Payments is a financial service that is changing rapidly and generating significant regulatory interest. New technologies enable financial institutions to transform how retail and commercial customers make and receive payments. These innovations present sizable growth opportunities, while delivering better experiences and lowering costs. However, new payment capabilities also introduce risks that must be managed. In this case it is helpful to look at what both the CFPB and Federal Reserve are doing and how they might be related.

The CFPB Sees Problems

In September, the CFPB issued a report highlighting several concerns around new payments innovations including:

  • Rapid growth of tap-to-pay usage
  • Dominant mobile operating systems impose different regulations on contactless payments
  • Restrictive tap-to-pay practices may reduce consumer choice and hamper innovation

The CFPB’s goal is to accelerate the shift to open banking and payments to “help people get paid faster, access more attractive rates on deposits and loans, switch more easily, avoid intrusive surveillance, and minimize the consequences of inaccurate credit reporting.”

To do so, the CFPB is working on a new proposed rule titled Personal Financial Data Rights under its Section 1033 authority of the Dodd-Frank Act. If successful, the new Section 1033 rule would govern access to and sharing of consumers’ personal financial data, which would have a massive impact on the relationship between banks, fintechs, and consumers. The proposals under consideration would require that financial firms provide consumers access to their own financial data on deposit accounts, credit cards, and other transaction accounts. Consumers would then be able to provide permissions to this data safely and securely to other financial firms.

In addition to the above report, in June, the CFPB also expressed concern that “Billions of Dollars Stored on Popular Payment Apps May Lack Federal Insurance.” Specifically:

  • More than three quarters of adults in the United States have used a payment app.
  • Nonbanks can earn money when users store funds on their platforms
  • Funds sitting in payment app accounts often lack deposit insurance
  • User agreements often lack specific information.

These issues specifically focus on the evolution of payments in point-of-sale (POS) purchases and the role that mobile device operating systems play. The popularity of contactless payments on smartphones and wearables means consumers can securely make POS payments through different apps and services. However, this innovation means that tech companies are playing a prominent role in determining consumers’ payment options. Any restrictions imposed by the dominant operating systems—Apple’s iOS operating system and Google’s Android operating system—will have a major effect on access to payments systems and could hinder the development of a truly open ecosystem.

The Federal Reserve offers a Solution

The Federal Reserve launched FedNow on July 20, 2023. FedNow is a service that provides interbank clearing and settlement enabling funds to be transferred from the account of a sender to the account of a receiver in near real-time and at any time, any day of the year. This service provides many benefits for businesses to help them manage payments effectively and efficiently.

One of the benefits FedNow provides is liquidity management transfer capability to support instant payments. The liquidity management transfer enables participants in the FedNow Service to transfer funds to one another to support liquidity needs related to payment activity. The transfer also supports participants in a private-sector instant payment service backed by a joint account at a Reserve Bank by enabling transfers between the master accounts of participants and a joint account.

Another benefit of FedNow is that it is designed to maintain uninterrupted processing with security features to support payment integrity and data security. End-of-day balances are reported on Federal Reserve accounting records for each participating depository institution on each FedNow Service business day. Access to intraday credit is provided to participants during the business day under the same terms and conditions as for other Federal Reserve services.

What this means for Your Organization

Financial services organizations who offer payment services currently need to continue to watch CFPB developments over the next several months. They will also need to prepare to make necessary changes to their policies, procedures, and compliance training to make sure they are operating under proper CFPB guidelines. In the meantime, FedNow offers many businesses many benefits for their payments services including:

  • Depository institutions and their service providers who are thinking of offering payment services can build on FedNow fundamental capability to offer value-added services to their customers.
  • Allow your organization to compete with institutions already offering instant payment services.
  • Allows organizations to provide interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in near real-time and at any time, any day of the year.