcontent/uploads/faster-payments-task-force-finalreport-part-two.pdf. The Board has previously used the term ‘‘faster payments’’ but has transitioned in this notice to the term ‘‘instant payments’’ to describe the types of payments the FedNow Service will support and distinguish them from other improvements to payment speed, such as same-day ACH. In addition, for the purposes of this notice, the term ‘‘instant payments’’ will specifically refer to a subset of payments in which an end user receives funds in near real time, with immediate interbank settlement of the payment also having occurred. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices Instant payments could be particularly helpful for individuals facing financial constraints or in times of crisis when there is heightened need to move money quickly and access funds almost immediately. For businesses, and in particular for small businesses, the ability to receive funds in near real time may result in better cash flow management in normal times, and this may be especially important in periods of stress. Instant payments may also provide businesses with considerable opportunity to improve efficiency and reduce costs of payments relative to paper checks and other existing payment methods. In light of these and many other potential benefits, the Board and a broad set of stakeholders determined that a core infrastructure is essential to support the development and availability of instant payment services. In particular, stakeholders recommended that the Federal Reserve explore and assess the need for an operational role in instant payments and develop a 24x7x365 settlement service to support such payments.5 This sentiment was echoed by the U.S. Treasury.6 It was also supported by the vast majority of over 400 comments received by the Board in 2018 in response to a Board proposal of potential actions to support instant payments in the United States (the 2018 Notice).7 As a result of this extensive consultation with a wide variety of stakeholders, the Board announced via public notice in August 2019 (the 2019 Notice), that the Reserve Banks would develop the FedNow Service, a new interbank 24x7x365 real-time gross settlement (RTGS) service with integrated clearing functionality to support instant payments in the United States.8 In making its decision, the Board concluded that the Federal Reserve’s operation of such a 24x7x365 RTGS service would be the most effective approach to advance the Federal Reserve’s and industry’s objective of ubiquitous, safe, and 5 See Faster Payments Task Force, ‘‘Final Report Part Two: A Call to Action,’’ supra note 4. 6 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-thatCreates-Economic-Opportunities-NonbankFinanci.pdf. 7 ‘‘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. 8 ‘‘Federal Reserve Actions To Support Interbank Settlement of Faster Payments, Request for Comments,’’ supra note 3. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 efficient instant payments in the United States. Consistent with the Federal Reserve’s historical role in supporting payment system improvements, the Board concluded that the Reserve Banks’ operation of the FedNow Service would support broader modernization of the nation’s payment system as the industry moves towards instant payments.9 Serving as an operator would also be consistent with the Federal Reserve’s historical role as a provider of payment services alongside the private sector, which is currently the established model for almost every major payment system in the United States.10 An operational role for the Federal Reserve would also help ensure competition in the market—an outcome that the U.S. Government Accountability Office concluded benefits consumers in other payment systems.11 Notably, over the course of the Federal Reserve’s multiyear engagement with the industry on instant payments, only one private-sector RTGS service for instant payments has been established in the United States (the existing private-sector service). The Board’s analysis supporting the decision to develop the FedNow Service indicated that the existing private-sector service was likely to remain the sole private-sector provider of RTGS services for instant payments in the United States. The Board explained in the 2019 Notice that no traditional payment system in the United States has only a single private-sector provider, and that such an outcome would create significant risks to the safety and efficiency of the nation’s payment system. In particular, the Board explained that a single private-sector service would face significant challenges in establishing an accessible infrastructure for instant payments with nationwide reach, would result in limited competition that could have 9 For example, in retail payment systems, improvements achieved through Reserve Bank operational roles in the past include facilitating efficient nationwide clearing of checks, supporting the development of the ACH system, and encouraging the nation’s transition to a virtually allelectronic check-processing environment. 10 As described in the 2019 Notice, implementing the FedNow Service is consistent with the requirements of the Monetary Control Act and longstanding Federal Reserve policy criteria for the provision of new financial services. 11 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. 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. PO 00000 Frm 00024 Fmt 4703 Sfmt 4703 48523 negative effects on pricing and innovation, and could create a single point of failure in the nation’s instant payments infrastructure. In light of these significant risks, the Board determined that an operational role would allow the Federal Reserve to advance a number of important objectives, including establishing an accessible nationwide infrastructure, fostering stability in times of crisis, supporting resiliency through redundancy, and stimulating healthy competition for clearing and settling instant payments. Given their operational role in providing payment and settlement services, the Reserve Banks have established broad reach and invested in connections and customer service relationships with more than 10,000 diverse financial institutions, both small and large, across the country. This reach, in turn, will support the Federal Reserve’s ability to provide a nationwide infrastructure for instant payments through the FedNow Service, furthering the goal of ubiquitous instant payments in the United States by connecting banks across the nation.12 As a result, banks of every size, in every community will have the ability to offer instant payment services to their customers, which is essential to their ability to meet evolving customer demands effectively. This, in turn, will ensure that individuals and businesses across the country have the ability to use such services regardless of geography. The Federal Reserve has also 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 in an operational role in instant payments will allow the Federal Reserve additional capacity in the future to respond to financial turmoil, natural disasters, and other crises, as it has done in the past. In addition, providing access to more than one RTGS service for instant payments for backup purposes will enhance resiliency by reducing the risks caused by a single point of failure. The FedNow Service will also promote competition by providing choice of instant payment services in the market. Competition exists in nearly every payment system in the United States today, including funds transfers, ACH, checks, and card transactions. The Board’s analysis indicated that choice in 12 Throughout this notice, the term ‘‘bank’’ refers to any type of depository institution. Depository institutions include commercial banks, savings banks, savings and loan associations, and credit unions. E:\FR\FM\11AUN1.SGM 11AUN1 48524 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices RTGS services for instant payments would likely result in efficiencies related to pricing, service quality, and innovation. Moreover, it will give banks and third-party service providers a neutral infrastructure to build on, allowing them to offer a variety of innovative and convenient instant payment services to individuals and businesses. A. An Overview of the FedNow Service The FedNow Service will be available to banks in the United States and will enable individuals and businesses to send instant payments any time of day, any day of the year through their bank accounts. An instant payment facilitated by the FedNow Service begins when a sender (that is, an individual or business) initiates a payment using a service provided by their bank, such as a banking application accessed on a computer, tablet, or mobile device.13 After the sender’s bank receives this request, it will send a message through the FedNow Service to the receiver’s bank, with information about the payment.14 Upon receipt of this message, the receiver’s bank will indicate whether it intends to accept the payment. If it intends to accept the payment, the receiver’s bank will send a positive confirmation back, and upon receipt the FedNow Service will transfer the funds between the Federal Reserve accounts associated with the banks. Each bank will debit and credit their customer’s account accordingly. The entire process is intended to take place in a matter of seconds, so the receiver will have funds available to use in near real time. Completed payments will be final, meaning they are irrevocable.15 From a technical perspective, the FedNow Service will be designed to maintain uninterrupted 24x7x365 processing with security features to support payment integrity and data security. The FedNow Service will enable credit transfers that support a range of different types of payments for 13 The following discussion illustrates a completed payment through the FedNow Service in its simplest form. Other steps could occur; for example, a payment could be rejected. In addition, the Federal Reserve may also consider supplementing this message flow and settlement process with additional options to facilitate certain uses of the service in the future. 14 References to receiver and receiver’s bank in this discussion are intended to refer to the beneficiary and the beneficiary’s bank, respectively, of a funds transfer. 15 This does not prevent banks from implementing procedures to resolve erroneous payments, or the ability for the receiver to send a new transaction to return funds in certain circumstances (see the discussion of return transfers as part of the Payment Flow and Message Types discussion in section III). VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 individuals and businesses, and will also support the transfer of supplemental information, such as invoices, related to a payment.16 The service will have a 24-hour business day each day of the week, including weekends and holidays. End-of-day balances will be reported on Federal Reserve accounting records for each participating bank on each FedNow Service business day. Access to intraday credit will be provided to participants in the FedNow Service.17 Because instant payment services such as the FedNow Service process and settle each payment separately and continuously on a 24x7x365 basis, participants will need adequate funds or available credit (liquidity) in their accounts at all times in order to settle each payment. In some circumstances, banks with account balances beyond their current needs may supply liquidity to those facing a shortfall. Typically, banks can use a service like the Fedwire® Funds Service to conduct such liquidity transfers. However, when those services are closed, participants in the FedNow Service or the existing private-sector service may need an alternative method to transfer liquidity. To facilitate such transfers, the FedNow Service will provide a liquidity management tool to support instant payment services that will be a critical enabler not only of the FedNow service but also the existing private-sector service. The tool will enable participants in the FedNow Service to transfer funds to one another to support liquidity needs related to payment activity in the FedNow Service. The tool will also support participants in a private-sector instant payment service backed by a joint account at a Reserve Bank by enabling transfers between the master accounts of participants and a joint account.18 Access to the tool 16 Credit transfers are those where a sender initiates a payment to an intended receiver and require the sender to authorize and initiate each individual payment. Credit transfers are distinct from debit transfers, in which 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. 17 Access to intraday credit in the FedNow Service would be provided during its business day under the same terms and conditions as for other Federal Reserve services. 18 In 2017, the Board approved 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. 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 PO 00000 Frm 00025 Fmt 4703 Sfmt 4703 would be available to users regardless of whether they are full participants using the FedNow Service to send instant payments between end users or if they use the FedNow Service only to make liquidity transfers.19 The tool will be available during specific hours, for example, when such transfers are not currently possible through other Federal Reserve services. The Federal Reserve is committed to using widely accepted standards in designing the FedNow Service to aid in accomplishing the key goals of achieving nationwide reach for instant payments and promoting interoperability with the existing private-sector service. To support these goals, the service will use the widely accepted ISO 20022 standard and adopt other industry best practices, that would remove barriers to interoperability, in order to avoid unnecessary and burdensome incompatibilities, to the extent the existing private-sector service also uses publicly available, widely accepted standards.20 The Federal Reserve intends to launch the FedNow Service as soon as practicably possible. Although the target release date remains 2023 or 2024, the Federal Reserve intends to announce a more specific time frame for launch, as well as earlier pilot programs, through established Reserve Bank channels once additional work is completed. This and other work related to the implementation of the FedNow Service is ongoing and includes development of the necessary infrastructure, integration with existing Federal Reserve systems, and continued engagement with industry stakeholders on features and design. The Federal Reserve will take a phased approach to providing additional features and functionality over time. Although this may result in the introduction of certain desirable features after the initial release, this approach will ensure the core features organization’s proposed instant 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. 19 Throughout this notice, the term ‘‘end users’’ encompasses individuals and businesses. 20 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 http://www.iso.org. The ISO 20022 standard is increasingly being adopted around the world as part of efforts to modernize payment services, including those used for instant payments. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices and functionality are delivered as quickly as possible. The Board believes this approach most appropriately balances the competing demands for the Federal Reserve to launch the FedNow service quickly and to provide enhanced features beyond core capabilities. Specifically, the first release of the FedNow Service will provide baseline functionality that will support market needs and help banks manage the transition to a 24x7x365 service. The first release will also offer additional optional features where there is high demand, such as fraud prevention tools, the ability to join initially as a receiveonly participant, request for payment capability, and tools to support participants in their handling of payment inquiries, reconcilements, and certain exceptions. Other aspects of the service, such as fee structures and governing terms, will be announced prior to the launch of the service through established Reserve Bank communication channels. The Federal Reserve also recognizes that market needs and technology related to instant payments are constantly evolving and intends to continue engaging with stakeholders and remain flexible in its approach when building out additional features and functionality of the FedNow Service. Based on ongoing stakeholder engagement, additional features and service enhancements will be introduced over time. For example, the service will endeavor to offer additional features in the initial period following launch to support alias-based payments such as directories, as well as fraud prevention, error resolution, or case management tools. Other features in the future might include support for bulk payments or enhanced remittance information. The Federal Reserve will continue to engage with stakeholders on these and other, more complex considerations, such as cross-border capability. B. Organization of Notice This notice provides a high-level discussion of the comments received by the Board in response to the 2019 Notice (Section II). The notice details the core features and functionality of the FedNow Service at launch and related comments considered by the Board (Section III). Section III also outlines the Federal Reserve’s approach to the introduction of additional features and service enhancements that may be offered in subsequent phases. Lastly, this notice provides a final competitive impact analysis of the FedNow Service (Section IV). Future communications about the FedNow Service, including VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 but not limited to technical specifications, detailed product offerings, pricing, and implementation timeline, will be provided through established channels, such as FRBservices.org. II. Comment Summary The Board received 182 comments in response to the 2019 Notice. Of those comment letters, 3 included signatures from multiple parties, for a total of 353 entities responding to the 2019 Notice. Comments were submitted by a wide variety of stakeholders from the following segments: Small and midsize banks, large banks, individuals, consumer organizations, merchants, service providers, private-sector operators, financial technology companies (fintechs), trade organizations, and other interested parties.21 Overall, small and midsize banks were the largest group of respondents, providing more than 40 percent of the total comment letters and representing institutions from 25 states. Trade organizations submitted letters representing several commenter segments, including small and midsize banks, large banks, merchants, fintechs, and service providers. Generally, these letters aligned with comments submitted by respondents in the same segment as a trade organization’s membership. The majority of comments provided specific feedback on features and functionality of the FedNow Service. While this Section provides an overview of comments, a more detailed discussion of comments can be found in Sections III and IV. The Board also received 2,246 form letters from individuals. These form letters argued that the Federal Reserve should not operate in competition with the private sector and viewed the decision to develop and implement the FedNow Service as an inappropriate expansion of the Federal Reserve’s role that is inconsistent with its historical purpose. Generally, these commenters stated that the introduction of the 21 ‘‘Banks’’ include any type of depository institution, such as commercial banks, savings banks, savings and loan associations, and credit unions. For the purposes of this notice, large banks are defined as having assets of more than $50 billion, while small and midsize banks are defined as having assets of less than $50 billion. ‘‘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 existing private-sector service for instant payments and payment card networks. ‘‘Other interested parties’’ include payment standards organizations, a congressional member organization, research and academic groups, consultancies, and regulatory bodies. PO 00000 Frm 00026 Fmt 4703 Sfmt 4703 48525 FedNow Service would lead to decreased innovation and unfair competition with the private sector. These topics were addressed by the Board as part of its analysis in the 2019 Notice. In the 2019 Notice, the Board provided the rationale for its conclusion that the Federal Reserve should offer the FedNow Service. This rationale was based on input received in response to the Board’s 2018 notice requesting comment on the Federal Reserve’s role in the payment system and whether to develop the FedNow Service.22 Approximately 80 commenters, largely representing small and midsize banks, trade organizations and individuals, addressed the proposed implementation time frame for the service. Nearly all of these commenters stated that the Federal Reserve should accelerate development and bring the FedNow Service to market sooner than the anticipated implementation date of 2023 or 2024. In general, these commenters indicated that the FedNow Service should be made available as soon as possible. These commenters generally believed that market needs and technology for instant payments are rapidly evolving and that an earlier implementation would better support innovation and widespread adoption of the FedNow Service and instant payments more broadly. Approximately 75 commenters, largely representing small and midsize banks, trade organizations, and service providers, recommended that the FedNow Service offer enhanced functionality that participants can use to mitigate fraud. While a majority of these commenters agreed that banks are primarily responsible for combatting fraud related to the accounts of their customers, most suggested that the Reserve Banks should nevertheless provide enhanced fraud prevention tools for FedNow Service participants. Most of these commenters offered 22 As the Board explained in the 2019 notice, the Federal Reserve has played an operational role in the payment system by providing key clearing and settlement infrastructure since its founding in 1913. In fulfilling this role, the Reserve Banks operate services, including check, ACH, and funds transfer services, that provide core infrastructure for financial transactions. The Federal Reserve operating alongside the private sector is consistent with almost every major payment system in the United States. The Board therefore believes offering the FedNow Service is consistent with its historical role in the payment system and is not an expansion of the Federal Reserve’s powers. Further, the Board continues to view the Reserve Banks’ operation of the FedNow Service as the most effective approach to advance the Federal Reserve’s and industry’s objective of ubiquitous, safe, and efficient instant payments in the United States. The FedNow Service is expected to provide public benefits ranging from enhanced resiliency, healthy competition, increased innovation, and more equitable access. E:\FR\FM\11AUN1.SGM 11AUN1 48526 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices specific recommendations as to how fraud prevention tools should be designed and implemented. Two commenters, however, stated that fraud prevention tools for the FedNow Service should be provided by the private sector and not the Reserve Banks. Approximately 80 commenters, largely representing small and midsize banks, trade organizations, and fintechs, addressed the inclusion of directory services to support alias-based payments as part of the FedNow Service.23 Nearly all these commenters noted that availability of a directory, whether provided by the Reserve Banks or the private sector, would support widespread adoption of the service for person-to-person (P2P) payments and reduce payment routing errors. Approximately 40 commenters, largely representing small and midsize banks, trade organizations, and individuals, described potential approaches to the development of directory services, with most of these commenters recommending that the FedNow Service provide either a centralized link to existing directories or build its own directory. Several commenters raised various other considerations with respect to directory services and highlighted potential complexities with day-to-day management of a directory service, such as protecting data privacy and security. Approximately 100 commenters, representing all commenter segments, expressed views related to interoperability. Nearly all 100 commenters highlighted the benefits of interoperability between the FedNow Service and the existing private-sector service. Approximately 40 commenters, representing small and midsize banks, trade organizations and service providers, expressed the view that interoperability would promote ubiquitous access to instant payments in the United States and support widespread usage and adoption of instant payments. Approximately 35 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, noted that interoperability would streamline operations for banks and service providers, allow for a consistent enduser experience with respect to funds 23 Alias-based payments provide a sender with the ability to send payments to a receiver based solely on public identifiers, or aliases, of the receiver, without a sender having to know the bank account number of the receiver. Aliases are generally linked to an email or phone number, or other personal identifier. Directory services can support alias-based payments by connecting an alias with a receiver’s banking information to ensure that a payment is routed to the correct end user in a way that is private and secure. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 availability, and generally promote efficiencies and savings. Very few commenters expressed views on how interoperability should be achieved, and many commenters appeared to use varying operational definitions of interoperability.24 Commenters also addressed considerations related to participant and service provider preparedness for FedNow Service onboarding and, more broadly, the transition to 24x7x365 realtime operations for instant payments. Approximately 40 commenters, largely representing small and midsize banks, trade organizations, and individuals, noted that successful integration of existing core service-provider systems is critical to achieving widespread adoption of the FedNow Service.25 These commenters noted that small and midsize banks rely on core service providers and that the Reserve Banks should share technical and operational requirements with such service providers well in advance of service implementation so that small and midsize banks are not disadvantaged. More generally, approximately 15 commenters highlighted various challenges related to transitioning to 24x7x365 real-time processing of instant payments. The majority of these commenters raised concerns that increased staffing costs and upgrades to technology required to maintain continuous operations may limit adoption of the service. Other groups of commenters raised relevant topics beyond specific features and functionality of the FedNow Service. For example, approximately 35 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, emphasized the importance of effective governance for the FedNow Service and suggested, more generally, that the Reserve Banks take part in any future industry efforts that may arise to develop common rules and standards for instant payments. Another 8 commenters noted that introduction of the FedNow Service may necessitate revisions of existing regulations. These commenters cited a wide range of rules and regulations that may need to be adjusted, including 24 For example, some commenters discussed adoption of standardized messaging formats between the FedNow Service and existing privatesector service, which would allow customers to choose to route a payment to either service. Other commenters discussed intermingling and sharing key processing steps between the services. 25 Most of these commenters were specifically referring to service providers that manage core banking systems for their bank customers. Typically, core service providers support their customers’ daily transaction processing and account management. PO 00000 Frm 00027 Fmt 4703 Sfmt 4703 regulations related to funds availability and funds transfers through Federal Reserve services. Another 6 commenters emphasized that the FedNow Service design should incorporate robust cybersecurity controls (for example, endpoint security requirements). Finally, approximately 10 commenters suggested that the Reserve Banks design the FedNow Service to minimize the possibility that the service might be used in a way that can cause consumer harm. Additionally, these commenters recommended that the Reserve Banks develop industry standards for disputing payments in the event of a fraudulent or erroneous transfer. III. The FedNow Service In the 2019 Notice, the Board proposed potential features and functionality for the FedNow Service. Based on additional analysis informed by the comments received in response to the 2019 Notice, the Board has approved the FedNow Service as described in this notice. Recognizing that market needs and technology for instant payments are rapidly evolving, the Board also expects that additional service modifications or features, other than those described here, could be included in the service at launch and in the future. The Federal Reserve intends to take a phased approach to developing and enhancing the FedNow Service, with flexibility to adjust features and functionality in response to available technology, industry developments, and evolving needs of banks and their customers. Additions or changes to the features described in this notice will be announced through established Reserve Bank communication channels. Consistent with the Board’s pricing principles, the Board will request public comment when changes in fees and service arrangements are proposed that would have significant longer-run effects on the nation’s payment system.26 A. General Description of the FedNow Service In the 2019 Notice, the Board explained that the FedNow Service would be designed to process individual payments continuously, 24 hours a day, 26 Section 11A of the Federal Reserve Act requires the Board to adopt a set of pricing principles for Reserve Bank services and a schedule of fees based on those principles. 12 U.S.C. 248a. The principles adopted by the Board incorporate statutory requirements and include additional provisions consistent with the purposes of section 11A. 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. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices 7 days a week, 365 days a year. The Board did not receive comments related to modifying the hours or days over which the service would be available, and the 24x7x365 functionality of the service will be adopted as proposed. In the 2019 Notice, the Board indicated the service would support credit transfers, where a sender initiates a payment to an intended receiver. Three commenters suggested that the Board also consider inclusion of debit transfer functionality, such that a receiver would be able to initiate a transfer that ‘‘pulls’’ funds from a sender’s account.27 These commenters expressed the view that debit transfers would facilitate certain types of payments (for example, recurring bill payments) and support broader adoption of the service. Although debit transfer functionality may facilitate some increased adoption of the FedNow Service and instant payments more broadly based on specific use cases, the Board believes that the risks of the FedNow Service supporting debit transfers outweigh the potential benefits, at least at the outset. Credit transfers require the sender to authorize and initiate each payment, which can decrease the risk of fraudulent or otherwise unauthorized payments and enhance the safety of the payment system.28 In addition, recurring bill payments and other payments that are typically made by debit transfer can also be supported by a ‘‘request for payment’’ functionality that builds on credit transfer functionality (see the Request for Payment section). Therefore, the FedNow Service will only support credit transfers as proposed. In the 2019 Notice, the Board explained that the FedNow Service would facilitate domestic payments. Four commenters suggested that the FedNow Service should be designed to accommodate nondomestic (that is, cross-border) payments. The Board recognizes that the ability to send and 27 Many payments in the United States, such as debit card payments and some electronic bill payments, have traditionally been conducted as debit transfers, with the sender providing information and authorization to the receiver that allows the receiver’s bank to initiate a debit to the sender’s bank account with funds subsequently credited to the receiver’s bank account. 28 According to a 2018 Federal Reserve study on U.S. payments fraud, in 2015, the fraud rate for ACH debit payments from general-purpose transaction accounts was more than double the rate for ACH credit payments. See Board of Governors of the Federal Reserve System, ‘‘Changes in U.S. Payments Fraud from 2012 to 2016: Evidence from the Federal Reserve Payments Study,’’ (Oct. 2018). Available at https://www.federalreserve.gov/ publications/files/changes-in-us-payments-fraudfrom-2012-to-2016-20181016.pdf. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 receive instant payments to and from other countries is functionality that could facilitate certain types of payments, including remittances to family members abroad and corporate trade payments. A number of regulatory and operational considerations, including cooperation with international operators, would need to be addressed before cross-border payments could be supported by the FedNow Service. In line with prioritization of a timely launch, the FedNow Service will only support domestic instant payments initially. The Board will continue to evaluate the costs and benefits of expanding the FedNow Service to allow for crossborder payments in the future, recognizing the need to address the heightened risks and compliance issues associated with cross-border payments. In the 2019 Notice, the Board indicated that the FedNow Service would be available to institutions eligible to hold accounts at the Reserve Banks, pursuant to applicable federal statutes and Federal Reserve rules, policies, and procedures.29 Seven commenters stated that eligibility to participate in the FedNow Service should be expanded to other institutions, including nonbanks that are not eligible for Federal Reserve accounts. These commenters stated that nonbanks’ reliance on banks to access the service would result in increased costs and other inefficiencies. Additionally, these commenters emphasized that participation by entities such as nonbank lenders, money transmitters, and fintechs would promote competition and broader adoption of instant payment services. In contrast, approximately 20 commenters, largely representing small and midsize banks and trade organizations, emphasized that participation in the FedNow Service should be limited to federally insured institutions. Nearly all of these commenters noted that allowing nonbanks to participate directly in the FedNow Service would introduce risk to the service and the broader payment system. While the Board recognizes the variety of perspectives offered by commenters, federal statutes and Federal Reserve rules, policies, and procedures limit the scope of entities 29 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 also maintain accounts for additional entities under other statutory authorities. PO 00000 Frm 00028 Fmt 4703 Sfmt 4703 48527 eligible to receive Federal Reserve accounts, as the Board indicated in the 2019 Notice. Although the service will be available only to institutions eligible to hold accounts at the Reserve Banks, entities that are not eligible to hold accounts at the Reserve Banks may nevertheless be able to act as service providers or agents for participants in the FedNow Service, as described later. In the 2019 Notice, the Board proposed that the FedNow Service would settle interbank obligations through debit and credit entries to balances in master accounts held at the Reserve Banks.30 Nine commenters expressed support for settlement of payments in master accounts. Another group of four commenters suggested that, instead of using master accounts, the Reserve Banks should establish separate accounts to settle payments through the FedNow Service. These commenters stated that use of a separate settlement account would reduce the overall complexity of managing instant payments and allow banker’s banks and corporate credit unions to manage and reconcile their customers’ account balances more easily. As discussed in the 2019 Notice, the Board previously sought comment on and analyzed a two-account structure, with a separate account dedicated to settlement of instant payments, but determined based on those comments that such a structure would introduce significant operational complexity for both the Federal Reserve and participating banks.31 Therefore, as proposed, the FedNow Service will settle payments in master accounts held at the Reserve Banks. In the 2019 Notice, the Board also proposed that settlement entries for transactions through the FedNow Service would be final. The finality of settlement entries would mean that interbank settlement is irrevocable. The Board did not receive comments on the topic of finality and therefore interbank settlement for transactions through the service will be final, as proposed.32 30 A master account is the record of financial rights and obligations between account-holding banks and a Reserve Bank. 31 The Board’s proposal that the FedNow Service would rely on a single account structure using master accounts at the Reserve Banks was in response to feedback from the public to the 2018 Notice, in which the Board requested comment on the operational burden banks would face if an instant payment service were designed using a settlement account separate from a master account. Commenters indicated that the benefits of such a design would have to outweigh the added costs of managing two accounts. 32 The finality of settlement entries does not preclude institutions from implementing procedures to resolve erroneous payments, or the E:\FR\FM\11AUN1.SGM Continued 11AUN1 48528 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices In the 2019 Notice, the Board proposed that participating banks would be required to make the funds associated with individual payments available to their end-user customers immediately after receiving notification of settlement from the service. Several commenters suggested that the Board further clarify funds availability expectations through industry standards or amendments to existing regulations. To be consistent with the goal of supporting instant payments for individuals and businesses, participating banks must agree to make the funds associated with individual payments available to their customers in near real time after receiving notification of settlement from the service, as proposed.33 The Board is assessing applicable laws and regulations, and, to the extent changes to the Board’s regulations are identified as necessary to clarify funds availability, the Board will request public comment. In the 2019 Notice, the Board indicated that a participating bank would be permitted to designate a service provider or agent to submit or receive payment instructions to and from the FedNow Service on its behalf. The Board also stated that a participating bank could choose to settle payments in the master account of a correspondent bank.34 The Board received 5 comments that supported the ability for a bank to designate a service provider to process FedNow payments on its behalf. These commenters noted that this ability would be especially important for community banks that rely on service provider relationships to access existing Federal Reserve services. Approximately 10 commenters expressed support for the inclusion of correspondent/respondent settlement relationships in the FedNow Service. These commenters emphasized that to support the management of correspondent/respondent relationships, respondent-level information, including settlement activity and account balances, should be provided to correspondents. ability for the receiver to send a new transaction to return funds in certain circumstance (see the discussion of return transfers as part of the Payment Flow and Message Types section). 33 Details for participating banks will be specified in technical or operational documentation that will describe the service or in terms as part of the Reserve Banks’ Operating Circular for the FedNow Service. 34 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. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 The Board agrees with commenters that use of service providers and correspondent banks will facilitate access to the FedNow Service, and these features will be adopted as proposed. In addition, the FedNow Service will be designed to provide correspondent banks with transaction-level and summary reports for respondent banks to which they provide services (see the Reporting section). Finally, banks will have the option of enrolling in the FedNow Service as a ‘‘receive-only’’ participant, a feature that was not proposed in the 2019 Notice. Such a participant will not be required to have the ability to originate payments through the FedNow Service but can still receive instant payments. The Federal Reserve expects that this option may ease the burden of adopting the FedNow Service, especially for small banks as they gain experience with instant payments. B. Implementation In the 2019 Notice, the Board acknowledged the time-to-market pressure for the payment industry related to instant payment services and indicated that the Federal Reserve is committed to launching the FedNow Service as soon as practicably possible. Many commenters raised concerns about the Federal Reserve’s anticipated implementation in 2023 or 2024. Commenters largely representing small and midsize banks, trade organizations and service providers stated that the Federal Reserve’s key role as a provider of payment and settlement services to most of the nation’s banks warranted an accelerated implementation timeline for the service to better support innovation related to instant payments, as well as development of third-party services. Other commenters, largely representing small and midsize banks, raised concerns that the current timeline would limit small and midsize banks’ ability to meet growing customer demand for instant payments services. These commenters also suggested that many smaller banks will delay offering their own instant payment services until the FedNow Service is available. The Board understands these timing concerns, and the Reserve Banks are working to bring the FedNow Service to market as soon as practicably possible, while also ensuring the requisite level of security and resiliency. Although the target release date remains 2023 or 2024, the Federal Reserve will announce a more specific time frame for launch, as well as earlier pilot programs, through established Reserve Bank channels. This and other work related to the implementation of the FedNow Service PO 00000 Frm 00029 Fmt 4703 Sfmt 4703 is ongoing and includes development of the necessary infrastructure, integration with existing Federal Reserve systems, and continuous engagement with industry stakeholders on features and design. As the development of the FedNow Service progresses, the Federal Reserve is committed to providing specific details in advance that will allow industry partners to take appropriate steps to ensure they are prepared to use the FedNow Service when it becomes available. Deployment of the FedNow Service will take a phased approach so that the service can be launched expeditiously while maintaining flexibility to augment features and functionality over time. The first release of the FedNow Service will provide baseline functionality that will support market needs and help banks manage the transition to a 24x7x365 service. The Federal Reserve will continue to engage with stakeholders as market needs and technology evolve and the service matures. Based on this ongoing engagement, additional features and service enhancements will be released over time. While this phased approach may result in the introduction of certain desirable features after the initial release, it will ensure core features and functionality are delivered as quickly as possible with a high level of security and resiliency. The Board believes this approach most appropriately balances the industry’s desires for the Federal Reserve to both move quickly and provide features beyond core clearing and settlement capabilities. C. Core Features of the FedNow Service 1. Payment Flow and Message Types In the 2019 Notice, the Board proposed a payment flow that described how a standard payment message could be processed and settled by the FedNow Service.35 The Board received approximately 15 comments that addressed the payment flow. All of these commenters expressed support for the flow as proposed. In particular, most commenters were in favor of the proposed process where, before interbank settlement occurs over the service, the receiver’s bank has an opportunity to confirm that it holds a valid account for the receiver and intends to accept the payment message. Several of these commenters noted that this confirmation step could reduce 35 References to the FedNow Service in this section are intended to refer to one or more Reserve Banks acting as sending and receiving banks, in connection with the FedNow Service. E:\FR\FM\11AUN1.SGM 11AUN1 48529 errors and increase end-user confidence in the service. The flow of a standard payment message, called a credit transfer message, will operate largely as proposed.36 Figure 1 illustrates a completed credit transfer over the FedNow Service in its simplest form.37 This process is intended to take place within seconds.38 • In step 1, a sender (that is, an individual or business) initiates a payment by sending a payment message to its bank through an end-user interface outside the FedNow Service.39 The sender’s bank is responsible for screening the payment according to its internal processes and requirements.40 • In step 2, the sender’s bank submits a payment message to the FedNow Service. • In step 3, the FedNow Service validates the payment message, for example, by verifying that the message meets message format specifications. • In step 4, the FedNow Service sends the contents of the payment message to the receiver’s bank to seek confirmation that the receiver’s bank intends to accept the payment message. At this point, the receiver’s bank will have the opportunity to confirm or deny that it maintains the specified account. • In step 5, the receiver’s bank sends a positive response to the FedNow Service, confirming that it intends to accept the payment message.41 Steps 4 and 5 are intended to reduce the number of misdirected payments and resulting exception cases that can occur in high-volume systems. • In step 6, the FedNow Service debits and credits the designated master accounts of the sender’s and receiver’s banks (or their correspondent banks), respectively. • In step 7, the FedNow Service sends a payment message forward to the receiver’s bank with an advice of credit and in parallel sends an acknowledgement to the sender’s bank notifying it that settlement is complete.42 • In step 8, the receiver’s bank credits the receiver’s account.43 As a condition of the FedNow Service, the receiver’s bank must agree to make funds available to the receiver almost immediately after step 7. This crediting to the receiver’s account as well as the debiting of the sender’s account by their respective banks happens outside the FedNow Service.44 In addition to the standard credit transfer message type, the FedNow Service will also include at least two additional payment message types and several nonvalue message types in the first release of the FedNow Service.45 One of the additional payment message types will be a return transfer. The return transfer will be part of a payment return process that will be included in the service to assist participating banks with exception processing. This process will enable the sender’s bank to request and potentially obtain a return of the previous payment. In this process, a sender’s bank will send a nonvalue ‘‘request for return’’ message to a receiver’s bank, requesting that funds previously sent through the FedNow Service be returned. After investigating the payment, the receiver’s bank will either initiate a return transfer to the sender’s bank to return the amount of the previous payment or send a nonvalue ‘‘status’’ message indicating it will not return funds. The return transfer will be a type of credit transfer, 36 The payment flow proposed in the 2019 Notice included a provisional hold on funds between steps 3 and 4, which may be included in future releases of the service but will not be a component of the first release. 37 Aspects of the payment flow would be different, for example, if either the sender’s bank or the receiver’s bank were to use an agent, service provider, or correspondent bank. 38 More specifically, steps 2–6 will have a defined maximum time period such that transactions not completed within the defined time will be rejected. As a result, the sender’s bank will know that it should receive notification of a completed payment or a rejection within the defined time period. In addition, other payment message types, including return transfers, will also have a defined maximum time period. The defined time period will be specified in technical or operational documentation that will describe the service or in terms as part of the Reserve Banks’ Operating Circular for the FedNow Service. 39 The end-user interface will most likely be provided by the sender’s bank or a service provider working with the sender’s bank. 40 While specific internal bank processes vary, this step could include authenticating the sender, validating the payment, and performing any screening or other procedures on the payment. 41 As noted previously, Figure 1 illustrates a completed payment through the FedNow Service in its simplest form. Other steps could occur, for example, if the receiver’s bank responds with a negative response. As another alternative, if the receiver’s bank needs additional time to determine whether to refrain from crediting the receiver’s account for legal or compliance reasons, the service will accommodate such need, with associated notifications, up to an additional specified time period. Additional information and specifications for all the payment flows and processes that will be available as part of the FedNow Service will be provided through existing Reserve Bank communication channels. 42 In sending a payment message forward to the receiver’s bank with an advice of credit, the FedNow Service ‘‘executes’’ the payment message that it received from the sender’s bank. 43 At this stage in the flow, the receiver’s bank will have the option of sending a message through the FedNow Service to the sender’s bank indicating that the payment has been posted to the receiver’s account. 44 The receiver’s bank agrees to make the funds associated the payment available to their customer in near real time after receiving notification of settlement in step 7. The sender’s bank debits the sender according to its internal processes or policies, which could occur at various points in the payment flow, for example, as part of step 2. In addition, the sending and receiving banks may notify their customers that the payment has been completed. 45 Nonvalue message types include a request for return, discussed as part of the return transfer payment message type in this section; request for payment, discussed later (see the Request for Payment section); and administrative messages such as payment status request, report request, or request for additional information about a payment. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 PO 00000 Frm 00030 Fmt 4703 Sfmt 4703 E:\FR\FM\11AUN1.SGM 11AUN1 EN11AU20.031</GPH> Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices 48530 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices but the message will be distinct from a standard credit transfer message. In particular, a return transfer will carry information associating it with the original credit transfer that the sender’s bank requested to be returned. The second additional payment message type in the FedNow Service will be for interbank funds transfers that do not involve end users. This message type is intended primarily to support the liquidity management needs of participants in either the FedNow Service or a private-sector instant payment service that is backed by a joint account at a Reserve Bank (see the Liquidity Management Tool section.) payment messages domestically and internationally in the future. As proposed, the FedNow Service will be based on the ISO 20022 standard. The Federal Reserve intends to continue engaging with the industry on topics related to the ISO 20022 standard and will provide ISO message specifications, including specific message types and interpretation of ISO formats prior to the launch of the FedNow Service through established Reserve Bank communication channels. As the standard evolves, the Reserve Banks will review changes to the standard and consider adjustments to message formats for the FedNow Service. 2. Message Standard In the 2019 Notice, the Board proposed that payment messages in the FedNow Service would use the ISO 20022 standard and its implementation with respect to instant payments in the United States. Approximately 30 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, addressed payment message formats for the FedNow Service. Nearly all of these commenters supported use of ISO 20022, noting that this standard is flexible enough to support various use cases and enables the transmission of payment data (for example, remittance and invoice information) along with a payment. Over half of these commenters noted that ISO 20022 is rapidly becoming the global standard for messaging frameworks and expressed the view that use of the ISO 20022 standard would align the FedNow Service with international and domestic payment systems. These comments indicated that adoption of a common messaging framework would support FedNow Service interoperability with other services for instant payments and facilitate the possibility of cross-border capabilities in the future. A group of 5 commenters specifically recommended that the Reserve Banks implement the ISO 20022 messaging framework in a way that is consistent with the ISO 20022 Real-Time Payments Group guidelines.46 The Board recognizes the benefits of ISO 20022 and agrees with commenters that the message standard could provide a common foundation for exchanging 3. Transaction Value Limit In the 2019 Notice, the Board proposed that the FedNow Service would include a transaction value limit of $25,000, with the potential to increase the limit over time. The $25,000 value limit was intended to restrict the size of potential fraudulent transactions, while also supporting payments associated with a variety of use cases. Approximately 25 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, addressed the $25,000 limit, stating that the Federal Reserve should increase the initial value limit at service launch or shortly thereafter. Many commenters recommended that the Federal Reserve adjust the transaction limit to be consistent with market practices at service launch and that the limit should continue to align with those practices over time. Commenters noted that the $25,000 limit could inhibit use of the FedNow Service for many use cases, such as large-value business-to-business payments. The Board agrees that the FedNow Service should support a wide variety of uses, including certain large-value transfers, and that the limit should be consistent with market practices and needs for instant payments. Therefore, prior to the launch of the service, the Reserve Banks will establish a transaction limit consistent with market practices and needs at the time and will announce the limit through established Reserve Bank communication channels. In addition, participating banks will have the ability to establish lower transaction value limits (see the Fraud Prevention Tools section). 46 The ISO 20022 Real-Time Payments Group (RTPG) is composed of more than 70 international stakeholders, with representation from payment associations, payment service providers, financial institutions, international and domestic clearinghouses, regulators, and others. The RTPG publishes usable sets of ISO 20022 usage guidelines that can be found here: https://www.iso20022.org/ catalogue-messages/additional-content-messages/ iso-20022-real-time-payments-group-rtpg. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 4. Business Day In the 2019 Notice, the Board proposed that the FedNow Service would have a 24-hour business day each day of the week, with defined opening and closing times. The Board PO 00000 Frm 00031 Fmt 4703 Sfmt 4703 specifically proposed that the FedNow Service should align with the business day of the Fedwire Funds Service to maintain consistency with practices for existing Federal Reserve services. Given the continuous operation of the FedNow Service, the opening time would occur immediately after the closing time, and the transition between closing and opening would not disrupt continuous processing.47 The Board also proposed that, for the purpose of the Reserve Banks’ accounting processes, transactions processed after the FedNow Service’s close but before midnight eastern time each calendar day would be recorded on Federal Reserve accounting records as transactions occurring on the next calendar day.48 For example, a FedNow Service transaction that occurs after the closing time and before midnight eastern time on a Saturday would be recorded as occurring on Sunday. The Board also explained in the 2019 Notice that the account recording convention used by the Federal Reserve would not dictate that participating banks adopt the same convention or preclude other conventions. The Board received approximately 10 comments that addressed the proposed FedNow Service business day and accounting processes. A few of these commenters recommended that the business day for the FedNow Service align with the calendar day.49 Two commenters expressed support for allowing banks to determine their own business day and accounting conventions, whereas one commenter suggested that the Federal Reserve develop a standard for transaction posting and funds availability. While the Board recognizes potential challenges that the proposed business day of the FedNow Service may pose, a business day based on calendar day would mean the closing time for the FedNow Service would not align with other Federal Reserve services, which would introduce significant complexity to the service. Therefore, to maintain consistency with other Federal Reserve services, the FedNow Service business 47 Transactions that are in process when the FedNow Service switches from one day to the next will continue to be processed. The settlement date of such transactions will be the date when Step 6 shown in Figure 1 occurs (debits and credits to the designated master accounts of the sender and receiver banks or their correspondent banks). 48 This approach mirrors the approach used by the Reserve Banks for recording Fedwire Funds Service transactions that occur after the service’s opening at 9 p.m. eastern time (ET) and before midnight ET, where these transactions are recorded as occurring on the next business day. 49 Most of these commenters did not suggest a specific time zone for the calendar day. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices day will be adopted as proposed with the following additional clarifying detail. The Board has determined that the closing time of the FedNow Service will align on all calendar days with the scheduled close of the Fedwire Funds Service.50 If the Fedwire Funds Service close is extended on any given day, the FedNow Service close would be extended to maintain alignment. Additionally, the Board expects that participating banks will record FedNow Service transactions in their customer accounts according to their own business day and accounting conventions (while still providing immediate access to funds received through the FedNow Service). The Board recognizes that a bank’s definition of a business day may also affect its conventions for reporting and recording transactions that occur on weekends and holidays, which is discussed in the next section, SevenDay Accounting. 5. Seven-Day Accounting In the 2019 Notice, the Board proposed that the Reserve Banks implement a seven-day accounting regime as part of implementing the FedNow Service. Under this regime, an end-of-day balance would be calculated for each day of the week, with transactions occurring on weekends and holidays recorded and reported in the same way as transactions occurring Monday through Friday (see the Business Day section).51 Approximately 15 commenters addressed topics related to implementation of a seven-day accounting regime. Although the majority of commenters were supportive of seven-day accounting for FedNow Service transactions, commenters recommended that the Federal Reserve provide guidance to banks that prefer to maintain a five-day accounting regime, in order to assist those institutions with calculating reserve balances over the weekend and on holidays. Commenters noted that this guidance would be particularly helpful for small and midsize banks that may participate in the FedNow Service but do not wish to 50 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. As of March 2021, the service is expected to close at 7:00 p.m. ET. On weekends and holidays when the Fedwire Funds Service is closed, the FedNow Service close will still align with this closing time. The schedule for funds transfers through the Fedwire Funds Service is provided in the Reserve Banks’ Operating Circular 6. 51 For FedNow Service participants, interest on reserve account balances will be calculated each day of the week based on that day’s closing balance. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 conduct all of their internal operations on a 24x7x365 basis. The Board recognizes that seven-day accounting is a significant shift from current practice in the banking industry and will require FedNow Service participants to update accounting systems and practices. A seven-day accounting regime adopted by the Federal Reserve, however, does not dictate or preclude use of specific other accounting regimes by participating banks. Based on the specific applicability of accounting principles, participating banks may choose to use alternative accounting approaches for recording and reporting FedNow Service transactions on weekends and holidays to their financial records (though still providing immediate access to funds received through the FedNow Service). In addition, the service will provide reports to support reconcilement and reporting by participating banks under their chosen internal accounting approaches. The Board also believes that as adoption of instant payments grows over the long term, seven-day accounting is likely to become the industry standard. Implementing seven-day accounting is therefore likely to be less disruptive and more efficient than switching from fiveto seven-day accounting in the future. For these reasons, the Board has determined that a seven-day accounting regime is appropriate. 6. Reports In the 2019 Notice, the Board stated that the FedNow Service would provide reports to participating banks to support transaction monitoring, reporting, and reconciliation. Eight commenters agreed that the FedNow Service should provide reporting capabilities and recommended that account balance information be available to participants on a 24x7x365, real-time basis. These commenters explained that such reporting capabilities would assist banks with management of their account balances at the Reserve Banks. The Board agrees that reporting capabilities will be important to facilitate participants’ effective use of the FedNow Service, and the FedNow Service will offer reports as proposed. Reports about FedNow Service payment activity, such as transaction-level or summary-level activity reports, will be available as part of existing end-of-day reports provided for other Federal Reserve services or by request.52 52 Banks will be able to choose whether to receive daily reports according to business day, for example, if participants do not wish to receive reports on weekends and holidays. PO 00000 Frm 00032 Fmt 4703 Sfmt 4703 48531 FedNow Service participants will also have the ability to request intraday account balances, which would reflect a master account balance inclusive of FedNow Service payment activity. Summary-level reports will provide the total dollar value of sent and received transactions, the number of completed and rejected transactions, and other information. Correspondent banks will also be able to obtain these transactionlevel and summary reports for their respondents. Details on reports available through the FedNow Service will be announced prior to the launch of the service through established Reserve Bank communication channels. 7. Liquidity and Credit In the 2019 Notice, the Board stated that it would consider providing intraday credit on a 24x7x365 basis to support FedNow Service transactions. The Reserve Banks currently provide liquidity in the form of intraday credit, also known as daylight overdrafts, to eligible banks in support of Federal Reserve services and subject to the Federal Reserve’s Policy on Payment System Risk, Part II (PSR Policy).53 Approximately 10 commenters addressed intraday credit, and all were supportive of the Reserve Banks providing intraday credit on a 24x7x365 basis to support FedNow Service transactions. Several commenters noted that access to intraday credit would provide flexibility for banks of varying sizes as they look to manage their account balances at the Reserve Banks and emphasized the importance of intraday credit to the smooth functioning of the FedNow Service. Commenters also stated that account balance management will become more complex in a 24x7x365 environment where payments settle continuously in master accounts. The Board agrees with commenters that access to 24x7x365 intraday credit would support the smooth functioning of the FedNow Service.54 Accordingly, access to intraday credit will be provided for participants in the FedNow Service during its business day under 53 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,’’ Available at https://www.federalreserve.gov/ paymentsystems/psr_about.htm. 54 In particular, over the weekend or on a holiday, a FedNow Service participant that faced an unexpected outflow of payments could experience a depletion of its master account balance. Absent intraday credit, a FedNow Service participant in this situation could have its payments rejected by the FedNow Service, to the detriment of that participant and its end-user customers. E:\FR\FM\11AUN1.SGM 11AUN1 48532 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices the same terms and conditions as are available for other Federal Reserve services.55 As is the case today, participating banks will be expected to manage their master accounts in compliance with Federal Reserve policies, including avoiding negative balances at the close of the business day, each day of the week, to avoid overnight overdrafts.56 Therefore, some participating banks may need to adjust internal account monitoring practices to manage intraday liquidity.57 In the 2019 Notice, the Board also explained that, while discount window loans would initially not be available on weekends and holidays, the Board would conduct an analysis to determine when it may be beneficial to expand discount window availability times.58 Approximately 10 commenters recommended that the Federal Reserve extend discount window availability to include weekends and holidays. Commenters noted that the ability to access funding during weekends and holidays will be critical, particularly while participants are still familiarizing themselves with 24x7x365 payment operations after the FedNow Service first becomes available. The Board recognizes that the ability of participants in the FedNow Service to access funding during weekends and holidays will be important. The Board also expects that initially the need for overnight credit on weekends and holidays will be limited, given that net 55 Specific changes to the Board’s PSR policy will be proposed separately. 56 To minimize Reserve Bank exposure to overnight overdrafts, the Board charges a penalty fee to discourage institutions from incurring overnight overdrafts. 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. If a bank has a negative balance at the end of the business day, it is charged an overnight overdraft penalty for a 24-hour period. The Board expects this would continue to be the case after launch of the FedNow Service, even if an overdraft is cured shortly after on the next business day through incoming FedNow payments or a liquidity transfer from another FedNow Service participant (see the Liquidity Management Tool section). On weekends, the Board expects overnight overdrafts will be counted for a 24-hour period (as opposed to the current 72-hour period), since there will be an opportunity to use the FedNow Service to cure overdrafts on Saturday and Sunday. Specific changes to the Overnight Overdraft Policy will be proposed separately. 57 Participating banks will be able to request intraday balances through the FedNow Service (see the Reports section). 58 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/discountwindow.htm. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 value of payment inflows and outflows related to FedNow Service transactions will likely represent a small portion of banks’ master account balances. In addition, as outlined in the next section, the FedNow Service will provide participants with a liquidity management tool that will assist with liquidity management in a 24x7x365 environment. Therefore, the Board has determined that, as proposed, the discount window will continue to be available until the close of the Fedwire Funds Service, Monday through Friday, under the same terms as today. The Reserve Banks will monitor account balance activity and review the need for overnight credit on weekends and holidays as the FedNow Service matures. 8. Liquidity Management Tool In the 2019 Notice, the Board discussed the importance of banks’ ability to manage liquidity needs associated with instant payments, given that such payments involve real-time gross settlement between banks on a 24x7x365 basis. For example, a participant in the FedNow Service could experience unexpectedly high outgoing payment volume that exceeds the participant’s liquidity available in its master account for settlement. If this outflow occurs during hours when the Fedwire Funds Service is not operating, the participant may incur an overdraft of its master account that it cannot address through a liquidity transfer from another FedNow Service participant, possibly resulting in an overnight overdraft. An analogous liquidity management issue can arise for participants in a private-sector instant payment service that is backed by a joint account at a Reserve Bank.59 The Board explained in the 2019 Notice that the Federal Reserve would explore expanded hours for the Fedwire Funds Service and National Settlement Service (NSS) as an option to provide such liquidity management functionality.60 59 A participant in such a service could find that its customers’ payment activity has depleted its position on the service’s ledger, but the participant has no way to provide supplemental funding to the joint account to support an increase in that ledger position when the Fedwire Funds Service is closed. 60 In the 2018 Notice, the Board requested comment on the development of a liquidity management tool. Comments received in response to the 2018 Notice generally supported development of such a tool and also supported expansion of hours for existing Federal Reserve services to support other industry needs. Reflecting this input, the Board indicated in the 2019 Notice that the Reserve Banks would explore the expansion of Fedwire Funds Service and NSS hours to provide liquidity management functionality and for other purposes. PO 00000 Frm 00033 Fmt 4703 Sfmt 4703 Approximately 20 commenters, largely representing small and midsize banks, trade organizations, and other interested parties, addressed the need for a liquidity management tool. Commenters noted that tools to manage liquidity on a 24x7x365 basis should be available at the launch of the FedNow Service and suggested that those tools could include automated transfers between FedNow Service participants, based on preestablished account thresholds and limits. Half of these commenters suggested that expansion of Fedwire Funds Service and NSS hours would allow for efficient liquidity management in a 24x7x365 environment. The Board agrees with commenters that the ability to manage liquidity needs resulting from the 24x7x365 realtime nature of instant payments is important, both for the FedNow Service at launch and for instant payment services more broadly. As a 24x7x365 service, the FedNow Service will inherently be able to support liquidity transfers around the clock and therefore will incorporate a liquidity management tool (FedNow LMT) as a core feature.61 The FedNow LMT will enable participants in the FedNow Service to transfer funds between one another to support liquidity needs related to payment activity in the FedNow Service. The tool will also support participants in private-sector instant payment services backed by joint accounts at a Reserve Bank by enabling transfers between the master accounts of such participants and their joint account. Because of the general importance of liquidity management for instant payment services, the Board recognizes the importance of flexibility related to the way that participants in such services might look to access the FedNow LMT. As a result, users of the FedNow LMT will not be required to be full FedNow Service participants. For example, participants in a private-sector joint account-based instant payment service, or providers of liquidity to FedNow Service participants, will be able to access the FedNow LMT functionality without joining as a full FedNow Service participant because they would not need the FedNow Service’s full set of features for sending 61 The Federal Reserve continues to explore expanded hours for the Fedwire Funds Service and NSS. As explained in the 2019 Notice, further analysis is needed to fully evaluate the relevant operational, risk, and policy considerations with expanded hours for the Fedwire Funds Service and NSS, given the systemic importance of the Fedwire Funds Service. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices and receiving instant payment transactions involving end users.62 The Reserve Banks anticipate imposing certain controls on the FedNow LMT to ensure that use of the functionality is limited to liquidity transfers in support of instant payments. Such controls will include transactionvalue limits or limits on the hours of the functionality, such as when transfers are not possible through other Federal Reserve services. Controls related to the FedNow LMT, service terms, eligibility requirements, and enrollment processes will be announced prior to the launch of the FedNow Service through established Reserve Bank communication channels. 9. Network Access In the 2019 Notice, the Board explained that participating banks would access the FedNow Service through the FedLine® network, which would be enhanced to support the service’s 24x7x365 processing.63 The Board received seven comments related to network access, all of which were generally supportive of accessing the FedNow Service through the FedLine network. Several of these commenters noted that use of the FedLine network to access the FedNow Service will streamline onboarding processes generally, as the Federal Reserve has existing relationships with most banks in the United States. Several of these commenters also noted that it will be important for the Federal Reserve to work with service providers and processors in order to ensure that smaller institutions without direct FedLine connections are also able to access the service. One small bank commenter recommended that the Reserve Banks assess whether any contemplated upgrades to FedLine components could disproportionately affect smaller institutions that may not have the ability to test or maintain enhanced components. As proposed, the FedLine network will serve as the channel through which 62 Liquidity providers may have an interest in providing liquidity to FedNow Service participants without making standard FedNow Service payments. Allowing participation by such liquidity providers could allow small and midsize banks to retain relationships with their existing liquidity providers for purposes of instant payment liquidity management. 63 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/ index.html. While the Board is not envisioning doing so at this time, it may consider in the future whether enabling access to the FedNow Service through alternate messaging networks would enhance resiliency or interoperability for instant payments. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 participating banks access the FedNow Service. Participating banks will need to test and deploy enhanced or upgraded FedLine components to enable the FedNow Service. Depending on their electronic connection with the FedLine network, banks would need to maintain adequate telecommunications services to support the transaction time requirement (see the Payment Flow and Message Type section). The Board recognizes that this need for adequate telecommunications services could present potential challenges for small and midsize banks that rely on telecommunication services through their internet service providers. As a result, the Federal Reserve intends to review and update its policies, standards, procedures and guidelines related to network access to provide direction and information to banks of all sizes regarding network access requirements for bandwidth, latency, and availability. 10. Request for Payment In the 2019 Notice, the Board sought comment on the incremental value and timing of including request-for-payment functionality in the FedNow Service. Request-for-payment functionality would involve a specific nonvalue message type. This message type would support participants’ ability to provide a potential receiver the capability, through an end-user service, to prompt a sender to initiate a standard credit transfer through the FedNow Service. The Board explained that this functionality may increase the use of instant payments by allowing end users to more easily conduct certain types of transactions, such as bill payments. Approximately 30 commenters, largely representing trade organizations, small and midsize banks, and other interested parties, addressed request-forpayment functionality. Nearly all of these commenters agreed that such functionality would support widespread use of instant payments. Six commenters highlighted that requestfor-payment functionality offers similar benefits to a debit (‘‘pull’’) transfer but allows the payment sender to actively authorize any payment to the receiver. Of those that specified a timeline for introduction of request-for-payment functionality, approximately 10 commenters supported its inclusion as a feature at the launch of the FedNow Service. Seven commenters suggested that this functionality be considered for future releases of the FedNow Service, indicating that it may add unnecessary complexity to the first release. The Board agrees that request-forpayment functionality may enable a PO 00000 Frm 00034 Fmt 4703 Sfmt 4703 48533 wider variety of transactions and help facilitate broader adoption of instant payments. The Board also does not believe that inclusion of the feature will introduce unnecessary complexity to the technical design of the FedNow Service. Therefore, the request-forpayment message type will be available as part of the FedNow Service at launch. 11. Fraud Prevention Tools In the 2019 Notice, the Board stated that, while participating banks would continue to serve as a primary line of defense against fraudulent transactions, the FedNow Service could offer fraud prevention tools to support participating banks in fulfilling that role or other tools at the payment-system level. Approximately 75 commenters raised topics related to fraud prevention tools, and over half of these commenters, largely representing small and midsize banks, trade organizations, and service providers, indicated that tools for monitoring and alerting participants to potentially fraudulent transactions should be included in the FedNow Service. Many of these commenters made specific suggestions about how such tools should be designed. For example, approximately 15 commenters recommended that tools should automatically stop potentially fraudulent transactions. Approximately 15 commenters recommended that FedNow Service participants have the ability to set controls to restrict payments by value, volume, and other characteristics. Finally, a few commenters suggested that the Reserve Banks assign a ‘‘score’’ to payment transfers in order to communicate potential fraud risk to participants. Commenters also suggested other tools that could support a safe and secure instant payment ecosystem. Approximately 25 commenters, largely representing small and midsize banks, recommended that the Reserve Banks develop a database that facilitates sharing of payment fraud information among instant payment stakeholders. The majority of these commenters specified that the database would rely on information contributed by FedNow Service participants. Additionally, approximately 15 commenters recommended that the Reserve Banks leverage their position as network operator to analyze network-wide data in order to identify patterns of potentially fraudulent activity. Based on public comments and analysis by the Reserve Banks of available fraud prevention tools and technology, the FedNow Service will include a set of fraud prevention tools at launch and in future phases. At E:\FR\FM\11AUN1.SGM 11AUN1 48534 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices implementation, the tools available to participating banks to assist them in their role as the primary line of defense against fraudulent transactions will include (1) the ability to set lower transaction value limits, (2) the ability to specify certain conditions under which transactions would be rejected, such as by account number, and (3) reporting features and functionality, including reports on the number of payment messages that were rejected based on a participant’s settings. The first two tools will allow banks to proactively set parameters that limit transaction activity in the FedNow Service, based on banks’ knowledge of their own customers. The third tool will provide summary information that banks can incorporate into their fraudmonitoring activities. The Federal Reserve intends to explore other features that could be made available as part of future releases to aid participating banks in managing fraud risk, such as value limits that could be tailored to certain uses, aggregate value or volume limits for specific periods (for example, per business day), or centralized monitoring performed by the FedNow Service such as functionality that leverages advanced statistical methods and historical patterns to identify potentially fraudulent payments. D. Features for Consideration in Future Releases The Reserve Banks intend to take a phased approach to developing and expanding the FedNow Service, as discussed earlier. The Board believes this approach will most effectively meet the need for the Federal Reserve to move quickly while still offering additional features as part of later releases intended to improve overall accessibility, safety, and efficiency of instant payments in the United States. For example, the service will seek to, as part of later releases, support alias-based payments through directories and application programming interfaces (APIs), both of which are discussed in further detail later in this section. Other features to be explored for later releases include support for bulk payments or enhanced remittance information. The Federal Reserve recognizes that market needs and the technology related to instant payments are constantly evolving and intends to continue engaging with stakeholders in order to be flexible in its approach when augmenting the features and functionality of the FedNow Service. Based on this engagement, additional features and service enhancements will be introduced over time. Any additional VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 functionality will be announced through established Reserve Bank communication channels. 1. Support for Alias-Based Payments In the 2019 Notice, the Board explained that the Reserve Banks intended to engage with industry stakeholders to understand more fully the benefits and drawbacks of various approaches to providing directory services.64 Directory services can enable alias-based payments by connecting a receiver’s alias (such as phone number or email address) with the receiver’s banking information to ensure that a payment is routed to the correct end user in a way that is private and secure. Approximately 80 commenters, largely representing small and midsize banks, trade organizations, and fintechs, addressed the inclusion of directory services as part of the FedNow Service. All of these commenters noted that directory services would be a critical tool to enable alias-based payments, and approximately 40 commenters provided specific recommendations as to how the Reserve Banks should provide access to directory services to FedNow Service participants. Commenters’ recommendations varied widely, with approximately 20 commenters suggesting the Reserve Banks provide a centralized link to existing directories. Another 20 commenters suggested the Reserve Banks develop their own directory, either as an independent service or in addition to a centralized link to existing directories. Additionally, several commenters highlighted potential risks and complexities associated with implementation and maintenance of directory services, such as the need for controls to ensure secure collection, storage and management of public identifiers. The Board recognizes that originating a payment using only the public alias of a receiver is becoming increasingly common, especially for individuals seeking a quick and convenient way to send money to each other. The Board also recognizes that banks of all sizes across the country wish to offer this type of service to their customers, and some of these banks are expecting the FedNow Service to provide the infrastructure necessary for them to 64 The 2018 Notice requested comment on whether a directory service is needed for an RTGS service for instant payments. The question generated a large number of responses, with commenters stating that directories are an important driver for adoption of instant payments because end users value the ability to send payments to receivers based solely on public identifiers, or aliases, without a sender having to know the bank account number of a receiver. PO 00000 Frm 00035 Fmt 4703 Sfmt 4703 enable end-user services for alias-based payments. The Board also agrees that facilitating aliased-based payments, through a directory service or other means, is a desirable feature for the FedNow Service and could help drive adoption of instant payments. At the same time, as indicated elsewhere in this notice, the Federal Reserve’s goal is to launch the service as soon as practicably possible. Therefore, the Federal Reserve has made a conscious decision to focus first on the core interbank clearing and settlement functionality necessary for supporting instant payments to facilitate an expeditious launch. Offering a directory service or similar feature at launch would add complexity that would extend the time frame necessary to launch the service. As a result, the FedNow Service will not include a directory service or other approach to support alias-based payments at launch, but instead will seek to provide this supplemental feature in a future release of the FedNow Service.65 The Federal Reserve is actively exploring various approaches based on suggestions from commenters to provide participants in the FedNow Service the means to facilitate alias-based payments.66 One approach would be to connect to one or more existing directories that could provide routing information for all or a subset of participants in the FedNow Service. Given that existing alias-based directories are typically embedded within proprietary payment services (mostly for person-to-person payments), contain information only for a closed user group, and are not designed for broader open access, this approach raises several considerations that will need to be further explored.67 The Federal Reserve is also exploring options for building a directory, which could function independently or supplement existing directories. This approach would mean that all participants in the FedNow Service would be able to provide and update alias information for their account holders to a Federal Reserve directory, if they wish to accept alias-based payments through the FedNow Service. Both of these approaches present a host of legal, security, and operational 65 As part of conducting FedNow transactions, participants in the FedNow Service are not precluded from using alias-based payment services that are unaffiliated with the FedNow Service. 66 In support of alias-based payments, the Federal Reserve may also consider message flows and settlement processes different from the basic credit transfer flow described earlier. 67 In this context, a closed user group is where the sender and receiver of a payment have signed up with a specific service. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices challenges that would need to be resolved. Because of these complexities and challenges, many of which were highlighted by commenters, additional analysis on the appropriate approach is needed. In addition to these potential options, the Federal Reserve will continue to explore other avenues for how the Reserve Banks might offer alias-based payment functionality as a feature of the FedNow Service after launch. The Board fully acknowledges the industry’s need for clarity regarding an alias-based capability in the FedNow Service, and the Federal Reserve will communicate its progress through established Reserve Bank communication channels. 2. Application Programming Interfaces (APIs) The Board received approximately 20 comments regarding the use of APIs within the FedNow Service. An API is a type of software technology that enables computer systems or applications to connect to each other, allowing information to be shared across the systems.68 Commenters, representing small and midsize banks, fintechs, and service providers, noted that APIs could be useful for allowing banks or their service providers to submit requests for various informational reports or allowing third parties to develop value-added services related to the FedNow Service. The Board recognizes that the use of APIs facilitates the provision of valueadded end-user services and provides useful tools for a number of purposes, such as providing real-time service status updates, providing downloadable information like message specifications as part of automated services, or even initiating and receiving transactions. The Federal Reserve will continue to engage with industry stakeholders as it explores the best ways to support APIs in the FedNow Service and will provide updates through established Reserve Bank communication channels. E. Interoperability In the 2019 Notice, the Board indicated that, in a market structure with multiple operators of instant payment services, the ability to achieve ubiquity in instant payments is advanced when customers of a bank participating in one instant payment 68 More specifically, in computer programming, an API is a set of routines, protocols and tools used to facilitate interactions between applications. An API specifies how software components should interact with each other, inclusive of formats and processes to facilitate data calls and requests. Among a variety of other uses, an API can be used to retrieve data from one application and process it in another application. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 service are able to reach the customers of a bank participating in another instant payment service. Over half of the comment letters received in response to the 2019 Notice emphasized the importance of the FedNow Service having interoperability with the existing private-sector service. Of the approximately 100 commenters that addressed interoperability, approximately 40, largely representing small and midsize banks and trade organizations, addressed issues related to timing. Approximately 20 commenters stated that interoperability should be available at service launch. Approximately 10 commenters did not specify whether the service should be interoperable at launch, but noted that the Federal Reserve should balance the importance of an expeditious launch against achieving interoperability. Another 10 commenters stated that interoperability is not critical at launch of the FedNow Service. Approximately 25 commenters, largely representing large banks, small and midsize banks, and trade organizations, recommended that the FedNow Service rely on common rules and standards with the existing privatesector service to support interoperability. Many of these commenters recommended that the FedNow Service offer the same message types that are currently available with the existing private-sector service. Additionally, a group of approximately 20 small and midsize banks expressed the concern that they may be disadvantaged if they join the FedNow Service and cannot send payments to or receive payments from banks participating in the existing privatesector service that are not also FedNow Service participants. The Board agrees with commenters on the importance of interoperability. Nationwide reach is one of the Federal Reserve’s primary policy objectives for instant payments, and interoperability between the FedNow Service and the existing private-sector service can help advance this goal. The Federal Reserve, however, cannot accomplish interoperability for instant payments alone. The industry—banks, bank service providers, and service operators—must work towards this common goal, as it has in the past with other payment services. Interoperability could take different forms. As noted in a recent paper by the U.S. Faster Payments Council, three primary models of interoperability have been used to accomplish nationwide reach in other types of payments, two of which the Board believes are more PO 00000 Frm 00036 Fmt 4703 Sfmt 4703 48535 suitable for instant payments.69 The first model, which is used in card payments and wire transfers and is likely to be most relevant to instant payments, relies on the sending bank routing payments through a specific service based on the path(s) available to reach the receiver; if there is more than one path, the sending bank may choose the service it uses based on specific criteria, such as price and features. In this model, nationwide reach can be achieved if banks choose to participate in the same service, such that there is always at least one path between any two banks. Further, banks can choose to participate in additional services as part of this model. The second model is interservice message exchange, in which banks choose to participate in one service, and a payment originated through that service can be cleared, settled, and received through another service. ACH payments use this model, which is designed for bilateral exchange between two service operators. This model can achieve nationwide reach by connecting individuals and businesses across the country through their banks, which are in turn connected to a service operator that enables the message exchange arrangement with the other service operator. The message exchange model, however, poses several additional complexities (such as technical message exchange and common settlement) and would require the commitment and active engagement by the existing private-sector service. The form and timeline for achieving interoperability depends on the level of commitment and engagement across the industry. The Federal Reserve is committed to working towards compatible standards and operating procedures with the existing privatesector service, which will enable interoperability through the model of payment routing, and has initiated discussions on this subject with the existing private-sector service toward that end. The Federal Reserve is also committed to using the widely accepted ISO 20022 standard and other industry best practices to remove unnecessary and burdensome incompatibilities that 69 The U.S. Faster Payments Council is an industry-led membership organization whose mission is to facilitate faster payments in the United States. The paper is available at https://faster paymentscouncil.org/userfiles/2080/files/Faster %20Payments%20Interoperability%20WP_ June%202020.pdf. A third model outlined by the Faster Payments Council, currently used for check payments and certain international payments, is one in which a series of intermediary banks are expected to clear, settle, and route payments. This model can lead to friction in payment flows, which makes this approach less attractive for domestic instant payments. E:\FR\FM\11AUN1.SGM 11AUN1 48536 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices could be a barrier to payment routing interoperability. The Federal Reserve is open to interoperability based on interservice message exchange in the future, after introduction of the FedNow Service. F. Cost Recovery & Service Fees In the 2019 Notice, the Board concluded that, due to considerations specific to new services, long-run cost recovery for the FedNow Service will fall outside of the traditional 10-year period for cost recovery typically applied by the Board to mature services. Similar to how cost recovery has been applied to new services in the past, the Board determined that until the service reaches maturity with relatively stable costs and revenues, FedNow Service fees will be based on transaction costs associated with mature volume estimates. In the 2019 Notice, the Board requested 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. Approximately 15 commenters raised topics related to long-run cost recovery for the FedNow Service. Of these comments, 9 supported the Board’s proposed approach to cost recovery, with several commenters expressing the concern that if the traditional 10-year cost recovery were applied to the FedNow Service, fees would be prohibitively high. Two commenters stated that the Board should apply the traditional 10-year cost recovery period to the FedNow Service. Several commenters also suggested that the Federal Reserve make additional information public about its cost estimates and long-term cost-recovery strategy. The Board agrees with the majority of commenters that applying the traditional 10-year cost recovery period to the FedNow Service, when volumes are low and potentially variable while fixed costs are high, could result in unnecessarily volatile prices or prohibitively high service fees. Such an outcome would negatively affect service usage, and ultimately undermine the Federal Reserve’s public policy objectives in providing the FedNow Service. In addition, the cost recovery provisions in section 11A of the Federal Reserve Act state that the Board’s pricing principles for Federal Reserve services should give due regard to competitive factors and the provision of an adequate level of service nationwide. Therefore, the Board continues to expect long-run cost recovery for the FedNow Service to occur outside the 10year period typically applied by the VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 Board to mature services. The Board also expects that fees will be based on transaction costs associated with mature volume estimates until the service reaches maturity with relatively stable revenues and costs. This approach will limit prohibitively high service fees, and allow for realization of the public benefits the Board identified in its approval of the FedNow Service. As part of this approach to cost recovery, the Board will monitor progress toward matching revenues and costs and will regularly confirm its expectation that the service will meet cost recovery objectives over the long run. To provide transparency as part of this process, the Board will also regularly disclose the service’s cost recovery. In addition, approximately 40 commenters, representing small and midsize banks, trade organizations and individuals, raised topics related to FedNow Service fees. Approximately 15 of these commenters recommended that the FedNow Service rely on a per-item fee schedule, as opposed to volumebased pricing. Additionally, 4 commenters suggested that FedNow Service fees align with market practices at the time of service launch. Another group of 4 commenters recommended that both the sender’s and receiver’s banks be assessed fees for a FedNow Service transfer. Other commenters recommended that the Reserve Banks communicate the service fee schedule as soon as possible, to provide participants adequate time to prepare for onboarding. The Board recognizes the need for additional specificity on service fees in advance of the FedNow Service’s launch. Based on prevailing market practices, the Board expects that the fee structure will include a combination of per-item fees, charged to the sender’s bank and potentially to the receiver’s bank, and fixed participation fees. The ultimate fee structure and schedule will be informed by the Federal Reserve’s assessment of market practices at the time of implementation. The Reserve Banks will publish the initial fee schedule for the FedNow Service well before its launch through established communication channels.70 IV. 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 FedNow 70 Following the release of the FedNow Service’s initial fee schedule, the Board will also publish FedNow Service fees in its annual service-pricing process for all services. PO 00000 Frm 00037 Fmt 4703 Sfmt 4703 Service.71 In the 2019 Notice, the Board conducted an initial competitive impact analysis for the FedNow Service and requested comment on that analysis. In light of the comments received and the Board’s additional assessment, the Board has conducted a final competitive impact analysis. As part of a competitive impact analysis, the Board 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 order to do so, the Board first identifies relevant privatesector providers of similar services and then compares those providers’ services with the FedNow Service. In instances where any differences create direct and material adverse effects on the ability of the private-sector providers to compete effectively, 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 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. A. Relevant Private-Sector Providers of Similar Services In conducting a competitive impact analysis, the Board first identifies relevant private-sector providers of similar services. As part of its initial competitive impact analysis, the Board identified one comparable private-sector service for instant payments in the United States, which has been operational since November 2017 (the existing private-sector service). Like the 71 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. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices FedNow Service, the existing privatesector service conducts payment-bypayment final settlement of interbank obligations on a 24x7x365 basis for instant payments. Unlike the FedNow Service, which will settle in central bank money using master accounts, the existing private-sector service relies on an internal ledger maintained by its operator to conduct settlement, which is supported by funds held in a joint account at a Reserve Bank.72 One commenter suggested the Board broaden its definition of relevant service providers in performing its competitive impact analysis to include entities, such as card companies that offer end-user solutions that may compete with instant payment solutions. 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 interbank RTGS services for instant payments, the Board does not view them as private-sector providers of similar services and, therefore, has not considered them as part of its final competitive impact analysis. B. Material Adverse Effects on the Ability of Relevant Service Providers To Compete Effectively After identifying relevant privatesector providers of similar services, the Board compares those providers’ services with the FedNow Service. The purpose of this comparison is to identify differences between private-sector and Federal Reserve services. Ultimately, it is 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.73 The Board’s competitive impact analysis therefore focuses on those differences that could create a 72 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-bypayment 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. 73 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. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 direct and material adverse effect on the ability of the private-sector services to compete effectively with the Federal Reserve. As part of its initial competitive impact analysis, the Board identified specific differences between the FedNow Service and the existing private-sector service. The Board requested comment on whether these differences, in addition to any other differences identified, had a direct and material adverse effect on the ability of the existing private-sector service to compete effectively with the Federal Reserve. 1. Use of Master Accounts In order to participate in the FedNow Service, participants must use a master account at the Reserve Banks (directly or indirectly), whereas the existing private-sector service uses a separate joint account that each participant must prefund (directly or indirectly through a funding agent). As part of its initial analysis, the Board noted that use of master accounts may provide an advantage to the FedNow Service because funds remain in participants’ Federal Reserve master accounts, earning interest and counting towards reserve requirements, and can be used for other purposes.74 Unlike funds held in a master account, prefunding held in the existing private-sector service’s joint account does not earn interest or count toward reserve requirements and is not available for other purposes that may arise, such as satisfying payment or liquidity needs outside the existing private-sector service.75 Approximately 15 commenters addressed the potential competitive advantages that the use of master accounts may provide the FedNow Service. These commenters raised different options for ways the Federal Reserve could mitigate the effects of this difference. Approximately 10 commenters also stated the Federal Reserve should pay interest on the 74 When the Board announced its decision that the Reserve Banks would develop the FedNow Service (August 2019), the maximum reserve ratio on net transaction accounts was 10 percent. On March 15, 2020, the Board announced reserve ratios on all transaction accounts would be reduced to zero effective March 26, 2020. 75 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. PO 00000 Frm 00038 Fmt 4703 Sfmt 4703 48537 balances held in the joint account and count these balances towards reserve requirements in order to mitigate the FedNow Service’s potential competitive advantage of settling in master accounts. A few commenters also pointed to the excess balance account (EBA) model as a potential example that the Federal Reserve could follow with the existing private-sector service.76 Two commenters suggested that expanding the Fedwire Funds Service and NSS hours to provide the ability to move funds to and from the joint account outside current operating hours for liquidity management purposes could ameliorate any adverse effect. In addition, one commenter suggested that the Federal Reserve could segregate funds used for transactions in the FedNow Service and not pay interest on those balances. Commenters offered differing views on the impact of these potential advantages. Only two of these commenters offered views on the materiality of these potential advantages. One commenter suggested the decision to pay interest on balances in the joint account and allow balances in this account to count towards reserve requirements would materially influence its decision on how to route payments and manage funds. Another commenter stated that the FedNow Service’s use of master accounts would not affect the existing private-sector service’s ability to compete and that the FedNow Service enhances competition. Taking into account the comments received and the provision of additional liquidity management features that will be available as discussed in Section III, the Board has assessed that the use of master accounts by the FedNow Service is a difference that will not create a direct and material adverse effect on the ability of the existing private-sector service to compete effectively.77 Only 76 An EBA is an interest-bearing account at a Reserve Bank established for one or more institutions that are eligible to earn interest on balances held at the Reserve Banks and managed by an agent. Only excess balances may be placed in an EBA; the account balance cannot be used to satisfy reserve balance requirements or for general payments or other activities. 77 The Board recognizes that in addition to the payment of interest and treatment of balances for reserve purposes, additional differences may exist between the existing private-sector service’s use of a joint account and the FedNow Service’s use of the master account that require participants to manage their account positions in different ways. On the one hand, the FedNow Service’s use of master accounts may create burden by requiring consideration of the defined closing and opening of other Federal Reserve services also settling in the same account. Use of master accounts for a service operating 24x7x365, such as the FedNow Service, also adds a layer of complexity to banks’ E:\FR\FM\11AUN1.SGM Continued 11AUN1 48538 Federal Register / Vol. 85, No. 155 / Tuesday, August 11, 2020 / Notices one commenter stated that the inability of funds held in the joint account to earn interest would materially affect its decision to join the existing privatesector service. But, as discussed earlier, the Federal Reserve’s provision of the liquidity management tool will enable banks to move excess funds in and out of the joint account, thereby allowing banks to minimize the balances in the joint account on an ongoing basis. Additionally, following the Board’s decision to reduce reserve ratios on all transaction accounts to zero, which was announced on March 15, 2020, reserve requirements have been effectively eliminated for all depository institutions.78 Thus, there is not at this time any advantage relating to master account balances’ being eligible to count towards satisfaction of reserve requirements. The Board, however, remains committed to creating as much competitive parity as possible, including by paying interest on the joint account. 2. Access to Intraday Credit Participants in the FedNow Service will have access to intraday credit under the same terms and conditions as apply to participation in other Federal Reserve services. Such intraday credit would lower the risk that payments will be rejected because of lack of funds. The Federal Reserve expects banks to manage their master accounts at all times in compliance with Federal Reserve policies. In the existing 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 payment transactions in the existing private-sector service being rejected. As part of the Board’s initial competitive impact analysis, the Board noted that access to intraday credit for funding a joint account would be management of their positions to avoid overnight overdrafts and associated penalties. On the other hand, unlike the master account, 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 in order to ensure funding requirements are met to avoid rejected payments on the ledger of the existing private-sector service. Overall, the Board does not believe these differences are significant enough to have a direct and material adverse effect on the ability of the existing private-sector service to compete effectively. Moreover, the ability to transfer liquidity between master accounts and the joint accounts as described earlier in Section III will further minimize any potential impacts. 78 See ‘‘Federal Reserve Actions to Support the Flow of Credit to Households and Businesses,’’ March 15, 2020. https://www.federalreserve.gov/ newsevents/pressreleases/monetary20200315b.htm. VerDate Sep<11>2014 17:02 Aug 10, 2020 Jkt 250001 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. However, as noted in Section III, the Reserve Banks will provide a mechanism for transferring liquidity. As a result, participants in the existing private-sector service could use this functionality to transfer funds from their master accounts to the joint account, for example by using intraday credit if they so choose, including during times when transfers are not possible through other Federal Reserve services. Therefore, the Board has determined that there is no direct and material adverse effect on the ability of the existing private-sector service to compete effectively because participants in both the existing private-sector service and the FedNow Service will have access to intraday credit during non-Fedwire Funds Service hours. on a regular basis and upon request for the purpose of policy analysis, including transaction-level data that the existing private-sector service does not report. The Board and Reserve Banks also make aggregate value and volume data available publicly. Further, while the Federal Reserve may initially impose limits on the number of participants in a joint account arrangement to ensure use of the account meets the public policy objectives set forth in the Board’s joint account guidelines, such as efficient risk management, the Board in its oversight capacity expects the FedNow Service to meet the same public policy objectives before it can launch. In light of this analysis, the Board does not believe that any of these differences create a direct and material adverse effect on the ability of the existing private-sector service to compete with the FedNow Service. 3. Additional Differences Commenters mentioned differences in addition to those noted in the Board’s initial competitive impact analysis. One commenter stated that the Federal Reserve is not subject to antitrust laws and suggested that the private sector has no remedy if the Reserve Banks engage in monopolistic or anticompetitive activity, so the Federal Reserve should commit to act in the public interest and ensure strong competition in the instant payments market. The same commenter also suggested that the limits on number of participants and reporting required on joint accounts that support settlement of instant payments, which is not required for any other private-sector retail payment system, provides a competitive advantage for the FedNow Service if it is not subject to similar requirements. The Reserve Banks are subject to section 11A of the Federal Reserve Act, which was added in part to ensure that the Reserves Banks were competing fairly with the private sector in the provision of financial services.79 Because the requirements imposed by section 11A are designed to ensure a level playing field with the private sector, such as the establishment of pricing principles and requirements that the Reserve Banks recover costs over the long run, the Board does not believe that not being subject to antitrust laws creates a direct and material adverse effect on the ability of the existing private-sector service to compete effectively. In addition, the Reserve Banks report significant amounts of data to the Board C. Conclusion Based on this analysis, the Board does not believe that any of the differences identified create a direct and material adverse effect on the ability of the existing private-sector service to complete effectively with the FedNow Service. 79 12 PO 00000 U.S.C. 248a. Frm 00039 Fmt 4703 Sfmt 4703 By order of the Board of Governors of the Federal Reserve System. Margaret McCloskey Shanks, Deputy Secretary of the Board. [FR Doc. 2020–17539 Filed 8–10–20; 8:45 am] BILLING CODE P FEDERAL RESERVE SYSTEM Notice of Proposals To Engage in or To Acquire Companies Engaged in Permissible Nonbanking Activities The companies listed in this notice have given notice under section 4 of the Bank Holding Company Act (12 U.S.C. 1843) (BHC Act) and Regulation Y, (12 CFR part 225) to engage de novo, or to acquire or control voting securities or assets of a company, including the companies listed below, that engages either directly or through a subsidiary or other company, in a nonbanking activity that is listed in § 225.28 of Regulation Y (12 CFR 225.28) or that the Board has determined by Order to be closely related to banking and permissible for bank holding companies. Unless otherwise noted, these activities will be conducted throughout the United States. The public portions of the applications listed below, as well as other related filings required by the Board, if any, are available for immediate inspection at the Federal E:\FR\FM\11AUN1.SGM 11AUN1

Agencies

[Federal Register Volume 85, Number 155 (Tuesday, August 11, 2020)]
[Notices]
[Pages 48522-48538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17539]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1670]


Service Details on Federal Reserve Actions To Support Interbank 
Settlement of Instant Payments

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Service Announcement.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
has approved the FedNow\SM\ Service as described in this announcement. 
The FedNow Service is a new interbank 24x7x365 real-time gross 
settlement service with clearing functionality to support instant 
payments in the United States. The new service will support banks' 
provision of end-to-end instant payment services and will provide 
infrastructure to promote ubiquitous, safe, and efficient instant 
payments in the United States.

DATES: September 10, 2020.

FOR FURTHER INFORMATION CONTACT: Kirstin Wells, Principal Economist 
(202-452-2962), Susan V. Foley, Senior Associate Director (202-452-
3596), Division of Reserve Bank Operations and Payment Systems; Jess 
Cheng, Senior Counsel (202-452-2309), 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 payment system is a core part of our nation's infrastructure. 
For more than a century, the Federal Reserve has provided payment and 
settlement services to promote an accessible, safe, and efficient U.S. 
payment system.\1\ Throughout its history, the Federal Reserve has 
provided these services alongside, and in support of, private-sector 
service providers. The Federal Reserve Banks (Reserve Banks) fulfill 
this statutory role by offering services that provide core 
infrastructure for financial transactions, including check, automated 
clearinghouse (ACH), and funds transfer services.\2\ This operational 
role provides key public benefits, including enhanced resiliency, 
healthy competition, increased innovation, and more equitable access. 
Since the Federal Reserve does not have plenary regulatory or 
supervisory authority over payments, this operational role has also 
helped catalyze fundamental improvements in the nation's payment 
system.\3\ This role in the payments system has allowed the Federal 
Reserve to advance its broader mission of providing the nation with a 
modern, safe, and effective financial system.
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    \1\ Additional information about the Federal Reserve's role in 
the payment system is available in The Federal Reserve System 
Purposes & Functions: Chapter 6, ``Fostering Payment and Settlement 
System Safety and Efficiency,'' (October 2016). Available at https://www.federalreserve.gov/aboutthefed/pf.htm.
    \2\ 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[supreg] Funds Service, the 
National Settlement Service, and FedACH[supreg] services. Throughout 
this notice, these services operated by the Reserve Banks will be 
referred to as Federal Reserve services.
    \3\ For a more detailed discussion related to the Federal 
Reserve's role in the payment system, including discussion related 
to regulatory and supervisory authorities, see ``Federal Reserve 
Actions To Support Interbank Settlement of Faster Payments, Request 
for Comments,'' 84 FR 39297 (Aug. 9, 2019). Available at https://www.federalregister.gov/d/2019-17027.
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    Consistent with this history, beginning in 2013 the Federal Reserve 
launched a collaborative initiative with a broad array of stakeholders 
to improve the speed, safety, and efficiency of the U.S. payment 
system. As part of this initiative, the Federal Reserve and 
stakeholders identified the need for instant payment capabilities in 
the United States that would allow individuals and businesses to 
conduct and complete payments almost immediately, around the clock, 
every day of the year and provide a receiver with access to funds in 
seconds (instant payments).\4\ The ability to both send and receive 
funds instantly allows individuals and businesses greater flexibility 
and control to manage their money and make time-sensitive payments. 
This flexibility in turn may help alleviate mismatches between the time 
that incoming funds are available for use and the time that such funds 
are needed for other purposes.
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    \4\ See Faster Payments Task Force, ``Final Report Part Two: A 
Call to Action,'' (July 2, 017). Available at https://fedpaymentsimprovement.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf.
    The Board has previously used the term ``faster payments'' but 
has transitioned in this notice to the term ``instant payments'' to 
describe the types of payments the FedNow Service will support and 
distinguish them from other improvements to payment speed, such as 
same-day ACH. In addition, for the purposes of this notice, the term 
``instant payments'' will specifically refer to a subset of payments 
in which an end user receives funds in near real time, with 
immediate interbank settlement of the payment also having occurred.
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    For individuals, instant payments reduces the need for high-cost 
borrowing and the risk of associated penalties, such as overdraft or 
late fees.

[[Page 48523]]

Instant payments could be particularly helpful for individuals facing 
financial constraints or in times of crisis when there is heightened 
need to move money quickly and access funds almost immediately. For 
businesses, and in particular for small businesses, the ability to 
receive funds in near real time may result in better cash flow 
management in normal times, and this may be especially important in 
periods of stress. Instant payments may also provide businesses with 
considerable opportunity to improve efficiency and reduce costs of 
payments relative to paper checks and other existing payment methods.
    In light of these and many other potential benefits, the Board and 
a broad set of stakeholders determined that a core infrastructure is 
essential to support the development and availability of instant 
payment services. In particular, stakeholders recommended that the 
Federal Reserve explore and assess the need for an operational role in 
instant payments and develop a 24x7x365 settlement service to support 
such payments.\5\ This sentiment was echoed by the U.S. Treasury.\6\ It 
was also supported by the vast majority of over 400 comments received 
by the Board in 2018 in response to a Board proposal of potential 
actions to support instant payments in the United States (the 2018 
Notice).\7\
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    \5\ See Faster Payments Task Force, ``Final Report Part Two: A 
Call to Action,'' supra note 4.
    \6\ 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.
    \7\ ``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.
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    As a result of this extensive consultation with a wide variety of 
stakeholders, the Board announced via public notice in August 2019 (the 
2019 Notice), that the Reserve Banks would develop the FedNow Service, 
a new interbank 24x7x365 real-time gross settlement (RTGS) service with 
integrated clearing functionality to support instant payments in the 
United States.\8\ In making its decision, the Board concluded that the 
Federal Reserve's operation of such a 24x7x365 RTGS service would be 
the most effective approach to advance the Federal Reserve's and 
industry's objective of ubiquitous, safe, and efficient instant 
payments in the United States.
---------------------------------------------------------------------------

    \8\ ``Federal Reserve Actions To Support Interbank Settlement of 
Faster Payments, Request for Comments,'' supra note 3.
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    Consistent with the Federal Reserve's historical role in supporting 
payment system improvements, the Board concluded that the Reserve 
Banks' operation of the FedNow Service would support broader 
modernization of the nation's payment system as the industry moves 
towards instant payments.\9\ Serving as an operator would also be 
consistent with the Federal Reserve's historical role as a provider of 
payment services alongside the private sector, which is currently the 
established model for almost every major payment system in the United 
States.\10\
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    \9\ For example, in retail payment systems, improvements 
achieved through Reserve Bank operational roles in the past include 
facilitating efficient nationwide clearing of checks, supporting the 
development of the ACH system, and encouraging the nation's 
transition to a virtually all-electronic check-processing 
environment.
    \10\ As described in the 2019 Notice, implementing the FedNow 
Service is consistent with the requirements of the Monetary Control 
Act and longstanding Federal Reserve policy criteria for the 
provision of new financial services.
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    An operational role for the Federal Reserve would also help ensure 
competition in the market--an outcome that the U.S. Government 
Accountability Office concluded benefits consumers in other payment 
systems.\11\ Notably, over the course of the Federal Reserve's 
multiyear engagement with the industry on instant payments, only one 
private-sector RTGS service for instant payments has been established 
in the United States (the existing private-sector service). The Board's 
analysis supporting the decision to develop the FedNow Service 
indicated that the existing private-sector service was likely to remain 
the sole private-sector provider of RTGS services for instant payments 
in the United States. The Board explained in the 2019 Notice that no 
traditional payment system in the United States has only a single 
private-sector provider, and that such an outcome would create 
significant risks to the safety and efficiency of the nation's payment 
system. In particular, the Board explained that a single private-sector 
service would face significant challenges in establishing an accessible 
infrastructure for instant payments with nationwide reach, would result 
in limited competition that could have negative effects on pricing and 
innovation, and could create a single point of failure in the nation's 
instant payments infrastructure.
---------------------------------------------------------------------------

    \11\ 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. 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.
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    In light of these significant risks, the Board determined that an 
operational role would allow the Federal Reserve to advance a number of 
important objectives, including establishing an accessible nationwide 
infrastructure, fostering stability in times of crisis, supporting 
resiliency through redundancy, and stimulating healthy competition for 
clearing and settling instant payments.
    Given their operational role in providing payment and settlement 
services, the Reserve Banks have established broad reach and invested 
in connections and customer service relationships with more than 10,000 
diverse financial institutions, both small and large, across the 
country. This reach, in turn, will support the Federal Reserve's 
ability to provide a nationwide infrastructure for instant payments 
through the FedNow Service, furthering the goal of ubiquitous instant 
payments in the United States by connecting banks across the 
nation.\12\ As a result, banks of every size, in every community will 
have the ability to offer instant payment services to their customers, 
which is essential to their ability to meet evolving customer demands 
effectively. This, in turn, will ensure that individuals and businesses 
across the country have the ability to use such services regardless of 
geography.
---------------------------------------------------------------------------

    \12\ Throughout this notice, the term ``bank'' refers to any 
type of depository institution. Depository institutions include 
commercial banks, savings banks, savings and loan associations, and 
credit unions.
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    The Federal Reserve has also 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 in an 
operational role in instant payments will allow the Federal Reserve 
additional capacity in the future to respond to financial turmoil, 
natural disasters, and other crises, as it has done in the past. In 
addition, providing access to more than one RTGS service for instant 
payments for backup purposes will enhance resiliency by reducing the 
risks caused by a single point of failure.
    The FedNow Service will also promote competition by providing 
choice of instant payment services in the market. Competition exists in 
nearly every payment system in the United States today, including funds 
transfers, ACH, checks, and card transactions. The Board's analysis 
indicated that choice in

[[Page 48524]]

RTGS services for instant payments would likely result in efficiencies 
related to pricing, service quality, and innovation. Moreover, it will 
give banks and third-party service providers a neutral infrastructure 
to build on, allowing them to offer a variety of innovative and 
convenient instant payment services to individuals and businesses.

A. An Overview of the FedNow Service

    The FedNow Service will be available to banks in the United States 
and will enable individuals and businesses to send instant payments any 
time of day, any day of the year through their bank accounts. An 
instant payment facilitated by the FedNow Service begins when a sender 
(that is, an individual or business) initiates a payment using a 
service provided by their bank, such as a banking application accessed 
on a computer, tablet, or mobile device.\13\ After the sender's bank 
receives this request, it will send a message through the FedNow 
Service to the receiver's bank, with information about the payment.\14\ 
Upon receipt of this message, the receiver's bank will indicate whether 
it intends to accept the payment. If it intends to accept the payment, 
the receiver's bank will send a positive confirmation back, and upon 
receipt the FedNow Service will transfer the funds between the Federal 
Reserve accounts associated with the banks. Each bank will debit and 
credit their customer's account accordingly. The entire process is 
intended to take place in a matter of seconds, so the receiver will 
have funds available to use in near real time. Completed payments will 
be final, meaning they are irrevocable.\15\
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    \13\ The following discussion illustrates a completed payment 
through the FedNow Service in its simplest form. Other steps could 
occur; for example, a payment could be rejected. In addition, the 
Federal Reserve may also consider supplementing this message flow 
and settlement process with additional options to facilitate certain 
uses of the service in the future.
    \14\ References to receiver and receiver's bank in this 
discussion are intended to refer to the beneficiary and the 
beneficiary's bank, respectively, of a funds transfer.
    \15\ This does not prevent banks from implementing procedures to 
resolve erroneous payments, or the ability for the receiver to send 
a new transaction to return funds in certain circumstances (see the 
discussion of return transfers as part of the Payment Flow and 
Message Types discussion in section III).
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    From a technical perspective, the FedNow Service will be designed 
to maintain uninterrupted 24x7x365 processing with security features to 
support payment integrity and data security. The FedNow Service will 
enable credit transfers that support a range of different types of 
payments for individuals and businesses, and will also support the 
transfer of supplemental information, such as invoices, related to a 
payment.\16\ The service will have a 24-hour business day each day of 
the week, including weekends and holidays. End-of-day balances will be 
reported on Federal Reserve accounting records for each participating 
bank on each FedNow Service business day. Access to intraday credit 
will be provided to participants in the FedNow Service.\17\
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    \16\ Credit transfers are those where a sender initiates a 
payment to an intended receiver and require the sender to authorize 
and initiate each individual payment. Credit transfers are distinct 
from debit transfers, in which 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.
    \17\ Access to intraday credit in the FedNow Service would be 
provided during its business day under the same terms and conditions 
as for other Federal Reserve services.
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    Because instant payment services such as the FedNow Service process 
and settle each payment separately and continuously on a 24x7x365 
basis, participants will need adequate funds or available credit 
(liquidity) in their accounts at all times in order to settle each 
payment. In some circumstances, banks with account balances beyond 
their current needs may supply liquidity to those facing a shortfall. 
Typically, banks can use a service like the Fedwire[supreg] Funds 
Service to conduct such liquidity transfers. However, when those 
services are closed, participants in the FedNow Service or the existing 
private-sector service may need an alternative method to transfer 
liquidity.
    To facilitate such transfers, the FedNow Service will provide a 
liquidity management tool to support instant payment services that will 
be a critical enabler not only of the FedNow service but also the 
existing private-sector service. The tool will enable participants in 
the FedNow Service to transfer funds to one another to support 
liquidity needs related to payment activity in the FedNow Service. The 
tool will also support participants in a private-sector instant payment 
service backed by a joint account at a Reserve Bank by enabling 
transfers between the master accounts of participants and a joint 
account.\18\ Access to the tool would be available to users regardless 
of whether they are full participants using the FedNow Service to send 
instant payments between end users or if they use the FedNow Service 
only to make liquidity transfers.\19\ The tool will be available during 
specific hours, for example, when such transfers are not currently 
possible through other Federal Reserve services.
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    \18\ In 2017, the Board approved 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. 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 instant 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.
    \19\ Throughout this notice, the term ``end users'' encompasses 
individuals and businesses.
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    The Federal Reserve is committed to using widely accepted standards 
in designing the FedNow Service to aid in accomplishing the key goals 
of achieving nationwide reach for instant payments and promoting 
interoperability with the existing private-sector service. To support 
these goals, the service will use the widely accepted ISO 20022 
standard and adopt other industry best practices, that would remove 
barriers to interoperability, in order to avoid unnecessary and 
burdensome incompatibilities, to the extent the existing private-sector 
service also uses publicly available, widely accepted standards.\20\
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    \20\ 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 http://www.iso.org. The ISO 20022 standard is increasingly being 
adopted around the world as part of efforts to modernize payment 
services, including those used for instant payments.
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    The Federal Reserve intends to launch the FedNow Service as soon as 
practicably possible. Although the target release date remains 2023 or 
2024, the Federal Reserve intends to announce a more specific time 
frame for launch, as well as earlier pilot programs, through 
established Reserve Bank channels once additional work is completed. 
This and other work related to the implementation of the FedNow Service 
is ongoing and includes development of the necessary infrastructure, 
integration with existing Federal Reserve systems, and continued 
engagement with industry stakeholders on features and design.
    The Federal Reserve will take a phased approach to providing 
additional features and functionality over time. Although this may 
result in the introduction of certain desirable features after the 
initial release, this approach will ensure the core features

[[Page 48525]]

and functionality are delivered as quickly as possible. The Board 
believes this approach most appropriately balances the competing 
demands for the Federal Reserve to launch the FedNow service quickly 
and to provide enhanced features beyond core capabilities.
    Specifically, the first release of the FedNow Service will provide 
baseline functionality that will support market needs and help banks 
manage the transition to a 24x7x365 service. The first release will 
also offer additional optional features where there is high demand, 
such as fraud prevention tools, the ability to join initially as a 
receive-only participant, request for payment capability, and tools to 
support participants in their handling of payment inquiries, 
reconcilements, and certain exceptions. Other aspects of the service, 
such as fee structures and governing terms, will be announced prior to 
the launch of the service through established Reserve Bank 
communication channels.
    The Federal Reserve also recognizes that market needs and 
technology related to instant payments are constantly evolving and 
intends to continue engaging with stakeholders and remain flexible in 
its approach when building out additional features and functionality of 
the FedNow Service. Based on ongoing stakeholder engagement, additional 
features and service enhancements will be introduced over time. For 
example, the service will endeavor to offer additional features in the 
initial period following launch to support alias-based payments such as 
directories, as well as fraud prevention, error resolution, or case 
management tools. Other features in the future might include support 
for bulk payments or enhanced remittance information. The Federal 
Reserve will continue to engage with stakeholders on these and other, 
more complex considerations, such as cross-border capability.

B. Organization of Notice

    This notice provides a high-level discussion of the comments 
received by the Board in response to the 2019 Notice (Section II). The 
notice details the core features and functionality of the FedNow 
Service at launch and related comments considered by the Board (Section 
III). Section III also outlines the Federal Reserve's approach to the 
introduction of additional features and service enhancements that may 
be offered in subsequent phases. Lastly, this notice provides a final 
competitive impact analysis of the FedNow Service (Section IV). Future 
communications about the FedNow Service, including but not limited to 
technical specifications, detailed product offerings, pricing, and 
implementation timeline, will be provided through established channels, 
such as FRBservices.org.

II. Comment Summary

    The Board received 182 comments in response to the 2019 Notice. Of 
those comment letters, 3 included signatures from multiple parties, for 
a total of 353 entities responding to the 2019 Notice. Comments were 
submitted by a wide variety of stakeholders from the following 
segments: Small and midsize banks, large banks, individuals, consumer 
organizations, merchants, service providers, private-sector operators, 
financial technology companies (fintechs), trade organizations, and 
other interested parties.\21\ Overall, small and midsize banks were the 
largest group of respondents, providing more than 40 percent of the 
total comment letters and representing institutions from 25 states. 
Trade organizations submitted letters representing several commenter 
segments, including small and midsize banks, large banks, merchants, 
fintechs, and service providers. Generally, these letters aligned with 
comments submitted by respondents in the same segment as a trade 
organization's membership. The majority of comments provided specific 
feedback on features and functionality of the FedNow Service. While 
this Section provides an overview of comments, a more detailed 
discussion of comments can be found in Sections III and IV.
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    \21\ ``Banks'' include any type of depository institution, such 
as commercial banks, savings banks, savings and loan associations, 
and credit unions. For the purposes of this notice, large banks are 
defined as having assets of more than $50 billion, while small and 
midsize banks are defined as having assets of less than $50 billion. 
``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 
existing private-sector service for instant payments and payment 
card networks. ``Other interested parties'' include payment 
standards organizations, a congressional member organization, 
research and academic groups, consultancies, and regulatory bodies.
---------------------------------------------------------------------------

    The Board also received 2,246 form letters from individuals. These 
form letters argued that the Federal Reserve should not operate in 
competition with the private sector and viewed the decision to develop 
and implement the FedNow Service as an inappropriate expansion of the 
Federal Reserve's role that is inconsistent with its historical 
purpose. Generally, these commenters stated that the introduction of 
the FedNow Service would lead to decreased innovation and unfair 
competition with the private sector. These topics were addressed by the 
Board as part of its analysis in the 2019 Notice. In the 2019 Notice, 
the Board provided the rationale for its conclusion that the Federal 
Reserve should offer the FedNow Service. This rationale was based on 
input received in response to the Board's 2018 notice requesting 
comment on the Federal Reserve's role in the payment system and whether 
to develop the FedNow Service.\22\
---------------------------------------------------------------------------

    \22\ As the Board explained in the 2019 notice, the Federal 
Reserve has played an operational role in the payment system by 
providing key clearing and settlement infrastructure since its 
founding in 1913. In fulfilling this role, the Reserve Banks operate 
services, including check, ACH, and funds transfer services, that 
provide core infrastructure for financial transactions. The Federal 
Reserve operating alongside the private sector is consistent with 
almost every major payment system in the United States. The Board 
therefore believes offering the FedNow Service is consistent with 
its historical role in the payment system and is not an expansion of 
the Federal Reserve's powers. Further, the Board continues to view 
the Reserve Banks' operation of the FedNow Service as the most 
effective approach to advance the Federal Reserve's and industry's 
objective of ubiquitous, safe, and efficient instant payments in the 
United States. The FedNow Service is expected to provide public 
benefits ranging from enhanced resiliency, healthy competition, 
increased innovation, and more equitable access.
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    Approximately 80 commenters, largely representing small and midsize 
banks, trade organizations and individuals, addressed the proposed 
implementation time frame for the service. Nearly all of these 
commenters stated that the Federal Reserve should accelerate 
development and bring the FedNow Service to market sooner than the 
anticipated implementation date of 2023 or 2024. In general, these 
commenters indicated that the FedNow Service should be made available 
as soon as possible. These commenters generally believed that market 
needs and technology for instant payments are rapidly evolving and that 
an earlier implementation would better support innovation and 
widespread adoption of the FedNow Service and instant payments more 
broadly.
    Approximately 75 commenters, largely representing small and midsize 
banks, trade organizations, and service providers, recommended that the 
FedNow Service offer enhanced functionality that participants can use 
to mitigate fraud. While a majority of these commenters agreed that 
banks are primarily responsible for combatting fraud related to the 
accounts of their customers, most suggested that the Reserve Banks 
should nevertheless provide enhanced fraud prevention tools for FedNow 
Service participants. Most of these commenters offered

[[Page 48526]]

specific recommendations as to how fraud prevention tools should be 
designed and implemented. Two commenters, however, stated that fraud 
prevention tools for the FedNow Service should be provided by the 
private sector and not the Reserve Banks.
    Approximately 80 commenters, largely representing small and midsize 
banks, trade organizations, and fintechs, addressed the inclusion of 
directory services to support alias-based payments as part of the 
FedNow Service.\23\ Nearly all these commenters noted that availability 
of a directory, whether provided by the Reserve Banks or the private 
sector, would support widespread adoption of the service for person-to-
person (P2P) payments and reduce payment routing errors. Approximately 
40 commenters, largely representing small and midsize banks, trade 
organizations, and individuals, described potential approaches to the 
development of directory services, with most of these commenters 
recommending that the FedNow Service provide either a centralized link 
to existing directories or build its own directory. Several commenters 
raised various other considerations with respect to directory services 
and highlighted potential complexities with day-to-day management of a 
directory service, such as protecting data privacy and security.
---------------------------------------------------------------------------

    \23\ Alias-based payments provide a sender with the ability to 
send payments to a receiver based solely on public identifiers, or 
aliases, of the receiver, without a sender having to know the bank 
account number of the receiver. Aliases are generally linked to an 
email or phone number, or other personal identifier. Directory 
services can support alias-based payments by connecting an alias 
with a receiver's banking information to ensure that a payment is 
routed to the correct end user in a way that is private and secure.
---------------------------------------------------------------------------

    Approximately 100 commenters, representing all commenter segments, 
expressed views related to interoperability. Nearly all 100 commenters 
highlighted the benefits of interoperability between the FedNow Service 
and the existing private-sector service. Approximately 40 commenters, 
representing small and midsize banks, trade organizations and service 
providers, expressed the view that interoperability would promote 
ubiquitous access to instant payments in the United States and support 
widespread usage and adoption of instant payments. Approximately 35 
commenters, largely representing small and midsize banks, trade 
organizations, and other interested parties, noted that 
interoperability would streamline operations for banks and service 
providers, allow for a consistent end-user experience with respect to 
funds availability, and generally promote efficiencies and savings. 
Very few commenters expressed views on how interoperability should be 
achieved, and many commenters appeared to use varying operational 
definitions of interoperability.\24\
---------------------------------------------------------------------------

    \24\ For example, some commenters discussed adoption of 
standardized messaging formats between the FedNow Service and 
existing private-sector service, which would allow customers to 
choose to route a payment to either service. Other commenters 
discussed intermingling and sharing key processing steps between the 
services.
---------------------------------------------------------------------------

    Commenters also addressed considerations related to participant and 
service provider preparedness for FedNow Service onboarding and, more 
broadly, the transition to 24x7x365 real-time operations for instant 
payments. Approximately 40 commenters, largely representing small and 
midsize banks, trade organizations, and individuals, noted that 
successful integration of existing core service-provider systems is 
critical to achieving widespread adoption of the FedNow Service.\25\ 
These commenters noted that small and midsize banks rely on core 
service providers and that the Reserve Banks should share technical and 
operational requirements with such service providers well in advance of 
service implementation so that small and midsize banks are not 
disadvantaged. More generally, approximately 15 commenters highlighted 
various challenges related to transitioning to 24x7x365 real-time 
processing of instant payments. The majority of these commenters raised 
concerns that increased staffing costs and upgrades to technology 
required to maintain continuous operations may limit adoption of the 
service.
---------------------------------------------------------------------------

    \25\ Most of these commenters were specifically referring to 
service providers that manage core banking systems for their bank 
customers. Typically, core service providers support their 
customers' daily transaction processing and account management.
---------------------------------------------------------------------------

    Other groups of commenters raised relevant topics beyond specific 
features and functionality of the FedNow Service. For example, 
approximately 35 commenters, largely representing small and midsize 
banks, trade organizations, and other interested parties, emphasized 
the importance of effective governance for the FedNow Service and 
suggested, more generally, that the Reserve Banks take part in any 
future industry efforts that may arise to develop common rules and 
standards for instant payments. Another 8 commenters noted that 
introduction of the FedNow Service may necessitate revisions of 
existing regulations. These commenters cited a wide range of rules and 
regulations that may need to be adjusted, including regulations related 
to funds availability and funds transfers through Federal Reserve 
services. Another 6 commenters emphasized that the FedNow Service 
design should incorporate robust cybersecurity controls (for example, 
endpoint security requirements). Finally, approximately 10 commenters 
suggested that the Reserve Banks design the FedNow Service to minimize 
the possibility that the service might be used in a way that can cause 
consumer harm. Additionally, these commenters recommended that the 
Reserve Banks develop industry standards for disputing payments in the 
event of a fraudulent or erroneous transfer.

III. The FedNow Service

    In the 2019 Notice, the Board proposed potential features and 
functionality for the FedNow Service. Based on additional analysis 
informed by the comments received in response to the 2019 Notice, the 
Board has approved the FedNow Service as described in this notice. 
Recognizing that market needs and technology for instant payments are 
rapidly evolving, the Board also expects that additional service 
modifications or features, other than those described here, could be 
included in the service at launch and in the future. The Federal 
Reserve intends to take a phased approach to developing and enhancing 
the FedNow Service, with flexibility to adjust features and 
functionality in response to available technology, industry 
developments, and evolving needs of banks and their customers. 
Additions or changes to the features described in this notice will be 
announced through established Reserve Bank communication channels. 
Consistent with the Board's pricing principles, the Board will request 
public comment when changes in fees and service arrangements are 
proposed that would have significant longer-run effects on the nation's 
payment system.\26\
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    \26\ Section 11A of the Federal Reserve Act requires the Board 
to adopt a set of pricing principles for Reserve Bank services and a 
schedule of fees based on those principles. 12 U.S.C. 248a. The 
principles adopted by the Board incorporate statutory requirements 
and include additional provisions consistent with the purposes of 
section 11A. 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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A. General Description of the FedNow Service

    In the 2019 Notice, the Board explained that the FedNow Service 
would be designed to process individual payments continuously, 24 hours 
a day,

[[Page 48527]]

7 days a week, 365 days a year. The Board did not receive comments 
related to modifying the hours or days over which the service would be 
available, and the 24x7x365 functionality of the service will be 
adopted as proposed.
    In the 2019 Notice, the Board indicated the service would support 
credit transfers, where a sender initiates a payment to an intended 
receiver. Three commenters suggested that the Board also consider 
inclusion of debit transfer functionality, such that a receiver would 
be able to initiate a transfer that ``pulls'' funds from a sender's 
account.\27\ These commenters expressed the view that debit transfers 
would facilitate certain types of payments (for example, recurring bill 
payments) and support broader adoption of the service.
---------------------------------------------------------------------------

    \27\ Many payments in the United States, such as debit card 
payments and some electronic bill payments, have traditionally been 
conducted as debit transfers, with the sender providing information 
and authorization to the receiver that allows the receiver's bank to 
initiate a debit to the sender's bank account with funds 
subsequently credited to the receiver's bank account.
---------------------------------------------------------------------------

    Although debit transfer functionality may facilitate some increased 
adoption of the FedNow Service and instant payments more broadly based 
on specific use cases, the Board believes that the risks of the FedNow 
Service supporting debit transfers outweigh the potential benefits, at 
least at the outset. Credit transfers require the sender to authorize 
and initiate each payment, which can decrease the risk of fraudulent or 
otherwise unauthorized payments and enhance the safety of the payment 
system.\28\ In addition, recurring bill payments and other payments 
that are typically made by debit transfer can also be supported by a 
``request for payment'' functionality that builds on credit transfer 
functionality (see the Request for Payment section). Therefore, the 
FedNow Service will only support credit transfers as proposed.
---------------------------------------------------------------------------

    \28\ According to a 2018 Federal Reserve study on U.S. payments 
fraud, in 2015, the fraud rate for ACH debit payments from general-
purpose transaction accounts was more than double the rate for ACH 
credit payments. See Board of Governors of the Federal Reserve 
System, ``Changes in U.S. Payments Fraud from 2012 to 2016: Evidence 
from the Federal Reserve Payments Study,'' (Oct. 2018). Available at 
https://www.federalreserve.gov/publications/files/changes-in-us-payments-fraud-from-2012-to-2016-20181016.pdf.
---------------------------------------------------------------------------

    In the 2019 Notice, the Board explained that the FedNow Service 
would facilitate domestic payments. Four commenters suggested that the 
FedNow Service should be designed to accommodate nondomestic (that is, 
cross-border) payments. The Board recognizes that the ability to send 
and receive instant payments to and from other countries is 
functionality that could facilitate certain types of payments, 
including remittances to family members abroad and corporate trade 
payments. A number of regulatory and operational considerations, 
including cooperation with international operators, would need to be 
addressed before cross-border payments could be supported by the FedNow 
Service. In line with prioritization of a timely launch, the FedNow 
Service will only support domestic instant payments initially. The 
Board will continue to evaluate the costs and benefits of expanding the 
FedNow Service to allow for cross-border payments in the future, 
recognizing the need to address the heightened risks and compliance 
issues associated with cross-border payments.
    In the 2019 Notice, the Board indicated that the FedNow Service 
would be available to institutions eligible to hold accounts at the 
Reserve Banks, pursuant to applicable federal statutes and Federal 
Reserve rules, policies, and procedures.\29\ Seven commenters stated 
that eligibility to participate in the FedNow Service should be 
expanded to other institutions, including nonbanks that are not 
eligible for Federal Reserve accounts. These commenters stated that 
nonbanks' reliance on banks to access the service would result in 
increased costs and other inefficiencies. Additionally, these 
commenters emphasized that participation by entities such as nonbank 
lenders, money transmitters, and fintechs would promote competition and 
broader adoption of instant payment services. In contrast, 
approximately 20 commenters, largely representing small and midsize 
banks and trade organizations, emphasized that participation in the 
FedNow Service should be limited to federally insured institutions. 
Nearly all of these commenters noted that allowing nonbanks to 
participate directly in the FedNow Service would introduce risk to the 
service and the broader payment system.
---------------------------------------------------------------------------

    \29\ 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 also maintain accounts for 
additional entities under other statutory authorities.
---------------------------------------------------------------------------

    While the Board recognizes the variety of perspectives offered by 
commenters, federal statutes and Federal Reserve rules, policies, and 
procedures limit the scope of entities eligible to receive Federal 
Reserve accounts, as the Board indicated in the 2019 Notice. Although 
the service will be available only to institutions eligible to hold 
accounts at the Reserve Banks, entities that are not eligible to hold 
accounts at the Reserve Banks may nevertheless be able to act as 
service providers or agents for participants in the FedNow Service, as 
described later.
    In the 2019 Notice, the Board proposed that the FedNow Service 
would settle interbank obligations through debit and credit entries to 
balances in master accounts held at the Reserve Banks.\30\ Nine 
commenters expressed support for settlement of payments in master 
accounts. Another group of four commenters suggested that, instead of 
using master accounts, the Reserve Banks should establish separate 
accounts to settle payments through the FedNow Service. These 
commenters stated that use of a separate settlement account would 
reduce the overall complexity of managing instant payments and allow 
banker's banks and corporate credit unions to manage and reconcile 
their customers' account balances more easily.
---------------------------------------------------------------------------

    \30\ A master account is the record of financial rights and 
obligations between account-holding banks and a Reserve Bank.
---------------------------------------------------------------------------

    As discussed in the 2019 Notice, the Board previously sought 
comment on and analyzed a two-account structure, with a separate 
account dedicated to settlement of instant payments, but determined 
based on those comments that such a structure would introduce 
significant operational complexity for both the Federal Reserve and 
participating banks.\31\ Therefore, as proposed, the FedNow Service 
will settle payments in master accounts held at the Reserve Banks.
---------------------------------------------------------------------------

    \31\ The Board's proposal that the FedNow Service would rely on 
a single account structure using master accounts at the Reserve 
Banks was in response to feedback from the public to the 2018 
Notice, in which the Board requested comment on the operational 
burden banks would face if an instant payment service were designed 
using a settlement account separate from a master account. 
Commenters indicated that the benefits of such a design would have 
to outweigh the added costs of managing two accounts.
---------------------------------------------------------------------------

    In the 2019 Notice, the Board also proposed that settlement entries 
for transactions through the FedNow Service would be final. The 
finality of settlement entries would mean that interbank settlement is 
irrevocable. The Board did not receive comments on the topic of 
finality and therefore interbank settlement for transactions through 
the service will be final, as proposed.\32\
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    \32\ The finality of settlement entries does not preclude 
institutions from implementing procedures to resolve erroneous 
payments, or the ability for the receiver to send a new transaction 
to return funds in certain circumstance (see the discussion of 
return transfers as part of the Payment Flow and Message Types 
section).

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[[Page 48528]]

    In the 2019 Notice, the Board proposed that participating banks 
would be required to make the funds associated with individual payments 
available to their end-user customers immediately after receiving 
notification of settlement from the service. Several commenters 
suggested that the Board further clarify funds availability 
expectations through industry standards or amendments to existing 
regulations.
    To be consistent with the goal of supporting instant payments for 
individuals and businesses, participating banks must agree to make the 
funds associated with individual payments available to their customers 
in near real time after receiving notification of settlement from the 
service, as proposed.\33\ The Board is assessing applicable laws and 
regulations, and, to the extent changes to the Board's regulations are 
identified as necessary to clarify funds availability, the Board will 
request public comment.
---------------------------------------------------------------------------

    \33\ Details for participating banks will be specified in 
technical or operational documentation that will describe the 
service or in terms as part of the Reserve Banks' Operating Circular 
for the FedNow Service.
---------------------------------------------------------------------------

    In the 2019 Notice, the Board indicated that a participating bank 
would be permitted to designate a service provider or agent to submit 
or receive payment instructions to and from the FedNow Service on its 
behalf. The Board also stated that a participating bank could choose to 
settle payments in the master account of a correspondent bank.\34\ The 
Board received 5 comments that supported the ability for a bank to 
designate a service provider to process FedNow payments on its behalf. 
These commenters noted that this ability would be especially important 
for community banks that rely on service provider relationships to 
access existing Federal Reserve services. Approximately 10 commenters 
expressed support for the inclusion of correspondent/respondent 
settlement relationships in the FedNow Service. These commenters 
emphasized that to support the management of correspondent/respondent 
relationships, respondent-level information, including settlement 
activity and account balances, should be provided to correspondents.
---------------------------------------------------------------------------

    \34\ 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.
---------------------------------------------------------------------------

    The Board agrees with commenters that use of service providers and 
correspondent banks will facilitate access to the FedNow Service, and 
these features will be adopted as proposed. In addition, the FedNow 
Service will be designed to provide correspondent banks with 
transaction-level and summary reports for respondent banks to which 
they provide services (see the Reporting section).
    Finally, banks will have the option of enrolling in the FedNow 
Service as a ``receive-only'' participant, a feature that was not 
proposed in the 2019 Notice. Such a participant will not be required to 
have the ability to originate payments through the FedNow Service but 
can still receive instant payments. The Federal Reserve expects that 
this option may ease the burden of adopting the FedNow Service, 
especially for small banks as they gain experience with instant 
payments.

B. Implementation

    In the 2019 Notice, the Board acknowledged the time-to-market 
pressure for the payment industry related to instant payment services 
and indicated that the Federal Reserve is committed to launching the 
FedNow Service as soon as practicably possible. Many commenters raised 
concerns about the Federal Reserve's anticipated implementation in 2023 
or 2024. Commenters largely representing small and midsize banks, trade 
organizations and service providers stated that the Federal Reserve's 
key role as a provider of payment and settlement services to most of 
the nation's banks warranted an accelerated implementation timeline for 
the service to better support innovation related to instant payments, 
as well as development of third-party services. Other commenters, 
largely representing small and midsize banks, raised concerns that the 
current timeline would limit small and midsize banks' ability to meet 
growing customer demand for instant payments services. These commenters 
also suggested that many smaller banks will delay offering their own 
instant payment services until the FedNow Service is available.
    The Board understands these timing concerns, and the Reserve Banks 
are working to bring the FedNow Service to market as soon as 
practicably possible, while also ensuring the requisite level of 
security and resiliency. Although the target release date remains 2023 
or 2024, the Federal Reserve will announce a more specific time frame 
for launch, as well as earlier pilot programs, through established 
Reserve Bank channels. This and other work related to the 
implementation of the FedNow Service is ongoing and includes 
development of the necessary infrastructure, integration with existing 
Federal Reserve systems, and continuous engagement with industry 
stakeholders on features and design. As the development of the FedNow 
Service progresses, the Federal Reserve is committed to providing 
specific details in advance that will allow industry partners to take 
appropriate steps to ensure they are prepared to use the FedNow Service 
when it becomes available.
    Deployment of the FedNow Service will take a phased approach so 
that the service can be launched expeditiously while maintaining 
flexibility to augment features and functionality over time. The first 
release of the FedNow Service will provide baseline functionality that 
will support market needs and help banks manage the transition to a 
24x7x365 service. The Federal Reserve will continue to engage with 
stakeholders as market needs and technology evolve and the service 
matures. Based on this ongoing engagement, additional features and 
service enhancements will be released over time. While this phased 
approach may result in the introduction of certain desirable features 
after the initial release, it will ensure core features and 
functionality are delivered as quickly as possible with a high level of 
security and resiliency. The Board believes this approach most 
appropriately balances the industry's desires for the Federal Reserve 
to both move quickly and provide features beyond core clearing and 
settlement capabilities.

C. Core Features of the FedNow Service

1. Payment Flow and Message Types
    In the 2019 Notice, the Board proposed a payment flow that 
described how a standard payment message could be processed and settled 
by the FedNow Service.\35\ The Board received approximately 15 comments 
that addressed the payment flow. All of these commenters expressed 
support for the flow as proposed. In particular, most commenters were 
in favor of the proposed process where, before interbank settlement 
occurs over the service, the receiver's bank has an opportunity to 
confirm that it holds a valid account for the receiver and intends to 
accept the payment message. Several of these commenters noted that this 
confirmation step could reduce

[[Page 48529]]

errors and increase end-user confidence in the service.
---------------------------------------------------------------------------

    \35\ References to the FedNow Service in this section are 
intended to refer to one or more Reserve Banks acting as sending and 
receiving banks, in connection with the FedNow Service.
---------------------------------------------------------------------------

    The flow of a standard payment message, called a credit transfer 
message, will operate largely as proposed.\36\ Figure 1 illustrates a 
completed credit transfer over the FedNow Service in its simplest 
form.\37\ This process is intended to take place within seconds.\38\
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    \36\ The payment flow proposed in the 2019 Notice included a 
provisional hold on funds between steps 3 and 4, which may be 
included in future releases of the service but will not be a 
component of the first release.
    \37\ Aspects of the payment flow would be different, for 
example, if either the sender's bank or the receiver's bank were to 
use an agent, service provider, or correspondent bank.
    \38\ More specifically, steps 2-6 will have a defined maximum 
time period such that transactions not completed within the defined 
time will be rejected. As a result, the sender's bank will know that 
it should receive notification of a completed payment or a rejection 
within the defined time period. In addition, other payment message 
types, including return transfers, will also have a defined maximum 
time period. The defined time period will be specified in technical 
or operational documentation that will describe the service or in 
terms as part of the Reserve Banks' Operating Circular for the 
FedNow Service.
[GRAPHIC] [TIFF OMITTED] TN11AU20.031

     In step 1, a sender (that is, an individual or business) 
initiates a payment by sending a payment message to its bank through an 
end-user interface outside the FedNow Service.\39\ The sender's bank is 
responsible for screening the payment according to its internal 
processes and requirements.\40\
---------------------------------------------------------------------------

    \39\ The end-user interface will most likely be provided by the 
sender's bank or a service provider working with the sender's bank.
    \40\ While specific internal bank processes vary, this step 
could include authenticating the sender, validating the payment, and 
performing any screening or other procedures on the payment.
---------------------------------------------------------------------------

     In step 2, the sender's bank submits a payment message to 
the FedNow Service.
     In step 3, the FedNow Service validates the payment 
message, for example, by verifying that the message meets message 
format specifications.
     In step 4, the FedNow Service sends the contents of the 
payment message to the receiver's bank to seek confirmation that the 
receiver's bank intends to accept the payment message. At this point, 
the receiver's bank will have the opportunity to confirm or deny that 
it maintains the specified account.
     In step 5, the receiver's bank sends a positive response 
to the FedNow Service, confirming that it intends to accept the payment 
message.\41\ Steps 4 and 5 are intended to reduce the number of 
misdirected payments and resulting exception cases that can occur in 
high-volume systems.
---------------------------------------------------------------------------

    \41\ As noted previously, Figure 1 illustrates a completed 
payment through the FedNow Service in its simplest form. Other steps 
could occur, for example, if the receiver's bank responds with a 
negative response. As another alternative, if the receiver's bank 
needs additional time to determine whether to refrain from crediting 
the receiver's account for legal or compliance reasons, the service 
will accommodate such need, with associated notifications, up to an 
additional specified time period. Additional information and 
specifications for all the payment flows and processes that will be 
available as part of the FedNow Service will be provided through 
existing Reserve Bank communication channels.
---------------------------------------------------------------------------

     In step 6, the FedNow Service debits and credits the 
designated master accounts of the sender's and receiver's banks (or 
their correspondent banks), respectively.
     In step 7, the FedNow Service sends a payment message 
forward to the receiver's bank with an advice of credit and in parallel 
sends an acknowledgement to the sender's bank notifying it that 
settlement is complete.\42\
---------------------------------------------------------------------------

    \42\ In sending a payment message forward to the receiver's bank 
with an advice of credit, the FedNow Service ``executes'' the 
payment message that it received from the sender's bank.
---------------------------------------------------------------------------

     In step 8, the receiver's bank credits the receiver's 
account.\43\ As a condition of the FedNow Service, the receiver's bank 
must agree to make funds available to the receiver almost immediately 
after step 7. This crediting to the receiver's account as well as the 
debiting of the sender's account by their respective banks happens 
outside the FedNow Service.\44\
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    \43\ At this stage in the flow, the receiver's bank will have 
the option of sending a message through the FedNow Service to the 
sender's bank indicating that the payment has been posted to the 
receiver's account.
    \44\ The receiver's bank agrees to make the funds associated the 
payment available to their customer in near real time after 
receiving notification of settlement in step 7. The sender's bank 
debits the sender according to its internal processes or policies, 
which could occur at various points in the payment flow, for 
example, as part of step 2. In addition, the sending and receiving 
banks may notify their customers that the payment has been 
completed.
---------------------------------------------------------------------------

    In addition to the standard credit transfer message type, the 
FedNow Service will also include at least two additional payment 
message types and several nonvalue message types in the first release 
of the FedNow Service.\45\ One of the additional payment message types 
will be a return transfer. The return transfer will be part of a 
payment return process that will be included in the service to assist 
participating banks with exception processing. This process will enable 
the sender's bank to request and potentially obtain a return of the 
previous payment. In this process, a sender's bank will send a nonvalue 
``request for return'' message to a receiver's bank, requesting that 
funds previously sent through the FedNow Service be returned. After 
investigating the payment, the receiver's bank will either initiate a 
return transfer to the sender's bank to return the amount of the 
previous payment or send a nonvalue ``status'' message indicating it 
will not return funds. The return transfer will be a type of credit 
transfer,

[[Page 48530]]

but the message will be distinct from a standard credit transfer 
message. In particular, a return transfer will carry information 
associating it with the original credit transfer that the sender's bank 
requested to be returned.
---------------------------------------------------------------------------

    \45\ Nonvalue message types include a request for return, 
discussed as part of the return transfer payment message type in 
this section; request for payment, discussed later (see the Request 
for Payment section); and administrative messages such as payment 
status request, report request, or request for additional 
information about a payment.
---------------------------------------------------------------------------

    The second additional payment message type in the FedNow Service 
will be for interbank funds transfers that do not involve end users. 
This message type is intended primarily to support the liquidity 
management needs of participants in either the FedNow Service or a 
private-sector instant payment service that is backed by a joint 
account at a Reserve Bank (see the Liquidity Management Tool section.)
2. Message Standard
    In the 2019 Notice, the Board proposed that payment messages in the 
FedNow Service would use the ISO 20022 standard and its implementation 
with respect to instant payments in the United States. Approximately 30 
commenters, largely representing small and midsize banks, trade 
organizations, and other interested parties, addressed payment message 
formats for the FedNow Service. Nearly all of these commenters 
supported use of ISO 20022, noting that this standard is flexible 
enough to support various use cases and enables the transmission of 
payment data (for example, remittance and invoice information) along 
with a payment. Over half of these commenters noted that ISO 20022 is 
rapidly becoming the global standard for messaging frameworks and 
expressed the view that use of the ISO 20022 standard would align the 
FedNow Service with international and domestic payment systems. These 
comments indicated that adoption of a common messaging framework would 
support FedNow Service interoperability with other services for instant 
payments and facilitate the possibility of cross-border capabilities in 
the future. A group of 5 commenters specifically recommended that the 
Reserve Banks implement the ISO 20022 messaging framework in a way that 
is consistent with the ISO 20022 Real-Time Payments Group 
guidelines.\46\
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    \46\ The ISO 20022 Real-Time Payments Group (RTPG) is composed 
of more than 70 international stakeholders, with representation from 
payment associations, payment service providers, financial 
institutions, international and domestic clearinghouses, regulators, 
and others. The RTPG publishes usable sets of ISO 20022 usage 
guidelines that can be found here: https://www.iso20022.org/catalogue-messages/additional-content-messages/iso-20022-real-time-payments-group-rtpg.
---------------------------------------------------------------------------

    The Board recognizes the benefits of ISO 20022 and agrees with 
commenters that the message standard could provide a common foundation 
for exchanging payment messages domestically and internationally in the 
future. As proposed, the FedNow Service will be based on the ISO 20022 
standard. The Federal Reserve intends to continue engaging with the 
industry on topics related to the ISO 20022 standard and will provide 
ISO message specifications, including specific message types and 
interpretation of ISO formats prior to the launch of the FedNow Service 
through established Reserve Bank communication channels. As the 
standard evolves, the Reserve Banks will review changes to the standard 
and consider adjustments to message formats for the FedNow Service.
3. Transaction Value Limit
    In the 2019 Notice, the Board proposed that the FedNow Service 
would include a transaction value limit of $25,000, with the potential 
to increase the limit over time. The $25,000 value limit was intended 
to restrict the size of potential fraudulent transactions, while also 
supporting payments associated with a variety of use cases. 
Approximately 25 commenters, largely representing small and midsize 
banks, trade organizations, and other interested parties, addressed the 
$25,000 limit, stating that the Federal Reserve should increase the 
initial value limit at service launch or shortly thereafter. Many 
commenters recommended that the Federal Reserve adjust the transaction 
limit to be consistent with market practices at service launch and that 
the limit should continue to align with those practices over time. 
Commenters noted that the $25,000 limit could inhibit use of the FedNow 
Service for many use cases, such as large-value business-to-business 
payments.
    The Board agrees that the FedNow Service should support a wide 
variety of uses, including certain large-value transfers, and that the 
limit should be consistent with market practices and needs for instant 
payments. Therefore, prior to the launch of the service, the Reserve 
Banks will establish a transaction limit consistent with market 
practices and needs at the time and will announce the limit through 
established Reserve Bank communication channels. In addition, 
participating banks will have the ability to establish lower 
transaction value limits (see the Fraud Prevention Tools section).
4. Business Day
    In the 2019 Notice, the Board proposed that the FedNow Service 
would have a 24-hour business day each day of the week, with defined 
opening and closing times. The Board specifically proposed that the 
FedNow Service should align with the business day of the Fedwire Funds 
Service to maintain consistency with practices for existing Federal 
Reserve services. Given the continuous operation of the FedNow Service, 
the opening time would occur immediately after the closing time, and 
the transition between closing and opening would not disrupt continuous 
processing.\47\ The Board also proposed that, for the purpose of the 
Reserve Banks' accounting processes, transactions processed after the 
FedNow Service's close but before midnight eastern time each calendar 
day would be recorded on Federal Reserve accounting records as 
transactions occurring on the next calendar day.\48\ For example, a 
FedNow Service transaction that occurs after the closing time and 
before midnight eastern time on a Saturday would be recorded as 
occurring on Sunday. The Board also explained in the 2019 Notice that 
the account recording convention used by the Federal Reserve would not 
dictate that participating banks adopt the same convention or preclude 
other conventions.
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    \47\ Transactions that are in process when the FedNow Service 
switches from one day to the next will continue to be processed. The 
settlement date of such transactions will be the date when Step 6 
shown in Figure 1 occurs (debits and credits to the designated 
master accounts of the sender and receiver banks or their 
correspondent banks).
    \48\ This approach mirrors the approach used by the Reserve 
Banks for recording Fedwire Funds Service transactions that occur 
after the service's opening at 9 p.m. eastern time (ET) and before 
midnight ET, where these transactions are recorded as occurring on 
the next business day.
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    The Board received approximately 10 comments that addressed the 
proposed FedNow Service business day and accounting processes. A few of 
these commenters recommended that the business day for the FedNow 
Service align with the calendar day.\49\ Two commenters expressed 
support for allowing banks to determine their own business day and 
accounting conventions, whereas one commenter suggested that the 
Federal Reserve develop a standard for transaction posting and funds 
availability.
---------------------------------------------------------------------------

    \49\ Most of these commenters did not suggest a specific time 
zone for the calendar day.
---------------------------------------------------------------------------

    While the Board recognizes potential challenges that the proposed 
business day of the FedNow Service may pose, a business day based on 
calendar day would mean the closing time for the FedNow Service would 
not align with other Federal Reserve services, which would introduce 
significant complexity to the service. Therefore, to maintain 
consistency with other Federal Reserve services, the FedNow Service 
business

[[Page 48531]]

day will be adopted as proposed with the following additional 
clarifying detail. The Board has determined that the closing time of 
the FedNow Service will align on all calendar days with the scheduled 
close of the Fedwire Funds Service.\50\ If the Fedwire Funds Service 
close is extended on any given day, the FedNow Service close would be 
extended to maintain alignment.
---------------------------------------------------------------------------

    \50\ 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. As of March 2021, the service is expected to close at 
7:00 p.m. ET. On weekends and holidays when the Fedwire Funds 
Service is closed, the FedNow Service close will still align with 
this closing time. The schedule for funds transfers through the 
Fedwire Funds Service is provided in the Reserve Banks' Operating 
Circular 6.
---------------------------------------------------------------------------

    Additionally, the Board expects that participating banks will 
record FedNow Service transactions in their customer accounts according 
to their own business day and accounting conventions (while still 
providing immediate access to funds received through the FedNow 
Service). The Board recognizes that a bank's definition of a business 
day may also affect its conventions for reporting and recording 
transactions that occur on weekends and holidays, which is discussed in 
the next section, Seven-Day Accounting.
5. Seven-Day Accounting
    In the 2019 Notice, the Board proposed that the Reserve Banks 
implement a seven-day accounting regime as part of implementing the 
FedNow Service. Under this regime, an end-of-day balance would be 
calculated for each day of the week, with transactions occurring on 
weekends and holidays recorded and reported in the same way as 
transactions occurring Monday through Friday (see the Business Day 
section).\51\ Approximately 15 commenters addressed topics related to 
implementation of a seven-day accounting regime. Although the majority 
of commenters were supportive of seven-day accounting for FedNow 
Service transactions, commenters recommended that the Federal Reserve 
provide guidance to banks that prefer to maintain a five-day accounting 
regime, in order to assist those institutions with calculating reserve 
balances over the weekend and on holidays. Commenters noted that this 
guidance would be particularly helpful for small and midsize banks that 
may participate in the FedNow Service but do not wish to conduct all of 
their internal operations on a 24x7x365 basis.
---------------------------------------------------------------------------

    \51\ For FedNow Service participants, interest on reserve 
account balances will be calculated each day of the week based on 
that day's closing balance.
---------------------------------------------------------------------------

    The Board recognizes that seven-day accounting is a significant 
shift from current practice in the banking industry and will require 
FedNow Service participants to update accounting systems and practices. 
A seven-day accounting regime adopted by the Federal Reserve, however, 
does not dictate or preclude use of specific other accounting regimes 
by participating banks. Based on the specific applicability of 
accounting principles, participating banks may choose to use 
alternative accounting approaches for recording and reporting FedNow 
Service transactions on weekends and holidays to their financial 
records (though still providing immediate access to funds received 
through the FedNow Service). In addition, the service will provide 
reports to support reconcilement and reporting by participating banks 
under their chosen internal accounting approaches. The Board also 
believes that as adoption of instant payments grows over the long term, 
seven-day accounting is likely to become the industry standard. 
Implementing seven-day accounting is therefore likely to be less 
disruptive and more efficient than switching from five- to seven-day 
accounting in the future. For these reasons, the Board has determined 
that a seven-day accounting regime is appropriate.
6. Reports
    In the 2019 Notice, the Board stated that the FedNow Service would 
provide reports to participating banks to support transaction 
monitoring, reporting, and reconciliation. Eight commenters agreed that 
the FedNow Service should provide reporting capabilities and 
recommended that account balance information be available to 
participants on a 24x7x365, real-time basis. These commenters explained 
that such reporting capabilities would assist banks with management of 
their account balances at the Reserve Banks.
    The Board agrees that reporting capabilities will be important to 
facilitate participants' effective use of the FedNow Service, and the 
FedNow Service will offer reports as proposed. Reports about FedNow 
Service payment activity, such as transaction-level or summary-level 
activity reports, will be available as part of existing end-of-day 
reports provided for other Federal Reserve services or by request.\52\ 
FedNow Service participants will also have the ability to request 
intraday account balances, which would reflect a master account balance 
inclusive of FedNow Service payment activity. Summary-level reports 
will provide the total dollar value of sent and received transactions, 
the number of completed and rejected transactions, and other 
information. Correspondent banks will also be able to obtain these 
transaction-level and summary reports for their respondents. Details on 
reports available through the FedNow Service will be announced prior to 
the launch of the service through established Reserve Bank 
communication channels.
---------------------------------------------------------------------------

    \52\ Banks will be able to choose whether to receive daily 
reports according to business day, for example, if participants do 
not wish to receive reports on weekends and holidays.
---------------------------------------------------------------------------

7. Liquidity and Credit
    In the 2019 Notice, the Board stated that it would consider 
providing intraday credit on a 24x7x365 basis to support FedNow Service 
transactions. The Reserve Banks currently provide liquidity in the form 
of intraday credit, also known as daylight overdrafts, to eligible 
banks in support of Federal Reserve services and subject to the Federal 
Reserve's Policy on Payment System Risk, Part II (PSR Policy).\53\ 
Approximately 10 commenters addressed intraday credit, and all were 
supportive of the Reserve Banks providing intraday credit on a 24x7x365 
basis to support FedNow Service transactions. Several commenters noted 
that access to intraday credit would provide flexibility for banks of 
varying sizes as they look to manage their account balances at the 
Reserve Banks and emphasized the importance of intraday credit to the 
smooth functioning of the FedNow Service. Commenters also stated that 
account balance management will become more complex in a 24x7x365 
environment where payments settle continuously in master accounts.
---------------------------------------------------------------------------

    \53\ 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,'' Available at https://www.federalreserve.gov/paymentsystems/psr_about.htm.
---------------------------------------------------------------------------

    The Board agrees with commenters that access to 24x7x365 intraday 
credit would support the smooth functioning of the FedNow Service.\54\ 
Accordingly, access to intraday credit will be provided for 
participants in the FedNow Service during its business day under

[[Page 48532]]

the same terms and conditions as are available for other Federal 
Reserve services.\55\ As is the case today, participating banks will be 
expected to manage their master accounts in compliance with Federal 
Reserve policies, including avoiding negative balances at the close of 
the business day, each day of the week, to avoid overnight 
overdrafts.\56\ Therefore, some participating banks may need to adjust 
internal account monitoring practices to manage intraday liquidity.\57\
---------------------------------------------------------------------------

    \54\ In particular, over the weekend or on a holiday, a FedNow 
Service participant that faced an unexpected outflow of payments 
could experience a depletion of its master account balance. Absent 
intraday credit, a FedNow Service participant in this situation 
could have its payments rejected by the FedNow Service, to the 
detriment of that participant and its end-user customers.
    \55\ Specific changes to the Board's PSR policy will be proposed 
separately.
    \56\ To minimize Reserve Bank exposure to overnight overdrafts, 
the Board charges a penalty fee to discourage institutions from 
incurring overnight overdrafts. 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. If a bank has a 
negative balance at the end of the business day, it is charged an 
overnight overdraft penalty for a 24-hour period. The Board expects 
this would continue to be the case after launch of the FedNow 
Service, even if an overdraft is cured shortly after on the next 
business day through incoming FedNow payments or a liquidity 
transfer from another FedNow Service participant (see the Liquidity 
Management Tool section). On weekends, the Board expects overnight 
overdrafts will be counted for a 24-hour period (as opposed to the 
current 72-hour period), since there will be an opportunity to use 
the FedNow Service to cure overdrafts on Saturday and Sunday. 
Specific changes to the Overnight Overdraft Policy will be proposed 
separately.
    \57\ Participating banks will be able to request intraday 
balances through the FedNow Service (see the Reports section).
---------------------------------------------------------------------------

    In the 2019 Notice, the Board also explained that, while discount 
window loans would initially not be available on weekends and holidays, 
the Board would conduct an analysis to determine when it may be 
beneficial to expand discount window availability times.\58\ 
Approximately 10 commenters recommended that the Federal Reserve extend 
discount window availability to include weekends and holidays. 
Commenters noted that the ability to access funding during weekends and 
holidays will be critical, particularly while participants are still 
familiarizing themselves with 24x7x365 payment operations after the 
FedNow Service first becomes available.
---------------------------------------------------------------------------

    \58\ 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.
---------------------------------------------------------------------------

    The Board recognizes that the ability of participants in the FedNow 
Service to access funding during weekends and holidays will be 
important. The Board also expects that initially the need for overnight 
credit on weekends and holidays will be limited, given that net value 
of payment inflows and outflows related to FedNow Service transactions 
will likely represent a small portion of banks' master account 
balances. In addition, as outlined in the next section, the FedNow 
Service will provide participants with a liquidity management tool that 
will assist with liquidity management in a 24x7x365 environment. 
Therefore, the Board has determined that, as proposed, the discount 
window will continue to be available until the close of the Fedwire 
Funds Service, Monday through Friday, under the same terms as today. 
The Reserve Banks will monitor account balance activity and review the 
need for overnight credit on weekends and holidays as the FedNow 
Service matures.
8. Liquidity Management Tool
    In the 2019 Notice, the Board discussed the importance of banks' 
ability to manage liquidity needs associated with instant payments, 
given that such payments involve real-time gross settlement between 
banks on a 24x7x365 basis. For example, a participant in the FedNow 
Service could experience unexpectedly high outgoing payment volume that 
exceeds the participant's liquidity available in its master account for 
settlement. If this outflow occurs during hours when the Fedwire Funds 
Service is not operating, the participant may incur an overdraft of its 
master account that it cannot address through a liquidity transfer from 
another FedNow Service participant, possibly resulting in an overnight 
overdraft. An analogous liquidity management issue can arise for 
participants in a private-sector instant payment service that is backed 
by a joint account at a Reserve Bank.\59\ The Board explained in the 
2019 Notice that the Federal Reserve would explore expanded hours for 
the Fedwire Funds Service and National Settlement Service (NSS) as an 
option to provide such liquidity management functionality.\60\
---------------------------------------------------------------------------

    \59\ A participant in such a service could find that its 
customers' payment activity has depleted its position on the 
service's ledger, but the participant has no way to provide 
supplemental funding to the joint account to support an increase in 
that ledger position when the Fedwire Funds Service is closed.
    \60\ In the 2018 Notice, the Board requested comment on the 
development of a liquidity management tool. Comments received in 
response to the 2018 Notice generally supported development of such 
a tool and also supported expansion of hours for existing Federal 
Reserve services to support other industry needs. Reflecting this 
input, the Board indicated in the 2019 Notice that the Reserve Banks 
would explore the expansion of Fedwire Funds Service and NSS hours 
to provide liquidity management functionality and for other 
purposes.
---------------------------------------------------------------------------

    Approximately 20 commenters, largely representing small and midsize 
banks, trade organizations, and other interested parties, addressed the 
need for a liquidity management tool. Commenters noted that tools to 
manage liquidity on a 24x7x365 basis should be available at the launch 
of the FedNow Service and suggested that those tools could include 
automated transfers between FedNow Service participants, based on 
preestablished account thresholds and limits. Half of these commenters 
suggested that expansion of Fedwire Funds Service and NSS hours would 
allow for efficient liquidity management in a 24x7x365 environment.
    The Board agrees with commenters that the ability to manage 
liquidity needs resulting from the 24x7x365 real-time nature of instant 
payments is important, both for the FedNow Service at launch and for 
instant payment services more broadly. As a 24x7x365 service, the 
FedNow Service will inherently be able to support liquidity transfers 
around the clock and therefore will incorporate a liquidity management 
tool (FedNow LMT) as a core feature.\61\ The FedNow LMT will enable 
participants in the FedNow Service to transfer funds between one 
another to support liquidity needs related to payment activity in the 
FedNow Service. The tool will also support participants in private-
sector instant payment services backed by joint accounts at a Reserve 
Bank by enabling transfers between the master accounts of such 
participants and their joint account.
---------------------------------------------------------------------------

    \61\ The Federal Reserve continues to explore expanded hours for 
the Fedwire Funds Service and NSS. As explained in the 2019 Notice, 
further analysis is needed to fully evaluate the relevant 
operational, risk, and policy considerations with expanded hours for 
the Fedwire Funds Service and NSS, given the systemic importance of 
the Fedwire Funds Service.
---------------------------------------------------------------------------

    Because of the general importance of liquidity management for 
instant payment services, the Board recognizes the importance of 
flexibility related to the way that participants in such services might 
look to access the FedNow LMT. As a result, users of the FedNow LMT 
will not be required to be full FedNow Service participants. For 
example, participants in a private-sector joint account-based instant 
payment service, or providers of liquidity to FedNow Service 
participants, will be able to access the FedNow LMT functionality 
without joining as a full FedNow Service participant because they would 
not need the FedNow Service's full set of features for sending

[[Page 48533]]

and receiving instant payment transactions involving end users.\62\
---------------------------------------------------------------------------

    \62\ Liquidity providers may have an interest in providing 
liquidity to FedNow Service participants without making standard 
FedNow Service payments. Allowing participation by such liquidity 
providers could allow small and midsize banks to retain 
relationships with their existing liquidity providers for purposes 
of instant payment liquidity management.
---------------------------------------------------------------------------

    The Reserve Banks anticipate imposing certain controls on the 
FedNow LMT to ensure that use of the functionality is limited to 
liquidity transfers in support of instant payments. Such controls will 
include transaction-value limits or limits on the hours of the 
functionality, such as when transfers are not possible through other 
Federal Reserve services. Controls related to the FedNow LMT, service 
terms, eligibility requirements, and enrollment processes will be 
announced prior to the launch of the FedNow Service through established 
Reserve Bank communication channels.
9. Network Access
    In the 2019 Notice, the Board explained that participating banks 
would access the FedNow Service through the FedLine[supreg] network, 
which would be enhanced to support the service's 24x7x365 
processing.\63\ The Board received seven comments related to network 
access, all of which were generally supportive of accessing the FedNow 
Service through the FedLine network. Several of these commenters noted 
that use of the FedLine network to access the FedNow Service will 
streamline onboarding processes generally, as the Federal Reserve has 
existing relationships with most banks in the United States. Several of 
these commenters also noted that it will be important for the Federal 
Reserve to work with service providers and processors in order to 
ensure that smaller institutions without direct FedLine connections are 
also able to access the service. One small bank commenter recommended 
that the Reserve Banks assess whether any contemplated upgrades to 
FedLine components could disproportionately affect smaller institutions 
that may not have the ability to test or maintain enhanced components.
---------------------------------------------------------------------------

    \63\ 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/index.html. While the Board is not envisioning doing so at this 
time, it may consider in the future whether enabling access to the 
FedNow Service through alternate messaging networks would enhance 
resiliency or interoperability for instant payments.
---------------------------------------------------------------------------

    As proposed, the FedLine network will serve as the channel through 
which participating banks access the FedNow Service. Participating 
banks will need to test and deploy enhanced or upgraded FedLine 
components to enable the FedNow Service. Depending on their electronic 
connection with the FedLine network, banks would need to maintain 
adequate telecommunications services to support the transaction time 
requirement (see the Payment Flow and Message Type section). The Board 
recognizes that this need for adequate telecommunications services 
could present potential challenges for small and midsize banks that 
rely on telecommunication services through their internet service 
providers. As a result, the Federal Reserve intends to review and 
update its policies, standards, procedures and guidelines related to 
network access to provide direction and information to banks of all 
sizes regarding network access requirements for bandwidth, latency, and 
availability.
10. Request for Payment
    In the 2019 Notice, the Board sought comment on the incremental 
value and timing of including request-for-payment functionality in the 
FedNow Service. Request-for-payment functionality would involve a 
specific nonvalue message type. This message type would support 
participants' ability to provide a potential receiver the capability, 
through an end-user service, to prompt a sender to initiate a standard 
credit transfer through the FedNow Service. The Board explained that 
this functionality may increase the use of instant payments by allowing 
end users to more easily conduct certain types of transactions, such as 
bill payments.
    Approximately 30 commenters, largely representing trade 
organizations, small and midsize banks, and other interested parties, 
addressed request-for-payment functionality. Nearly all of these 
commenters agreed that such functionality would support widespread use 
of instant payments. Six commenters highlighted that request-for-
payment functionality offers similar benefits to a debit (``pull'') 
transfer but allows the payment sender to actively authorize any 
payment to the receiver. Of those that specified a timeline for 
introduction of request-for-payment functionality, approximately 10 
commenters supported its inclusion as a feature at the launch of the 
FedNow Service. Seven commenters suggested that this functionality be 
considered for future releases of the FedNow Service, indicating that 
it may add unnecessary complexity to the first release.
    The Board agrees that request-for-payment functionality may enable 
a wider variety of transactions and help facilitate broader adoption of 
instant payments. The Board also does not believe that inclusion of the 
feature will introduce unnecessary complexity to the technical design 
of the FedNow Service. Therefore, the request-for-payment message type 
will be available as part of the FedNow Service at launch.
11. Fraud Prevention Tools
    In the 2019 Notice, the Board stated that, while participating 
banks would continue to serve as a primary line of defense against 
fraudulent transactions, the FedNow Service could offer fraud 
prevention tools to support participating banks in fulfilling that role 
or other tools at the payment-system level. Approximately 75 commenters 
raised topics related to fraud prevention tools, and over half of these 
commenters, largely representing small and midsize banks, trade 
organizations, and service providers, indicated that tools for 
monitoring and alerting participants to potentially fraudulent 
transactions should be included in the FedNow Service. Many of these 
commenters made specific suggestions about how such tools should be 
designed. For example, approximately 15 commenters recommended that 
tools should automatically stop potentially fraudulent transactions. 
Approximately 15 commenters recommended that FedNow Service 
participants have the ability to set controls to restrict payments by 
value, volume, and other characteristics. Finally, a few commenters 
suggested that the Reserve Banks assign a ``score'' to payment 
transfers in order to communicate potential fraud risk to participants. 
Commenters also suggested other tools that could support a safe and 
secure instant payment ecosystem. Approximately 25 commenters, largely 
representing small and midsize banks, recommended that the Reserve 
Banks develop a database that facilitates sharing of payment fraud 
information among instant payment stakeholders. The majority of these 
commenters specified that the database would rely on information 
contributed by FedNow Service participants. Additionally, approximately 
15 commenters recommended that the Reserve Banks leverage their 
position as network operator to analyze network-wide data in order to 
identify patterns of potentially fraudulent activity.
    Based on public comments and analysis by the Reserve Banks of 
available fraud prevention tools and technology, the FedNow Service 
will include a set of fraud prevention tools at launch and in future 
phases. At

[[Page 48534]]

implementation, the tools available to participating banks to assist 
them in their role as the primary line of defense against fraudulent 
transactions will include (1) the ability to set lower transaction 
value limits, (2) the ability to specify certain conditions under which 
transactions would be rejected, such as by account number, and (3) 
reporting features and functionality, including reports on the number 
of payment messages that were rejected based on a participant's 
settings. The first two tools will allow banks to proactively set 
parameters that limit transaction activity in the FedNow Service, based 
on banks' knowledge of their own customers. The third tool will provide 
summary information that banks can incorporate into their fraud-
monitoring activities. The Federal Reserve intends to explore other 
features that could be made available as part of future releases to aid 
participating banks in managing fraud risk, such as value limits that 
could be tailored to certain uses, aggregate value or volume limits for 
specific periods (for example, per business day), or centralized 
monitoring performed by the FedNow Service such as functionality that 
leverages advanced statistical methods and historical patterns to 
identify potentially fraudulent payments.

D. Features for Consideration in Future Releases

    The Reserve Banks intend to take a phased approach to developing 
and expanding the FedNow Service, as discussed earlier. The Board 
believes this approach will most effectively meet the need for the 
Federal Reserve to move quickly while still offering additional 
features as part of later releases intended to improve overall 
accessibility, safety, and efficiency of instant payments in the United 
States. For example, the service will seek to, as part of later 
releases, support alias-based payments through directories and 
application programming interfaces (APIs), both of which are discussed 
in further detail later in this section. Other features to be explored 
for later releases include support for bulk payments or enhanced 
remittance information. The Federal Reserve recognizes that market 
needs and the technology related to instant payments are constantly 
evolving and intends to continue engaging with stakeholders in order to 
be flexible in its approach when augmenting the features and 
functionality of the FedNow Service. Based on this engagement, 
additional features and service enhancements will be introduced over 
time. Any additional functionality will be announced through 
established Reserve Bank communication channels.
1. Support for Alias-Based Payments
    In the 2019 Notice, the Board explained that the Reserve Banks 
intended to engage with industry stakeholders to understand more fully 
the benefits and drawbacks of various approaches to providing directory 
services.\64\ Directory services can enable alias-based payments by 
connecting a receiver's alias (such as phone number or email address) 
with the receiver's banking information to ensure that a payment is 
routed to the correct end user in a way that is private and secure. 
Approximately 80 commenters, largely representing small and midsize 
banks, trade organizations, and fintechs, addressed the inclusion of 
directory services as part of the FedNow Service. All of these 
commenters noted that directory services would be a critical tool to 
enable alias-based payments, and approximately 40 commenters provided 
specific recommendations as to how the Reserve Banks should provide 
access to directory services to FedNow Service participants. 
Commenters' recommendations varied widely, with approximately 20 
commenters suggesting the Reserve Banks provide a centralized link to 
existing directories. Another 20 commenters suggested the Reserve Banks 
develop their own directory, either as an independent service or in 
addition to a centralized link to existing directories. Additionally, 
several commenters highlighted potential risks and complexities 
associated with implementation and maintenance of directory services, 
such as the need for controls to ensure secure collection, storage and 
management of public identifiers.
---------------------------------------------------------------------------

    \64\ The 2018 Notice requested comment on whether a directory 
service is needed for an RTGS service for instant payments. The 
question generated a large number of responses, with commenters 
stating that directories are an important driver for adoption of 
instant payments because end users value the ability to send 
payments to receivers based solely on public identifiers, or 
aliases, without a sender having to know the bank account number of 
a receiver.
---------------------------------------------------------------------------

    The Board recognizes that originating a payment using only the 
public alias of a receiver is becoming increasingly common, especially 
for individuals seeking a quick and convenient way to send money to 
each other. The Board also recognizes that banks of all sizes across 
the country wish to offer this type of service to their customers, and 
some of these banks are expecting the FedNow Service to provide the 
infrastructure necessary for them to enable end-user services for 
alias-based payments.
    The Board also agrees that facilitating aliased-based payments, 
through a directory service or other means, is a desirable feature for 
the FedNow Service and could help drive adoption of instant payments. 
At the same time, as indicated elsewhere in this notice, the Federal 
Reserve's goal is to launch the service as soon as practicably 
possible. Therefore, the Federal Reserve has made a conscious decision 
to focus first on the core interbank clearing and settlement 
functionality necessary for supporting instant payments to facilitate 
an expeditious launch. Offering a directory service or similar feature 
at launch would add complexity that would extend the time frame 
necessary to launch the service. As a result, the FedNow Service will 
not include a directory service or other approach to support alias-
based payments at launch, but instead will seek to provide this 
supplemental feature in a future release of the FedNow Service.\65\
---------------------------------------------------------------------------

    \65\ As part of conducting FedNow transactions, participants in 
the FedNow Service are not precluded from using alias-based payment 
services that are unaffiliated with the FedNow Service.
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    The Federal Reserve is actively exploring various approaches based 
on suggestions from commenters to provide participants in the FedNow 
Service the means to facilitate alias-based payments.\66\ One approach 
would be to connect to one or more existing directories that could 
provide routing information for all or a subset of participants in the 
FedNow Service. Given that existing alias-based directories are 
typically embedded within proprietary payment services (mostly for 
person-to-person payments), contain information only for a closed user 
group, and are not designed for broader open access, this approach 
raises several considerations that will need to be further 
explored.\67\ The Federal Reserve is also exploring options for 
building a directory, which could function independently or supplement 
existing directories. This approach would mean that all participants in 
the FedNow Service would be able to provide and update alias 
information for their account holders to a Federal Reserve directory, 
if they wish to accept alias-based payments through the FedNow Service. 
Both of these approaches present a host of legal, security, and 
operational

[[Page 48535]]

challenges that would need to be resolved. Because of these 
complexities and challenges, many of which were highlighted by 
commenters, additional analysis on the appropriate approach is needed.
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    \66\ In support of alias-based payments, the Federal Reserve may 
also consider message flows and settlement processes different from 
the basic credit transfer flow described earlier.
    \67\ In this context, a closed user group is where the sender 
and receiver of a payment have signed up with a specific service.
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    In addition to these potential options, the Federal Reserve will 
continue to explore other avenues for how the Reserve Banks might offer 
alias-based payment functionality as a feature of the FedNow Service 
after launch. The Board fully acknowledges the industry's need for 
clarity regarding an alias-based capability in the FedNow Service, and 
the Federal Reserve will communicate its progress through established 
Reserve Bank communication channels.
2. Application Programming Interfaces (APIs)
    The Board received approximately 20 comments regarding the use of 
APIs within the FedNow Service. An API is a type of software technology 
that enables computer systems or applications to connect to each other, 
allowing information to be shared across the systems.\68\ Commenters, 
representing small and midsize banks, fintechs, and service providers, 
noted that APIs could be useful for allowing banks or their service 
providers to submit requests for various informational reports or 
allowing third parties to develop value-added services related to the 
FedNow Service.
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    \68\ More specifically, in computer programming, an API is a set 
of routines, protocols and tools used to facilitate interactions 
between applications. An API specifies how software components 
should interact with each other, inclusive of formats and processes 
to facilitate data calls and requests. Among a variety of other 
uses, an API can be used to retrieve data from one application and 
process it in another application.
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    The Board recognizes that the use of APIs facilitates the provision 
of value-added end-user services and provides useful tools for a number 
of purposes, such as providing real-time service status updates, 
providing downloadable information like message specifications as part 
of automated services, or even initiating and receiving transactions. 
The Federal Reserve will continue to engage with industry stakeholders 
as it explores the best ways to support APIs in the FedNow Service and 
will provide updates through established Reserve Bank communication 
channels.

E. Interoperability

    In the 2019 Notice, the Board indicated that, in a market structure 
with multiple operators of instant payment services, the ability to 
achieve ubiquity in instant payments is advanced when customers of a 
bank participating in one instant payment service are able to reach the 
customers of a bank participating in another instant payment service.
    Over half of the comment letters received in response to the 2019 
Notice emphasized the importance of the FedNow Service having 
interoperability with the existing private-sector service. Of the 
approximately 100 commenters that addressed interoperability, 
approximately 40, largely representing small and midsize banks and 
trade organizations, addressed issues related to timing. Approximately 
20 commenters stated that interoperability should be available at 
service launch. Approximately 10 commenters did not specify whether the 
service should be interoperable at launch, but noted that the Federal 
Reserve should balance the importance of an expeditious launch against 
achieving interoperability. Another 10 commenters stated that 
interoperability is not critical at launch of the FedNow Service.
    Approximately 25 commenters, largely representing large banks, 
small and midsize banks, and trade organizations, recommended that the 
FedNow Service rely on common rules and standards with the existing 
private-sector service to support interoperability. Many of these 
commenters recommended that the FedNow Service offer the same message 
types that are currently available with the existing private-sector 
service. Additionally, a group of approximately 20 small and midsize 
banks expressed the concern that they may be disadvantaged if they join 
the FedNow Service and cannot send payments to or receive payments from 
banks participating in the existing private-sector service that are not 
also FedNow Service participants.
    The Board agrees with commenters on the importance of 
interoperability. Nationwide reach is one of the Federal Reserve's 
primary policy objectives for instant payments, and interoperability 
between the FedNow Service and the existing private-sector service can 
help advance this goal. The Federal Reserve, however, cannot accomplish 
interoperability for instant payments alone. The industry--banks, bank 
service providers, and service operators--must work towards this common 
goal, as it has in the past with other payment services.
    Interoperability could take different forms. As noted in a recent 
paper by the U.S. Faster Payments Council, three primary models of 
interoperability have been used to accomplish nationwide reach in other 
types of payments, two of which the Board believes are more suitable 
for instant payments.\69\ The first model, which is used in card 
payments and wire transfers and is likely to be most relevant to 
instant payments, relies on the sending bank routing payments through a 
specific service based on the path(s) available to reach the receiver; 
if there is more than one path, the sending bank may choose the service 
it uses based on specific criteria, such as price and features. In this 
model, nationwide reach can be achieved if banks choose to participate 
in the same service, such that there is always at least one path 
between any two banks. Further, banks can choose to participate in 
additional services as part of this model.
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    \69\ The U.S. Faster Payments Council is an industry-led 
membership organization whose mission is to facilitate faster 
payments in the United States. The paper is available at https://fasterpaymentscouncil.org/userfiles/2080/files/Faster%20Payments%20Interoperability%20WP_June%202020.pdf. A third 
model outlined by the Faster Payments Council, currently used for 
check payments and certain international payments, is one in which a 
series of intermediary banks are expected to clear, settle, and 
route payments. This model can lead to friction in payment flows, 
which makes this approach less attractive for domestic instant 
payments.
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    The second model is interservice message exchange, in which banks 
choose to participate in one service, and a payment originated through 
that service can be cleared, settled, and received through another 
service. ACH payments use this model, which is designed for bilateral 
exchange between two service operators. This model can achieve 
nationwide reach by connecting individuals and businesses across the 
country through their banks, which are in turn connected to a service 
operator that enables the message exchange arrangement with the other 
service operator. The message exchange model, however, poses several 
additional complexities (such as technical message exchange and common 
settlement) and would require the commitment and active engagement by 
the existing private-sector service.
    The form and timeline for achieving interoperability depends on the 
level of commitment and engagement across the industry. The Federal 
Reserve is committed to working towards compatible standards and 
operating procedures with the existing private-sector service, which 
will enable interoperability through the model of payment routing, and 
has initiated discussions on this subject with the existing private-
sector service toward that end. The Federal Reserve is also committed 
to using the widely accepted ISO 20022 standard and other industry best 
practices to remove unnecessary and burdensome incompatibilities that

[[Page 48536]]

could be a barrier to payment routing interoperability. The Federal 
Reserve is open to interoperability based on interservice message 
exchange in the future, after introduction of the FedNow Service.

F. Cost Recovery & Service Fees

    In the 2019 Notice, the Board concluded that, due to considerations 
specific to new services, long-run cost recovery for the FedNow Service 
will fall outside of the traditional 10-year period for cost recovery 
typically applied by the Board to mature services. Similar to how cost 
recovery has been applied to new services in the past, the Board 
determined that until the service reaches maturity with relatively 
stable costs and revenues, FedNow Service fees will be based on 
transaction costs associated with mature volume estimates.
    In the 2019 Notice, the Board requested 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. Approximately 
15 commenters raised topics related to long-run cost recovery for the 
FedNow Service. Of these comments, 9 supported the Board's proposed 
approach to cost recovery, with several commenters expressing the 
concern that if the traditional 10-year cost recovery were applied to 
the FedNow Service, fees would be prohibitively high. Two commenters 
stated that the Board should apply the traditional 10-year cost 
recovery period to the FedNow Service. Several commenters also 
suggested that the Federal Reserve make additional information public 
about its cost estimates and long-term cost-recovery strategy.
    The Board agrees with the majority of commenters that applying the 
traditional 10-year cost recovery period to the FedNow Service, when 
volumes are low and potentially variable while fixed costs are high, 
could result in unnecessarily volatile prices or prohibitively high 
service fees. Such an outcome would negatively affect service usage, 
and ultimately undermine the Federal Reserve's public policy objectives 
in providing the FedNow Service. In addition, the cost recovery 
provisions in section 11A of the Federal Reserve Act state that the 
Board's pricing principles for Federal Reserve services should give due 
regard to competitive factors and the provision of an adequate level of 
service nationwide.
    Therefore, the Board continues to expect long-run cost recovery for 
the FedNow Service to occur outside the 10-year period typically 
applied by the Board to mature services. The Board also expects that 
fees will be based on transaction costs associated with mature volume 
estimates until the service reaches maturity with relatively stable 
revenues and costs. This approach will limit prohibitively high service 
fees, and allow for realization of the public benefits the Board 
identified in its approval of the FedNow Service. As part of this 
approach to cost recovery, the Board will monitor progress toward 
matching revenues and costs and will regularly confirm its expectation 
that the service will meet cost recovery objectives over the long run. 
To provide transparency as part of this process, the Board will also 
regularly disclose the service's cost recovery.
    In addition, approximately 40 commenters, representing small and 
midsize banks, trade organizations and individuals, raised topics 
related to FedNow Service fees. Approximately 15 of these commenters 
recommended that the FedNow Service rely on a per-item fee schedule, as 
opposed to volume-based pricing. Additionally, 4 commenters suggested 
that FedNow Service fees align with market practices at the time of 
service launch. Another group of 4 commenters recommended that both the 
sender's and receiver's banks be assessed fees for a FedNow Service 
transfer. Other commenters recommended that the Reserve Banks 
communicate the service fee schedule as soon as possible, to provide 
participants adequate time to prepare for onboarding.
    The Board recognizes the need for additional specificity on service 
fees in advance of the FedNow Service's launch. Based on prevailing 
market practices, the Board expects that the fee structure will include 
a combination of per-item fees, charged to the sender's bank and 
potentially to the receiver's bank, and fixed participation fees. The 
ultimate fee structure and schedule will be informed by the Federal 
Reserve's assessment of market practices at the time of implementation. 
The Reserve Banks will publish the initial fee schedule for the FedNow 
Service well before its launch through established communication 
channels.\70\
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    \70\ Following the release of the FedNow Service's initial fee 
schedule, the Board will also publish FedNow Service fees in its 
annual service-pricing process for all services.
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IV. 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 FedNow Service.\71\ In the 2019 Notice, the Board conducted an 
initial competitive impact analysis for the FedNow Service and 
requested comment on that analysis. In light of the comments received 
and the Board's additional assessment, the Board has conducted a final 
competitive impact analysis.
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    \71\ 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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    As part of a competitive impact analysis, the Board 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 order to do so, the 
Board first identifies relevant private-sector providers of similar 
services and then compares those providers' services with the FedNow 
Service. In instances where any differences create direct and material 
adverse effects on the ability of the private-sector providers to 
compete effectively, 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 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.

A. Relevant Private-Sector Providers of Similar Services

    In conducting a competitive impact analysis, the Board first 
identifies relevant private-sector providers of similar services. As 
part of its initial competitive impact analysis, the Board identified 
one comparable private-sector service for instant payments in the 
United States, which has been operational since November 2017 (the 
existing private-sector service). Like the

[[Page 48537]]

FedNow Service, the existing private-sector service conducts payment-
by-payment final settlement of interbank obligations on a 24x7x365 
basis for instant payments. Unlike the FedNow Service, which will 
settle in central bank money using master accounts, the existing 
private-sector service relies on an internal ledger maintained by its 
operator to conduct settlement, which is supported by funds held in a 
joint account at a Reserve Bank.\72\ One commenter suggested the Board 
broaden its definition of relevant service providers in performing its 
competitive impact analysis to include entities, such as card companies 
that offer end-user solutions that may compete with instant payment 
solutions. 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 interbank RTGS services for instant payments, the Board does 
not view them as private-sector providers of similar services and, 
therefore, has not considered them as part of its final competitive 
impact analysis.
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    \72\ 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 compares those providers' services with the FedNow 
Service. The purpose of this comparison is to identify differences 
between private-sector and Federal Reserve services. Ultimately, it is 
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.\73\ The Board's 
competitive impact analysis therefore focuses on those differences that 
could create a direct and material adverse effect on the ability of the 
private-sector services to compete effectively with the Federal 
Reserve.
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    \73\ 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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    As part of its initial competitive impact analysis, the Board 
identified specific differences between the FedNow Service and the 
existing private-sector service. The Board requested comment on whether 
these differences, in addition to any other differences identified, had 
a direct and material adverse effect on the ability of the existing 
private-sector service to compete effectively with the Federal Reserve.
1. Use of Master Accounts
    In order to participate in the FedNow Service, participants must 
use a master account at the Reserve Banks (directly or indirectly), 
whereas the existing private-sector service uses a separate joint 
account that each participant must prefund (directly or indirectly 
through a funding agent). As part of its initial analysis, the Board 
noted that use of master accounts may provide an advantage to the 
FedNow Service because funds remain in participants' Federal Reserve 
master accounts, earning interest and counting towards reserve 
requirements, and can be used for other purposes.\74\ Unlike funds held 
in a master account, prefunding held in the existing private-sector 
service's joint account does not earn interest or count toward reserve 
requirements and is not available for other purposes that may arise, 
such as satisfying payment or liquidity needs outside the existing 
private-sector service.\75\
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    \74\ When the Board announced its decision that the Reserve 
Banks would develop the FedNow Service (August 2019), the maximum 
reserve ratio on net transaction accounts was 10 percent. On March 
15, 2020, the Board announced reserve ratios on all transaction 
accounts would be reduced to zero effective March 26, 2020.
    \75\ 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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    Approximately 15 commenters addressed the potential competitive 
advantages that the use of master accounts may provide the FedNow 
Service. These commenters raised different options for ways the Federal 
Reserve could mitigate the effects of this difference. Approximately 10 
commenters also stated the Federal Reserve should pay interest on the 
balances held in the joint account and count these balances towards 
reserve requirements in order to mitigate the FedNow Service's 
potential competitive advantage of settling in master accounts. A few 
commenters also pointed to the excess balance account (EBA) model as a 
potential example that the Federal Reserve could follow with the 
existing private-sector service.\76\ Two commenters suggested that 
expanding the Fedwire Funds Service and NSS hours to provide the 
ability to move funds to and from the joint account outside current 
operating hours for liquidity management purposes could ameliorate any 
adverse effect. In addition, one commenter suggested that the Federal 
Reserve could segregate funds used for transactions in the FedNow 
Service and not pay interest on those balances.
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    \76\ An EBA is an interest-bearing account at a Reserve Bank 
established for one or more institutions that are eligible to earn 
interest on balances held at the Reserve Banks and managed by an 
agent. Only excess balances may be placed in an EBA; the account 
balance cannot be used to satisfy reserve balance requirements or 
for general payments or other activities.
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    Commenters offered differing views on the impact of these potential 
advantages. Only two of these commenters offered views on the 
materiality of these potential advantages. One commenter suggested the 
decision to pay interest on balances in the joint account and allow 
balances in this account to count towards reserve requirements would 
materially influence its decision on how to route payments and manage 
funds. Another commenter stated that the FedNow Service's use of master 
accounts would not affect the existing private-sector service's ability 
to compete and that the FedNow Service enhances competition.
    Taking into account the comments received and the provision of 
additional liquidity management features that will be available as 
discussed in Section III, the Board has assessed that the use of master 
accounts by the FedNow Service is a difference that will not create a 
direct and material adverse effect on the ability of the existing 
private-sector service to compete effectively.\77\ Only

[[Page 48538]]

one commenter stated that the inability of funds held in the joint 
account to earn interest would materially affect its decision to join 
the existing private-sector service. But, as discussed earlier, the 
Federal Reserve's provision of the liquidity management tool will 
enable banks to move excess funds in and out of the joint account, 
thereby allowing banks to minimize the balances in the joint account on 
an ongoing basis. Additionally, following the Board's decision to 
reduce reserve ratios on all transaction accounts to zero, which was 
announced on March 15, 2020, reserve requirements have been effectively 
eliminated for all depository institutions.\78\ Thus, there is not at 
this time any advantage relating to master account balances' being 
eligible to count towards satisfaction of reserve requirements. The 
Board, however, remains committed to creating as much competitive 
parity as possible, including by paying interest on the joint account.
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    \77\ The Board recognizes that in addition to the payment of 
interest and treatment of balances for reserve purposes, additional 
differences may exist between the existing private-sector service's 
use of a joint account and the FedNow Service's use of the master 
account that require participants to manage their account positions 
in different ways. On the one hand, the FedNow Service's use of 
master accounts may create burden by requiring consideration of the 
defined closing and opening of other Federal Reserve services also 
settling in the same account. Use of master accounts for a service 
operating 24x7x365, such as the FedNow Service, also adds a layer of 
complexity to banks' management of their positions to avoid 
overnight overdrafts and associated penalties. On the other hand, 
unlike the master account, 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 in order to ensure funding requirements are met to avoid 
rejected payments on the ledger of the existing private-sector 
service. Overall, the Board does not believe these differences are 
significant enough to have a direct and material adverse effect on 
the ability of the existing private-sector service to compete 
effectively. Moreover, the ability to transfer liquidity between 
master accounts and the joint accounts as described earlier in 
Section III will further minimize any potential impacts.
    \78\ See ``Federal Reserve Actions to Support the Flow of Credit 
to Households and Businesses,'' March 15, 2020. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm.
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2. Access to Intraday Credit
    Participants in the FedNow Service will have access to intraday 
credit under the same terms and conditions as apply to participation in 
other Federal Reserve services. Such intraday credit would lower the 
risk that payments will be rejected because of lack of funds. The 
Federal Reserve expects banks to manage their master accounts at all 
times in compliance with Federal Reserve policies.
    In the existing 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 payment transactions in the 
existing private-sector service being rejected. As part of the Board's 
initial competitive impact analysis, the Board noted that access to 
intraday credit for funding a joint account 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. However, as noted in Section III, the Reserve 
Banks will provide a mechanism for transferring liquidity. As a result, 
participants in the existing private-sector service could use this 
functionality to transfer funds from their master accounts to the joint 
account, for example by using intraday credit if they so choose, 
including during times when transfers are not possible through other 
Federal Reserve services. Therefore, the Board has determined that 
there is no direct and material adverse effect on the ability of the 
existing private-sector service to compete effectively because 
participants in both the existing private-sector service and the FedNow 
Service will have access to intraday credit during non-Fedwire Funds 
Service hours.
3. Additional Differences
    Commenters mentioned differences in addition to those noted in the 
Board's initial competitive impact analysis. One commenter stated that 
the Federal Reserve is not subject to antitrust laws and suggested that 
the private sector has no remedy if the Reserve Banks engage in 
monopolistic or anticompetitive activity, so the Federal Reserve should 
commit to act in the public interest and ensure strong competition in 
the instant payments market. The same commenter also suggested that the 
limits on number of participants and reporting required on joint 
accounts that support settlement of instant payments, which is not 
required for any other private-sector retail payment system, provides a 
competitive advantage for the FedNow Service if it is not subject to 
similar requirements.
    The Reserve Banks are subject to section 11A of the Federal Reserve 
Act, which was added in part to ensure that the Reserves Banks were 
competing fairly with the private sector in the provision of financial 
services.\79\ Because the requirements imposed by section 11A are 
designed to ensure a level playing field with the private sector, such 
as the establishment of pricing principles and requirements that the 
Reserve Banks recover costs over the long run, the Board does not 
believe that not being subject to antitrust laws creates a direct and 
material adverse effect on the ability of the existing private-sector 
service to compete effectively.
---------------------------------------------------------------------------

    \79\ 12 U.S.C. 248a.
---------------------------------------------------------------------------

    In addition, the Reserve Banks report significant amounts of data 
to the Board on a regular basis and upon request for the purpose of 
policy analysis, including transaction-level data that the existing 
private-sector service does not report. The Board and Reserve Banks 
also make aggregate value and volume data available publicly. Further, 
while the Federal Reserve may initially impose limits on the number of 
participants in a joint account arrangement to ensure use of the 
account meets the public policy objectives set forth in the Board's 
joint account guidelines, such as efficient risk management, the Board 
in its oversight capacity expects the FedNow Service to meet the same 
public policy objectives before it can launch. In light of this 
analysis, the Board does not believe that any of these differences 
create a direct and material adverse effect on the ability of the 
existing private-sector service to compete with the FedNow Service.

C. Conclusion

    Based on this analysis, the Board does not believe that any of the 
differences identified create a direct and material adverse effect on 
the ability of the existing private-sector service to complete 
effectively with the FedNow Service.

    By order of the Board of Governors of the Federal Reserve 
System.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2020-17539 Filed 8-10-20; 8:45 am]
BILLING CODE P