Fed to have payments service ready 'as soon as practicably possible'

WASHINGTON — The Federal Reserve released new details Thursday on its FedNow real-time payments system, and said it hopes to make the system operational "as soon as practicably possible."

The target launch date for FedNow remains 2023 or 2024, but Fed Chair Jerome Powell has previously said the central bank would like to launch it sooner.

Government efforts to distribute stimulus funds during the pandemic illustrate the necessity of a government-managed faster payments system, Fed Gov. Lael Brainard said.

“The urgency with which the emergency [stimulus] payments were spent underscores the importance of rapid access to funds for many households and businesses that face cash flow constraints,” Brainard said in remarks prepared for a FedNow service webinar. “In good times as well as bad, instant payments will enable millions of American households and small businesses to get instant access to funds, rather than waiting days for checks to clear.”

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Brainard's comments accompanied the release of a 50-page notice with details about FedNow's features, data security protocols and when the service will be available following its launch.

The Fed said that it plans to make FedNow operational at all hours every day, including holidays.

“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,” the agency said in the notice.

The service will be launched in phases, starting with “core clearing and settlement features” that will help support market needs and help banks transition to a 24-hour payment system. Based on additional stakeholder engagement, additional features will be added over time, the Fed said.

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The U.S. government has been pumping billions of dollars of liquidity into the marketplace in the midst of the coronavirus pandemic, including sending emergency $1,200 stimulus checks to Americans earning less than $75,000 following the passage of the Coronavirus Aid, Relief, and Economic Security Act.

The Fed said that FedNow will be designed to maintain “uninterrupted 24x7x365 processing” with security features to support data integrity and data security. Access to intraday credit will also be provided to participants in FedNow.

Because FedNow is intended to process and settle payments continuously, participant banks will be required to have adequate funds or available credit “at all times” in order to settle all payments. In some circumstances, the Fed said that banks with superfluous credit may supply liquidity to those facing a shortfall.

FedNow will only be available to institutions eligible to hold an account at one of the Fed's regional banks. But ineligible entities may be able to act as service providers or agents for participants in the service, the Fed said.

To facilitate transfers between banks, the FedNow services will include a liquidity management tool that will enable participants to transfer funds to support liquidity needs related to payment activities. That tool will support both FedNow and private sector real-time payments systems.

Large private banks, which lobbied against the Fed's creation of FedNow, already offer a faster payments system through The Clearing House's RTP network. But some smaller banks have shown reluctance to join a faster payments system built by the nation's largest banks. Those smaller banks pushed the Fed to build a separate system.

In congressional testimony late last year, Powell expressed hope that the program could be launched before a 2024 target date.

“We don’t think it will take five years,” Powell said. “We’re thinking three or four. We want to do it right. It’s a complicated project, it’s very important, it’s a top priority for us. Getting it right the first time is key. So we want to have it up and running within three to four years.”