The Fed Proposes an Always-On Settlement System for Faster Payments

The Federal Reserve on Wednesday unveiled a proposal to facilitate real-time settlement of faster payments. The Fed said it is not committed to any specific action on its plan, but banks and private-sector payment processors are watching for any infringement on their turf.

“Over the past year, we have undertaken an assessment of what the Federal Reserve could do to modernize its infrastructure to support interbank settlement of faster payments,” Lael Brainard, a member of the Federal Reserve’s board of governors, said in announcing the plan at the FedPayments Improvement Community Forum in Chicago, a new conference sponsored by the Federal Reserve Bank of Chicago. “That assessment found that 24-7 payment-by-payment interbank settlement in real time, what we refer to as real-time gross settlement, offers clear benefits in minimizing risk and maximizing efficiency.”

Brainard added that “a 24-7 economy with 24-7 real-time payments needs 24-7 real-time settlement, and RTGS is the way to achieve this. That is where we believe that the Federal Reserve and the private sector together need to make investments for the future.”

The Fed’s announcement comes in the wake of its Payment System Improvement project that brought banks, payment processors, tech companies, and others together over the past few years to find new ways of making payments faster and more secure. Other nations have RTGS systems, primarily as wholesale services for banks, but some have been evolving as countries implement faster-payments systems.

The new proposal has two major facets. One outlines the RTGS plan for settlement of payments every day at all times. The other involves a so-called liquidity tool the Fed says could increase banks’ participation in a real-time system by limiting exposure that can arise outside of business hours. The general idea behind both is to reduce the risk from providing funds to payment recipients before settlement has actually occurred.

Details of the plan are contained in a 47-page notice published in the Federal Register, the official record of the federal government. The Fed is taking comments until Dec. 14.

The RTGS plan accommodates the non-bank tech companies that have become so important in the Internet age by enabling them to become agents of participant banks and submit payments into the system.

“This common infrastructure would support connections across banks, and faster-payment service providers acting as their agents, with the potential to weave together the current patchwork of systems,” Brainard said. “As a result, we would also expect the overall safety of faster payments to increase. The capability to finalize interbank settlement before funds are made available to the recipient would avoid an undesirable buildup of risk in the system.”

Steve Ledford, senior vice president of product strategy at The Clearing House, a bank-owned New York City-based service provider and processor, tells Digital Transactions News that the Fed’s liquidity proposal “is a fantastic idea.” The plan would help banks cover obligations when unanticipated payments lower their funds availability, he notes.

The RTGS idea, however, would compete with his company’s new Real Time Payments service, Ledford says. Still, he deferred immediate comment until he reads the detailed proposal. “We need to take a closer look,” he says.

The Fed already offers some services available through the private sector. For example, both the Fed and TCH operate automated clearing house switches.

Exactly what the central bank will do after Dec. 14 has not been determined, according to Susan Foley, senior associate director at the board.

“We will come out with a determination, and we will get back to you on that determination,” Foley told the 300-plus conference attendees. “That determination could be everything from we do nothing to we offer two different services, and here’s the service proposals … it is a wide spectrum of what could happen here.”