Open letter to the Fed

Faster, Better, More:
An open letter to the Federal Reserve

Dear Board of Governors of the Federal Reserve System,

Congratulations on your recent launch of the FedNow System for instant payments! Government support has been an important component to the success of faster payments across the world, including India’s United Payments Interface (UPI), Brazil’s PIX, and the UK’s Faster Payment System. But merely lending your support is insufficient. 

Faster payments have succeeded in these markets because they support new payment types (e.g. push payments), risk-free transactions via strong customer authentication, ubiquitous bank coverage, and minimal transaction processing costs. For Faster Payments to be successful, FedNow has more work to do. 

Faster payments in most other markets are built on “push-style payments” and requirements around “Strong Customer Authentication.” This means users must authenticate with their bank, and take action to direct where they want their money to go. These two foundational elements of faster payments virtually eliminate transaction failure and fraud, further reducing the cost of payments for all parties. FedNow has the opportunity to deliver on this promise with the “Request for Payment,” however realizing this promise will require all participating banks not only to support this message type but also support RTP send (as opposed to just receive).      

FedNow still has work ahead to reach ubiquitous coverage. Visa and Mastercard have done an incredible job at driving coverage and partnering with fintechs (ranging from PayPal to Uber) to solve for real-time disbursements — directly to users’ bank accounts. 

Unfortunately, as many banks have tried to recoup the cost of upgrading core systems to support real-time payments, many fintechs see fees greater than push to card (which offers greater user coverage). Relative to TCH’s RTP Network and push to card, the FedNow System doesn’t improve coverage nor economics, neither does it create new use cases nor meaningfully increase transaction speed (relative to “push to card”). What it does do (if anything) is create confusion about which faster payment network to use.

The Federal Reserve has singular influence across the U.S. financial systems. We implore you, Board of Governors, to wield it. There are many dimensions and paths this should and could take, but here’s where we’d suggest starting:

• Mandate adoption across federally chartered institutions  (including a process for Request for Payment)

• Create a Payment Initiation role à la the European Union to build consumer trust

• Set network pricing close to zero

• Create a revenue-share model akin to interchange to not just force but incentivize FI participation

Faster payments can have a truly transformative impact on an economy, even one as advanced as the United States. Your leadership in this process will be essential — let’s get to work!

Your hopeful collaborators,
Eric Morse (Cofounder, Push Cash)
Zach Noorani (Partner, Foundation Capital)