Don't let FedNow wither on the vine

Last week Sen. John Fetterman, D-Pa., published a letter he sent to the Federal Reserve regarding FedNow, the central bank's faster payments network. In that Sept. 26 letter to Fed Vice Chair for Supervision Michael Barr, Fetterman said he was "disappointed by the lack of detail" in the Fed's responses to questions about FedNow he submitted for the record in a hearing earlier this year, adding that "FedNow has been available for over a year, and the public deserves transparency about its performance and operations."

The questions Fetterman was asking were pretty straightforward. How many transactions and of what dollar volume have been executed on the FedNow network since its inception? How many banks and credit unions are now members of the FedNow system, and how many of those that have adopted have done so to receive but not transmit payments? What exactly were the Fed's expectations for depository institutions' adoption of the network, and how has the reality differed from those expectations? How much are banks charging their customers for the service, and what is the Fed doing to keep those costs competitive for consumers?

The Fed's response to those questions was cagey and noncommittal. The number of transactions and dollar amounts have been "modest" since the network's introduction, the Fed said, but "in line with what we expected for a new service," especially one that involves banks "adjusting to round-the-clock operations." The Fed said it "intends" to publish volume and dollar value transaction data "in the future," but the central bank's expectation is that adoption will follow "the typical trajectory of a new payment service and grow steadily over time."

As for the bank markup of FedNow services, the Fed was more straightforward in its response: "The payment products that banks and credit unions offer their customers and potential associated fees are within the domain of the private sector.  While we do not systematically track this information, our understanding from years of industry engagement is that the market for financial institution payment services is competitive, and institutions often provide consumer-facing payment services at low or no cost."

In other words, the Fed does not have data on how or even whether banks are offering faster payments to customers through FedNow, but as a general matter payments are competitive and cheap forconsumers.

Fetterman took exception to that, asking in his rebuttal what information the Fed does track regarding banks' faster payment offerings and "why has the Fed chosen not to systematically track this markup information and will it reconsider doing so."

Members of Congress send letters to regulators all the time, and with a greater or lesser degree of sincerity, which is their prerogative — they are politicians, after all. But the fact that Fetterman submitted these questions for the record rather than airing them out in public suggests that he was asking not to put the Fed in an uncomfortable position but because the adoption of faster payments is important. But based on the answers he received, it isn't clear that the Fed feels the same way. 

The 2-3 day payment settlement period that our economy is used to brings with it certain costs and benefits. The benefit for the bank — and the cost to the consumer — is that they can process debit transactions before they process deposit transactions and thus trigger overdraft or non-sufficient funds fees from customers, creating a significant revenue stream, particularly for smaller banks. The benefit of the current system for all concerned is that batch ACH settlement is exceptionally cheap.

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Adopting faster payments as a day-to-day experience also brings with it costs and benefits. For one, faster and irrevocable payments require new systems that cost money to establish — costs incurred by the bank and recouped through higher fees to the consumer. There is also a legitimate concern about fraud or scams being perpetrated on the network, though old fashioned check fraud is on the rise and might be reduced if a more convenient digital payments alternative were widely available.

I suspect that the reason the Fed is not answering Fetterman's questions in the fullest possible detail is because the data would show that many, if not most, of the banks and credit unions that have adopted FedNow have done so as receive-only. That means they have technically adopted the system — as the Fed is happy to tell us 900 institutions have done as of September — but don't have imminent plans to make the network a workhorse of their settlement systems. I further suspect that if we knew the dollar volume and transaction numbers, we the public could rightly conclude that the instant payments future has not arrived — and may not be arriving.

In other words, the Fed is not publishing these details because they don't want the public to conclude that FedNow has failed on its promise of delivering faster payments to the masses — especially since it's too soon to declare the system's success or failure one way or the other. But if it is important to the Fed that FedNow be a success, then it should be taking steps to make sure the banking industry it regulates isn't standing in the way of that success. 

How banks price FedNow services is critical to that endeavor — the Fed clearly controls how much it charges banks for the service, but apparently is not concerned that banks may be offering that service at a cost-prohibitive markup. If it costs little for employers to run payroll or merchants to issue point-of-sale transactions on the network, then more people would choose faster payments. The fact that they're not — or at least not widely — suggests that someone has their thumb on the scale. In a competitive payments marketplace, the Fed should want to know why a superior technology is lagging behind an inferior one, especially if it is offering that service at a competitive price.

While the Fed can't and wouldn't tell everyone to use FedNow, they can tell banks to settle payments faster through the means of their choosing. That would counteract what seems to be a lack of incentive to adopt faster payments in earnest and compel banks that rely on the old system to figure out how to adapt to a new one. The Fed may not feel empowered to make such a move on its own, and given the level of disinformation out there about FedNow, that caution is well-founded. But if that's the case, the central bank should be publishing the data it has about FedNow adoption — or lack thereof — and seeking out the help of lawmakers like Fetterman.

The political case for faster payments isn't hard to understand. Other countries have had this infrastructure for years, and a faster payments economy would keep more Americans' dollars in their pockets and force banks that remain reliant on overdraft fees as a source of income to find a better way to run their railroad. The Fed — which built this network after a great deal of deliberation — should be more than a passive observer in ensuring its success.