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On May 28, the Federal Reserve Board issued a notice and request for comments on proposed changes to its Policy on Payments System Risk (PSR Policy) to expand access to collateralized intraday credit from Federal Reserve Banks (Reserve Banks) and clarify eligibility standards for accessing uncollateralized intraday credit from the Reserve Banks. Specifically, the Fed is proposing changes to part II of its PSR Policy, which was previously revised and implemented in 2011 to “improve intraday liquidity management and payment flows for the banking system while helping to mitigate the credit exposures of the Reserve Banks from daylight overdrafts.” The proposed changes would also align the Fed’s payments system risk and overnight overdraft policies with the deployment of the FedNow Service (covered by InfoBytes here) and the Fed’s 24x7x365 payment environment. Relatedly, the Fed noted it is also proposing to incorporate its policy on overnight overdrafts into the PSR Policy. Comments on the proposed changes are due 60 days after publication in the Federal Register.
On May 5, the Federal Reserve Board issued a notice and request for comments on proposed guidelines for evaluating account and service requests that would allow companies with “novel types of banking charters” to access the Fed’s payments system. Among other things, the notice outlines six proposed principals for Reserve Banks to consider when an institution requests access. These include:
- Whether the institution is eligible under federal statute to maintain an account at a Federal Reserve Bank and has a “well-founded, clear, transparent, and enforceable legal basis for its operations.”
- Whether the provision of an account and services to an institution would “present or create undue credit, operational, settlement, cyber or other risks to the Reserve Bank.”
- Whether the provision of an account and services to an institution would “present or create undue credit, operational, settlement, cyber or other risks to the overall payment system.”
- Whether the provision of an account and services to an institution would “create undue risk to the stability of the U.S. financial system.”
- Whether the provision of an account and services to an institution would “create undue risk to the overall economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, or other illicit activity.”
- Whether the provision of an account and services to an institution would “adversely affect the Federal Reserve’s ability to implement monetary policy.”
“With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions are evaluated in a consistent and transparent manner that promotes a safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system,” Fed Governor Lael Brainard said in the announcement.
If the Fed decides to grant an access request, “it may impose (at the time of account opening, granting access to service, or any time thereafter) obligations relating to, or conditions or limitations on, use of the account or services as necessary to limit operational, credit, legal, or other risks posed to the Reserve Banks, the payment system, financial stability or the implementation of monetary policy or to address other considerations,” the notice stated, adding that the “account-holding Reserve Bank may, at its discretion, decide to place additional risk management controls on the account and services, such as real-time monitoring of account balances, as it may deem necessary to mitigate risks.”
Comments on the proposal are due 60 days following publication in the Federal Register.
On January 4, the OCC published an interpretive letter addressing the legal permissibility of certain payment-related activities involving the use of new technologies, including using independent node verification networks (INVN) and related stablecoins to conduct payment activities and other bank-permissible functions. Specifically, the letter clarifies that a national bank or federal savings association “may validate, store, and record payments transactions by serving as a node on an INVN,” and may also “use INVNs and related stablecoins to carry out other permissible payment activities” provided the bank or federal savings association complies with applicable laws and safe, sound, and fair banking practices. Due to the decentralized nature of INVNs—which not only “allows a comparatively large number of nodes to verify transactions in a trusted manner” but also “limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information”—the OCC believes that INVNs may enhance payment activities’ efficiency, effectiveness, and stability within the federal banking system. The letter also outlines potential risks associated with INVN-related activities, such as operational and compliance risks and fraud related to the possibility of money laundering and terrorist financing, and warns banks and federal savings associations to expand their programs to ensure compliance with Bank Secrecy Act reporting and recordkeeping requirements and to address cryptocurrency transaction risks.
On August 6, the Federal Reserve Board (Board) announced details of its new payment clearing system, the FedNow Service, which the Board plans to implement through a phased approach with a target launch date sometime in 2023 or 2024. As previously covered by InfoBytes, in August 2019, the Board issued a request for information on a “round-the-clock real-time payment and settlement service,” seeking feedback on how the service might be designed in order to support payment system stakeholders and the general functioning of the U.S. payment system. The Board notes that the newly released details are based on the input received from stakeholders. The Federal Register notice discusses the phased released approach, noting that the “approach will ensure the core features and functionality are delivered as quickly as possible,” even if “certain desirable features” are not available in the initial release. Highlights of the core features of the “24x7x365” FedNow Service include, among other things, (i) a payment flow where the receiver’s bank has an opportunity to confirm that it holds a valid account for the receiver and intends to accept the payment message, before interbank settlement occurs; (ii) the use of the “widely accepted ISO 20022 standard and adopt other industry best practices” for payment message format; (iii) a transaction limit that will be “consistent with market practices and needs at the time” of the launch of service; and (iv) a liquidity-management tool that will allow participants to transfer funds to each other to support the liquidity needs of instant payments. After the initial launch, the Board intends to offer additional features related to fraud prevention, error resolution and case management.
On July 21, the Federal Reserve Board announced that due to the uncertainties created by the Covid-19 pandemic, it will retain the current schedule of prices for most of its payment services to depository institutions in 2021. The Board notes that the pricing information is normally conveyed later in the year and that the Federal Register notice containing the final fee schedules will be released later in 2020. However, in order to “support the business planning of users and providers of payment services,” it wanted to provide early notice of “its intent to keep most 2021 prices flat.”
On June 18, the Federal Reserve Board (Fed) released a set of tools and materials to provide a consistent way for organizations to classify and better understand fraudulent activity occurring across the payments industry. The FraudClassifier model was developed by the Fraud Definitions Work Group (comprised of Fed and payment industry fraud experts), and will allow organizations to classify fraud independently of payment type, payment channel, or other payment characteristics by presenting a series of questions, beginning with who initiated the payment to differentiate payments initiated by authorized or unauthorized parties. This will “help ensure greater internal consistency in fraud classification across an organization. . .and allow for improved information and fraud tracking.” Each of the classifications is supported by definitions that allow the FraudClassifier model to be consistently applied across the industry.
On February 5, Federal Reserve Governor Lael Brainard spoke at the “Symposium on the Future of Payments” to discuss benefits and risks associated with the digitalization of payments and currency. Noting that some of the new players in this space are outside financial regulatory guardrails and offer new currencies that “could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission,” Brainard stressed the importance of assessing new approaches and redrawing existing parameters. Emphasizing, however, that no federal agency has broad authority over the payments systems, Brainard stated that Congress should review how retail payments are regulated in the U.S., given the growth in ways that money is able to move around without the need for a financial intermediary. Banking agencies may oversee nonbank payments “to the extent there is a bank nexus” or bank affiliation, Brainard noted, however, she cautioned that “this oversight will be quite limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when technology firms develop payments services connected to digital wallets rather than bank accounts and rely on digital currencies rather than sovereign currencies as the means of exchange.” According to Brainard, “a review of the nation’s oversight framework for retail payment systems could be helpful to identify important gaps.”
Among other topics, Brainard stated that the Fed is currently reviewing nearly 200 comment letters concerning the proposed FedNow Service announced last summer, which would “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide.” (Covered by InfoBytes here.) Brainard also discussed the possibility of creating a central bank digital currency (CBDC). While noting that the “prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems,” Brainard stressed the importance of taking into account private sector innovations and considering whether adding a new form of central bank liability would improve the payment system and reduce operational vulnerabilities from a safety and resilience perspective. She noted that the Fed is “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.”
On August 5, the Federal Reserve Board (Board) announced that Federal Reserve Banks will develop a “round-the-clock real-time payment and settlement service” called the “FedNow℠ Service.” According to a notice and request for comment, “the service would support depository institutions’ provision of end-to-end faster payment services and would provide infrastructure to promote, ubiquitous, safe, and efficient faster payments in the United States.” The Board is requesting comments on how the service might be designed in order to support payment system stakeholders and the general functioning of the U.S. payment system. FedNow is anticipated to be available in 2023 or 2024. Comments on the notice will be due 90 days after publication in the Federal Register. The Board also released FAQs associated with faster payments.
In a speech announcing the service, Governor Brainard noted that FedNow will be accessible to all banks and “will permit banks of every size in every community across the country to provide real-time payments to their customers.” Brainard noted that the Board is “uniquely placed to deliver this outcome” given its “long-standing service connections with more than 10,000 banks across the country.”
As previously covered by InfoBytes, the Board issued a request for comments in October 2018 regarding potential actions the Board could take to facilitate real-time interbank settlement of faster payments. The Board reports that it received over 350 comments and over 90 percent supported the Board operating its own, round-the-clock payment service alongside services provided by the private sector.
On April 1, the Federal Reserve Board published a revised policy statement on payment system risk (PSR policy) in connection with procedures used to determine the “net debit cap and maximum daylight overdraft capacity” of U.S. branches and agencies of foreign banking organizations (FBO). Among other things, the amended PSR policy (i) removes references to the Strength of Support Assessment ranking, citing the ranking is an “inefficient use” of supervisory resources; (ii) removes references to a FBO’s financial holding company status, since that status has limited ability to measure the health of a FBO; and (iii) adopts alternative methods for determining a FBO’s “eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain maximum daylight overdraft capacity.” The Board adopted the changes substantially as proposed, following a notice and request for comment period at the end of 2017. The revisions are effective April 1, 2020.
On March 21, the Federal Reserve Board announced the release of its biennial report on debit card transactions in 2017. The report is the fifth in a series published every two years pursuant to Section 920 of the Electronic Fund Transfer Act (EFTA). As in prior years, the 2017 report reflected that issuers’ costs of authorizing, clearing, and settling debit card transactions (excluding issuer fraud losses) varied significantly across respondents. Among other things, data compiled in the report estimates that (i) in 2017, payment card networks processed 68.5 billion debit and prepaid card transactions valued at $2.62 trillion in the U.S.; (ii) debit and prepaid card fraud losses to all parties increased to 11.2 basis points in 2017 from 10.3 basis points in 2015; and (iii) the median covered issuer had average fraud prevention and data security costs of 1.5 cents per transaction, down from 1.7 in 2015.