What’s the definition of immediate, the Board of the Federal Reserve has asked in connection with FedNow, the new real-time payments network set to launch in 2023.
Only a few domestic banks and payments organizations responded to the request for comment, so the Fed has extended its deadline until Sept. 9. The U.S. Faster Payments
Council asked for another 60 days for comments.
Katie Lawrence, payment operations compliance manager at SAFE Credit Union in the Folsom, Calif. wants the Fed to specify what it means by immediate payment.
“If we are talking about an instant payment system, they have to define what instant means. It has to be defined for people to trust it, for people to understand that when I send a payment I should know in x amount of time whether it is going through or not. They didn’t have that. They just said immediately, but “Payments will post immediately” can mean anything to anybody.
“SAFE Credit Union believes that funds must be made available within five seconds of receipt by the creditor agent,” she wrote in her comments to the Board.
Given that card transactions decisions are made within 10 milliseconds means that consumers would regard anything longer that five seconds as not immediate, which would reduce the appeal of FedNow.
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Bruce Summers who was a senior supervisor of payments at the Federal Reserve and retired as director of Federal Reserve Information Technology, recommended leaving the definition on immediately to the dictionary rather than specify timing.
“Relying on the dictionary definition sufficiently conveys the intention that receiving banks, once they complete the business process step of accepting a transfer, not introduce delays that would interfere with getting funds ‘directly’ to the beneficiary.
“The Board’s commentary is clear about the general intent that the time unit of measure is seconds, not minutes, hours, or even overnight as in the case of a Fedwire, and it establishes this expectation as a term of service for FedNow participants.”
For example, a bank could accept a fund transfer in one second but not notify the account holder, such as a message to her mobile, right away. A second bank might take two seconds to accept a transfer but notify its customer immediately, providing better service. Summers suggested that bank examiners look at the bank’s payment practices in their periodic reviews.
Some staff commentary appears to undercut the Board’s position, he added.
The Fed needs to update its regulations to reflect the real-time nature of FedNow, said Summers.
“The legal regime as proposed is backward-looking, building on timing conventions and less-than-certain transfer and availability of funds that can characterize third-party Fedwire payments. The proposal is an alphabet soup of older regulations that is difficult to apply in the IFT world,” he wrote.
“If done well, ‘immediate funds transfer’ through USD banks would satisfy a lot of the public’s needs for a digital aka crypto currency.”
Wespay, the oldest and one of the largest payments associations in the United States, said its members want more time for a receiving bank to determine whether to accept a payment orders when fraud is a consideration.
BNY Mellon said FedNow and RTP need to follow a common rules set. The Fed proposed both UCC Article 4A and the Electronic Funds Transfer Act (EFTA) apply to consumer transfers, while the RTP says the EFTA is the sole law to follow.
“The requirement to simultaneously manage the application of two sets of regulations to the same transaction types will impose additional operational compliance and legal burdens,” wrote Paul Camp, chief executive officer, treasury services at the bank.
Disputes can be expensive, said Summers.
“My practical experience is that conflicts surrounding acceptance of large-value funds transfers can be contentious, litigious, and expensive to resolve.” He suggests the Board review its legal foundation to make sure it aligns with the operations of FedNow. “Everything about the FedNow design and operational structure is new…My understanding is that the FedNow operational platform is being built from the ground up, and I surmise that controls and security features will also reflect new thinking. I recommend that the Board consider whether its proposed legal foundation provides the best possible support for the FedNow service.”
The FedNow Service will be open to all eligible depository institutions across the country, no matter their size or geographic location, the Fed said in an announcement.
Summers said FedNow offers far greater versatility than most existing methods of payments because it can be used for P2P, P2B, B2P, B2B.
“The versatility is unlike that which is offered by other means of payment, including Fedwire and ACH, or credit and debit cards. In this sense, FedNow is most like the paper check, which can be used for virtually any type of transaction across all combinations of payors and payees.”
He predicts disruption to traditional payment companies especially credit cards.
“Retail merchants can re-fashion POS checkout based on an immediate payment alternative to credit and debit cards. The incentive for doing so is avoidance of monopoly-style interchange fees, with savings shared between merchants and their POS customers.”