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FedNow Service poses challenges and opportunities for fintechs

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Consumers increasingly expect real-time payments, and fintech companies have expressed frustration about the difficulty of providing payments services in the U.S. that can meet this expectation. Although those fintech companies whose primary service is the provision of faster payments may face a future threat from the proposed FedNow Service, fintech companies may also benefit from the availability of a Fed-led real-time payments network.

The Federal Reserve Board has announced plans to develop a real-time payment service that should appeal to fintech companies and community banks. The Fed announced it will develop a new round-the-clock real-time payment and settlement service to support faster payments in the U.S.
This new real-time gross settlement (RTGS) service, which will be known as the FedNow Service, is anticipated to be available in 2023 or 2024. The Fed is currently soliciting comments on all aspects of the proposed service in order to finalize its design and features. The Fed’s intention to operate a RTGS service is a win for community banks and fintech companies, although it may threaten those fintechs with business models centered around providing real- time payments.

The Fed’s plans were not developed in a vacuum. The Clearing House (TCH), which is owned by 30 of the world’s largest commercial banks, previously rolled out a RTGS system known as the “RTP network” in November 2017, some six years before the Fed anticipates that its FedNow Service may first become available. The RTP network reportedly cost over $1 billion to develop and already reaches over 50% of U.S. demand deposit accounts. TCH’s Business Principles for the RTP Network provide that TCH runs the RTP network “as a utility for the benefit of the industry” and that it charges flat fees to all participants regardless of size or volume.

It is fair to say that community banks have been skeptical of the intentions of the large commercial banks behind TCH and the RTP network. The Independent Community Bankers of America, for example, strongly advocated for the Fed to operate a competing RTGS service. The ICBA argued there was a need for competition in real-time payments and expressed concern about “the risk of having only one, for-profit, private sector settlement service run by the nation’s largest and riskiest financial institutions.” Due in part to these concerns, the Fed’s previously announced consideration of whether it should create a competing system reportedly slowed adoption of the RTP network by community banks.

Fintech companies may also benefit from the availability of a Fed-led real-time payments network. Consumers increasingly expect real-time payments, and fintech companies have expressed frustration about the difficulty of providing payments services in the U.S. that can meet this expectation. Of course, those fintech companies whose primary service is the provision of faster payments may face a future threat from the FedNow Service.

This also may have an impact on certain cryptocurrencies and companies providing cryptocurrency services, to the extent those services compete with FedNow. While cryptocurrencies are not widely used for payments at present, providing fast and efficient payments historically has been one of the most often cited use cases for cryptocurrencies.

To the extent that the RTP network and/or the FedNow Service come to provide consumers with ubiquitous 24x7x365 payments and settlements in connection with functions like bill payment and peer-to-peer payments, the use case for certain cryptocurrencies in the U.S. may be reduced. Other use cases for cryptocurrencies in the U.S. should be unaffected by broad use of an RGTS service.

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