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The Fed enters the instant-payment fray

Justin Ho Aug 6, 2019
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The Federal Reserve building in Washington, D.C., in 2008.
Chip Somodevilla/Getty Images

This week, the Federal Reserve announced it’s building a real-time payment system that would let users instantly move money between bank accounts. The Federal Reserve said it plans on making the service available in 2023 at the earliest.

Federal Reserve Gov. Lael Brainard said instant payment systems help people access their money immediately and avoid overdraft fees. They also help small businesses pay their suppliers faster.

But the Fed isn’t first at bat here. The Clearing House, which is owned by several big banks, launched an instant payment service in 2017. 

Still, the Fed does have a few advantages.

“They don’t necessarily have to make the business pitch to outside investors,” said Seth Carpenter, chief U.S. economist at UBS. “They can just decide to do it and fund it themselves.”

The Fed’s been processing and clearing payments for decades. And because the Fed is independent, Mayra Rodriguez Valladares at MRV Associates said the Fed can take its time rolling the system out.

“That allows them to spend a lot more time really trying to work out the kinks,” Valladares said.

Peter Davey, vice president of product innovation at The Clearing House, said the Fed’s entrance into real-time payments might cause some financial institutions to delay their adoption of real time payment systems until they see what the Fed has to offer.

“What this is really being driven by are the small- and medium-sized banks who just don’t want to play ball with the larger banks,” said Ron Shevlin at Cornerstone Advisors. 

Still, he said those banks won’t be able to offer instant payment services to customers for a while, given that the Fed’s new system won’t be available until 2023.

In a statement, Brainard said the country’s payment system stands to benefit from the added competition.

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