Letters to Regulators: Letter to FRB in Support of FedNow and Urging Consumer Protections

View or download a PDF of the letter here.

September 9, 2021  

Ann E. Misback, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Ave. NW
Washington, DC 20551 

Re: Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers  Through Fedwire, Docket No. R-1750; RIN 7100-AG16 

Dear Ms. Misback,  

The undersigned consumer, civil rights, community and other advocacy organizations write to  express our support for the Federal Reserve Board (FRB)’s continued development of its  FedNow Service. As the FRB notes in the introduction of its proposed rule, real time payments  provide both individuals and businesses with more flexibility in managing their money and  enable them to make instant payments when they are needed, which will have a positive impact  on the entire economy.1 We applaud the FRB taking steps to move forward with the  development of the FedNow Service through this rulemaking. The FRB’s own real time payment  system will prevent a private monopoly market, and better protect the broader interests of  consumers and the public at large. Launching the FedNow Service will be a crucial step towards  making faster payments a widespread reality for consumers and small businesses in the United  States because it will allow financial institutions of all sizes to offer access to real time  payments.  

Real time payments can provide several potential benefits for consumers. Faster payments  based on good funds, without the delayed clearing time needed for checks and ACH payments  today, will give consumers greater certainty about their balance, helping them manage their  money and avoid overdraft fees. Families living paycheck to paycheck will be able to receive  their wages more quickly and more easily pay bills when due without incurring late fees. More  ubiquitous, free or low-cost person-to-person payment options will make it easier to pay  landlords, split rent, receive money from family members or other sources of support for an  emergency, or be paid electronically for household employment. 

By setting up a competing faster payments network, the FRB can also help avoid the risks of  giving a monopoly position to The Clearing House, the current operator of the real time  payments network. While the Clearing House system is advertised as being open to all  depository institutions, a single dominant faster payment system controlled by the biggest banks  may lack strong consumer protections, lead to monopoly pricing, or disadvantage smaller  institutions. Moving money instantly brings real risks of fraud, errors, and weakened consumer protections. Institutions that are dependent on overdraft fee revenue may find a way to preserve  those fees even in a system predicated on good funds. The FedNow Service will help make the  benefits of faster payments much more widespread by making it more possible to reach all  consumers and the smallest financial institutions. A FRB system that is subject to transparent  public control will ensure competition, making it more likely that faster payments will serve  everyone equally, and deliver a payment system that can continue to operate in periods of  financial stress when private entities may fail. The FRB’s role as an operator of the current ACH  electronic payment system has helped to keep that system very low cost, and the FRB has the  potential to do the same for faster payments with its new system.  

To give consumers the full benefits of real time payments that the FedNow Service can provide, it is absolutely critical that the FRB launch a secure system that functions as intended and has  robust consumer protections in place. The FRB, as a public agency, has a public responsibility to ensure that its system is safe, especially for those users for whom fraud or errors can be  devastating. The FRB can provide a model for other systems developed by private companies  that do not have the same public accountability. However, the proposed rules must be  strengthened significantly to provide adequate safeguards for consumers and small business  users. We urge the FRB to make sure that the following essential consumer protections are  directly incorporated into the FedNow rules before launching its FedNow Service. As long as  such improvements are made to the FedNow rules, the FedNow Service will be able to provide  widespread access to the public with necessary safeguards to protect against fraud and misuse.  

Fraud prevention. The ability of anyone to receive money electronically quickly, with immediate  funds availability and finality, is ideal for scammers and opens the door to greater fraud and  exploitation than traditional payment systems. Faster payments must not mean faster fraud  without recourse, but the rules as proposed provide insufficient protection. The FRB should  include rules to prevent, detect, remedy, and punish fraudulent uses, even if the consumer was  fraudulently induced to send money to a scammer. Service providers should be required to build  protections into their systems, and institutions that allow scammers to create and hold accounts  to receive fraudulent conduct should be held responsible. Such rules will give the providers of  faster payment systems and receiving institutions the incentive to develop and constantly  improve measures to better prevent fraud and stop it as soon as possible.  

Error resolution. The FedNow rules also need greater safety measures to prevent and resolve  costly errors. Mismatched information indicating potentially incorrect recipient information should  be addressed, and the Federal Reserve Banks should be required to look for and act on  inconsistencies between the name on a payment order and a number that identifies the  recipient. The FRB should aggregate and share information to maximize error prevention and consider creating a central directory of end users to allow institutions to check the consistency  of the information provided and enable payors to verify the recipient. A directory would help to  ensure that consumers are sending funds to the correct person and might also be used to  ensure that an email, cell phone, or other identifier are not linked to the wrong account or an  imposter account. Receiving institutions should be permitted to delay acceptance of a payment  order or immediate funds availability in cases of suspected fraud or mistake.

Privacy and data security. Faster payment services often give providers access to sensitive  financial data and private information. The FRB should incorporate protections to ensure that  data is held securely, that only data necessary for the transaction is collected, for the minimum  time necessary, that the data is not used or shared in ways that violate consumer privacy, and  that consumers can easily terminate access to their data. 

Greater scrutiny before international use. Because sending and receiving money from  abroad comes with greater risks, international use of faster payments should not be permitted  until the heightened fraud and error resolution risks of international transfers are addressed.  International transfers should be forbidden or made consistent with the Electronic Funds  Transfer Act (EFTA), which gives senders of international remittances 30 minutes to cancel a  transfer.  

Right to immediate availability of funds. In the absence of suspected fraud or error,  consumers should have an enforceable right under the FedNow rules to immediate funds  availability to allow consumers to actually rely on the FedNow Service. The vast majority of  payments can still be processed immediately with immediate funds availability. While the  proposed rules require immediate funds availability, they do not provide consumers or small  businesses any rights to enforce that availability and relegate them to the much slower funds  availability rule of the Expedited Funds Availability Act, which will not give them the relief  needed for any harm they suffer as a result of funds not being immediately available, such as  late fees.  

The FRB should work closely with the Consumer Financial Protection Bureau (CFPB) to ensure  that the FedNow ecosystem is safe for participants. The two agencies should work closely  together to develop a comprehensive set of proposed regulations that both facilitates faster  payments and sufficiently protects consumers and small businesses.  

We appreciate the FRB’s effort to include public input in the development of its FedNow Service  and thank you for the opportunity to submit these comments. We support the FRB’s efforts to  create and operate an independent real time payment system and ask that the FRB incorporate  adequate consumer protections into FedNow’s design and operations so that the system is  safe, secure and effective for the consumers and small businesses who will be using it.