New, Now, Next in Payments

By Sarah Edwards, McGlinchey

What’s up and coming around the corner for the payments industry? Below we discuss three areas of innovation in payments that banks should be monitoring: the Real Time Payments Network, the FedNow Service, and the OCC Payments Charter.

Real Time Payments
The Real Time Payment (RTP) network – a private network owned and operated by The Clearing House – is currently the only instant payments infrastructure in the United States. Unlike traditional payments rails, such as the check network or the ACH network, the RTP network offers consumers and businesses the ability to send and receive payments instantly, 24/7/365.

“Instant” or “real time” settlement means that the transfer of final funds between the payor’s and payee’s financial institutions occurs with the transmission of the payment message and only seconds before the payee’s financial institutions makes the payment available to the payee. In an instant payment scenario, the payee’s financial institution does not incur credit risk because it receives funds from the payor immediately.

Payments on the RTP network clear and settle individually in real time with immediate finality in a real-time gross settlement or “open loop” system (there is no batch processing) for credit-only transactions. Network participants must be federally insured depository institutions, but any federally insured depository may participate. Participating institutions can integrate into the RTP network directly, or through third-party service providers, bankers’ banks, and corporate credit unions.

FedNow Service
FedNow is the Federal Reserve’s answer to consumer and small-business instant payments and the RTP network. Like the RTP network, FedNow will be an “open loop” system that enables payors to make payments to a broader group of payees. The FedNow Service aims to route and settle payments among the various participating financial institutions through a common network.

The FedNow Service is expected to pilot in 2021, with commercial availability in 2023 or 2024. The Federal Reserve expects the service to be open to all eligible depository institutions across the United States, no matter their size or geographic location.

For now, the Federal Reserve recommends that banks take the following steps to ensure they are able to utilize FedNow when it becomes available: (1) ensure the bank has the ability to use ISO 20022 messaging for interbank fund transactions; (2) determine how online and mobile banking and customer service support may need to change to support instant payments; and (3) stay abreast of developments in the instant payments landscape.

OCC Payments Charter
Banks should also keep an eye on the OCC’s proposed Payment Charter for national money transmitters, the blueprint for which the Acting Comptroller of the Currency previewed this year.

This special-purpose charter could eliminate multi-state licensure for nonbank money transmitters by preempting state-level regulation. Unlike the OCC’s proposed FinTech Charter, the

Payments Charter would not create any lending authority for chartered entities.

According to statements from Acting Comptroller Brooks, the Payments Charter would be rolled out in two phases. Phase One would allow for federal preemption in money transmission regulation and would essentially create a national money transmission license. However, newly chartered entities would not have access to the Federal Reserve’s payment system. Phase Two, which is proposed to begin 18 months after Phase One, would grant chartered entities access to the Federal Reserve payment system, allowing payments to clear directly through the Reserve rather than through ACH or third-party depository institutions.

The Payments Charter proposal, while still informal, has already been challenged by an Industry Letter requesting transparency in the chartering process and an opportunity for industry comment. This initial industry concern, along with the change in leadership at the OCC anticipated with a change in the administration in Washington, may doom the Payments Charter before it is formally proposed. Even if doomed, however, we do not anticipate national money transmitters to abandon their push for federal regulatory reform.

Sarah Edwards is an attorney in McGlinchey’s Consumer Financial Services Compliance group and is based in the firm’s New Orleans office. Her work focuses on helping financial services clients comply with federal and state regulations, particularly with respect to offering new or updated products in money transmission as well as in the brokering, lending, and servicing spaces.