The Federal Reserve may consider reducing fees for its FedNow real-time payments system in the future after the service attracts more financial institution participation, or as it faces competition, according to a Wolfe Research report last month.
Wolfe Research analyst Darrin Peller interviewed Dan Baum, FedNow’s head of payments product, on a webcast last month for the research firm’s clients and issued a report on it July 21.
“Regarding future pricing, Dan noted that the Fed is offering initial discounting to get [financial institutions] on the platform and contributing volume, but that it could lower fees over time as more banks join the platform or due to competition,” Peller wrote in the report provided to Payments Dive.
Baum is a senior vice president at the Federal Reserve Bank of Atlanta while Peller specializes in coverage of payments firms and fintechs, among other companies.
The Fed launched FedNow last year and has collected about 900 financial institutions as users on the system, the central bank said last month. While there are about 10,000 banks and credit unions in the U.S., the Fed aims to attract about 8,000 of them, Baum told Payments Dive earlier this year.
FedNow competes with the private sector real-time system known as RTP, which is operated by The Clearing House and owned by an international group of banks. It also competes against other high-speed payments services such as Visa Direct, run by the card network giant.
In spooling up the FedNow system, the Fed attempted to essentially match RTP’s pricing in an effort, at least initially, to be less disruptive to the market. A central aim of the FedNow system has been to give smaller community banks and credit unions an alternative to the RTP system. Those smaller financial institutions have been reluctant to join a system operated by their larger peers.
While Fed officials haven’t released statistics regarding FedNow’s payments volume so far, some companies have attested to its rising flow. Still, it hasn’t lured all the major U.S. banks, and wasn’t necessarily expected to have significant volume at the beginning.
“The Fed is approaching the roll-out with two adoption curves, first building out the network of banks on the platform and then focus on growing payment volume,” the Wolfe report said.
Peller noted in an interview with Payments Dive last week that FedNow is mainly interested in offering speedy payment services in ways they may not be available elsewhere, and isn’t seeking to earn a profit.
“The Federal Reserve's mandate is, effectively, to drive adoption and to have a system that is as ubiquitous as possible across the landscape,” Peller said in the interview. Pricing is meant to cover costs, he said.
“In some regard, the Federal Reserve thinks of itself as filling the gaps wherever other systems aren't reaching,” Peller said. The Fed’s “point of view is there should be a very easy, low-friction, ubiquitous, cheap system for [real-time payments] everywhere,” Peller said.
While FedNow is only available to U.S. financial institutions, Fed officials have said they envision potentially extending the system for cross-border uses. The system was built using the ISO 20022 standard in order to facilitate interoperability.
FedNow officials’ interaction with international officials on this point was one aspect of the interview with Baum that stood out for the analyst. That could be good for companies like Block that may want to tap cheap cross-border capabilities for their digital wallet offerings, but it may be bad for money transfer companies, such as Western Union or Remitly, that could face lower-cost competition, Peller said. The analyst noted Baum talked about how the Fed is discussing cross-border possibilities.
“That was fascinating to me, to hear him say that they are constantly in dialogue with other global, other schemes, in other national market [real-time payment] systems, so that eventually they're going to connect,” Peller said.
The Wolfe research report regarding the webcast with Baum, and webcast, aren’t publicly available.
