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The Federal Reserve announced that it plans to create a 24/7 real-time payment (RTP) and settlement service called FedNow earlier this month. The service, which is targeting a launch date in 2023 or 2024, is set to revamp the Fed’s current system that can take multiple days to process transactions and does not operate on weekends.
It will compete with The Clearing House (TCH) — a company that’s owned by 25 major banks and has its own RTP network — but thus far the FedNow announcement is boosting TCH’s profile. TCH SVP of Product and Strategy Steve Ledford said that the announcement has "created a great deal of interest in [TCH’s] network, and our actual number of inquiries that we’ve been getting has tripled" at a conference, per Digital Transactions.
Here’s what it means: Burgeoning interest in TCH’s RTP network suggests that concerns that FedNow’s announcement would slow adoption of RTP were unnecessary.
Some thought that financial institutions (FIs) might choose to wait for FedNow to launch rather than work with TCH and utilize RTP sooner. For example, soon after FedNow’s announcement Ledford said, "There may be financial institutions that wait for the Fed, which slows down overall access to the network," per The Wall Street Journal.
The surge in TCH’s inquiries may mean that FedNow’s announcement is having the opposite effect, as it might have raised awareness of RTP and its benefits, making FIs interested in working with TCH and boosting RTP’s adoption.
The bigger picture: Working with as many FIs as possible now is key to TCH succeeding once FedNow is launched, as the Fed’s system may have some advantages over it.
- The Fed only needs to break even on its system and it isn’t owned by major banks, which may make FedNow more attractive to FIs. The Fed, by law, will not aim to make a profit but instead must only break even with FedNow, which could enable it to offer lower fees for FIs than TCH. And smaller FIs may prefer not to work with TCH considering it’s owned by major banks that they might compete with, potentially setting FedNow up for success once it launches.
- But many FIs are aiming to have RTP use cases in place in the next two years — before FedNow will launch — giving TCH a huge head start. Of the finance professionals polled at the 2019 NACHA Payments Conference, 47% said it will take their organization two years or less to identify a use case for RTP and implement it, according to data from TD Bank sent to Business Insider Intelligence. With 30% saying they already have it in place and only 9% reporting it would take three years or more — 14% were unsure how long it would take — TCH has a clear window to work with FIs before FedNow launches. And TCH could potentially build loyalty over the next few years so it doesn’t lose FIs to FedNow once it’s introduced.
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