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Opinion

Should credit unions embrace Fed's faster-payments platform?

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Last month, the Federal Reserve Board released a proposal to develop a new real time gross payment settlement service called FedNow. The service would be the first new payments rail built by the Fed in more than 30 years.

The announcement is the next step in the Fed’s Strategies for Improving the U.S. Payments System initiative, which began in 2013. That initiative produced two task forces – the Faster Payments Task Force and the Secure Payments Task Force – to help achieve its goal of a faster and safer payments system. Serving on both task forces, NAFCU provided the central bank with valuable industry recommendations.

While the central bank has done its work, the private sector has also been moving to innovate and create faster payment options. NAFCU has long supported efforts to improve the payments system and provide credit unions with more tools to serve their unique fields of membership. Currently, credit unions are able to settle real-time payments through The Clearing House’s RTP network.

The addition of FedNow would give credit unions another option when considering whether to offer real-time payment settlements, and could facilitate migration to a more diverse range of end-user platforms for real-time transactions.

Any depository institution eligible to hold an account at a Reserve Bank could connect to the service, including federally insured credit unions. FedNow would settle interbank obligations by making debit and credit entries in each financial institution’s master Reserve Bank account. It would also provide clearing functionality with ISO 2022 standard messages containing the information required to complete end-to-end payments.

At this stage, the FedNow proposal is only that – a proposal. When the Fed made the announcement, it also published a request for comment regarding service details like pricing, fraud prevention and how to implement a directory service. NAFCU is currently collecting comments from member credit unions until Oct. 18.

A credit union’s decision to participate in any real-time payments system should be determined by member demand and financial strategy, balanced against the operational burden of tighter liquidity management. Each credit union must decide based on the needs of its membership, both now and into the future. It is important to keep in mind that the demand for faster payments is increasingly consumer driven, and with time, this feature could become a competitive advantage for credit unions.

To assist credit unions as they consider this service and prepare their comments, NAFCU has identified some ways FedNow could impact credit unions.

Integration

If your credit union currently uses RTP or has plans to do so, it is important to note that FedNow’s interoperability with existing, private sector systems is not guaranteed – although it is a desired goal. NAFCU believes this is a crucial issue and will work to ensure that this innovation remains a collaborative effort between public and private industry stakeholders.

Security

Because FedNow supports credit transfers, which require the sender to initiate and authorize each individual payment, the Fed believes the service’s structure would decrease fraud risk. However, any real-time, irrevocable payment systems presents an increased risk of loss because all settlement entries are final – they cannot be canceled or revoked once processed by the service. Credit unions should consider what kinds of tools or support they would need to minimize that risk.

Pricing

The Fed is expected to announce FedNow’s fee structure and a fee schedule sometime before the service is launched, but has indicated it would include a combination of per-item fees, charged to sending institutions and potentially receiving institutions, as well as fixed participation fees. The Clearing House’s RTP network charges a single price for all participants and under RTP rules, participating financial institutions only pay for transactions they originate. Credit unions should compare these two structures and share which pricing structure would best facilitate service adoption. Although details are limited at this stage, NAFCU would like to provide a clear message on pricing at the earliest possible stage of FedNow’s development.

Liquidity management

FedNow would establish a “business day” by setting opening and closing times that would determine end-of-day balances for master account reconciliation purposes. However, opening and closing times would not affect the service’s 24x7x365 payment processing. This could make account balance management more complicated, so the Fed is considering providing intraday credit and extending discount window operations to help better manage liquidity.

In addition to the FedNow Service, the Fed intends to consider expansion of the operating hours for the Fedwire Funds Service and the National Settlement Service (NSS), up to 24x7x365, to support a wide range of payment activities including liquidity management in private-sector services for faster payments. This enhancement would be part of a separate rule making process, but comments that generally address credit unions’ ability to manage liquidity in a real time environment are welcome now.

NAFCU welcomes feedback regarding additional FedNow features or concerns about potential issues that might arise. We will continue to keep credit unions updated on this initiative and others that involve ways technology can improve service to members, but also potentially increase risk.

As the watchdog of the credit union community, we remain vigilant in our mission to strengthen and grow credit unions by providing strong and steadfast advocacy, valuable education and compliance guidance.

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