Federal Reserve System
PROBLEM
Payment delays and ability to reverse ACH payments. Counterparty risk. Amplified identity and credit risk from faster payments. Float reduction. Fragmented rail use.
FEDNOW PROBLEM
Counterparty risk from liquidity mismatches between payment legs. Cybersecurity. Irrevocable payments. $500,000 max limit. Overdrafts. No way to link an individuals' accounts with routing information. Lack of ubiquity. Equitable access. Concentrated use, attention restricted to institutions with send capability. Need bank account to send or recieve FedNow payments.
FEDWIRE PROBLEM
$9,999,999,999.99 payment limit. 94 cents for the first 14,000 payments a month. Up to $40 for the sender and $15 for the receiver for domestic wire transfers.
RTP PROBLEM
Complexity via liquidity provision to account at FRBNY. More counterparties due to joint account held at FRBNY. banks are charged $2.00 per drawdown from this account. 4.5 cents per transfer.
This is like a hash time lock contract.
ACH PROBLEM
Batch processing. Only settles four times a day. Takes one to three days. Fee for same-day ACH. Payment transactions typically costs between $0.26 and $0.50
From the point of view of faster payments, an important limitation of ACH is its revocability. Both insufficient funds and fraud contribute to the failure of payments to complete, and the time gap between payment and settlement is a factor in ACH returns. While Same Day ACH reduces the problem somewhat, it by no means eliminates it: Suppose, for example, access to a bank account has been attained fraudulently. A customer-initiated return of the payment can take sixty days to process; meanwhile the vendor has shipped the goods to the fraudster [Sullivan, 2023].
FEDACH PROBLEM
1/3 cent to originator and receiver, with a 1/10 cent surcharge for same day service, and with a minimum monthly fee of $50 for originations and $40 for receipts.
FEDNOW FEES
Participating institutions are charged 4.5 cents per transfer (free in 2024 for the first 2500 transfers per month) and 4.5 cents per return of transfer. Transfers for liquidity management are charged $1. Participation fees are $25 per month (and nonexistent for 2024). Each request for payment is charged 1 cent.
USER FLOW
Alice sends a request to Bank A “Pay Bank B $5 for the benefit of Bob”
Bank A verifies Alice’s identity and adequacy of Alice’s funds
Bank A notifies Bank B of the payment
Bank B verifies Bob has an account
Bank B sends confirmation to Bank A
Both banks send confirmation to their respective customers.
FEDNOW FLOW
A payer authorizes his bank to send a payment of a specified amount from his account. The payer provides the recipient’s bank and identifying information.
The payer’s bank confirms the payer has funds available.
The payer’s bank sends a notification via FedNow to the recipient’s bank. At this point the payer can no longer change the transaction.
The receiving bank receives the payment message, reviews transaction details and validates the recipient’s account.
The receiving bank sends an “accept response” to FedNow. The Federal Reserve moves funds from the paying bank’s master account to the receiving bank’s master account and notifies the paying bank. The receiving bank deposits funds into the receiver’s account.
Payer and receiver are notified by their banks that the funds have been sent.
STATE OF THE ART
Synthetic instant ACH via Plaid
An instant verification product or an instant micropayment service to authenticate the payer’s account.
A risk reduction product to score payment risks based on a large number of factors, giving the business the option to assume the risk of the payment in low-risk cases, or to engage in deeper examinations including verification of availability of funds in the buyer’s account.
A transfer product to facilitate the actual transmission of funds.
RESOURCES
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