A High Price To Pay - FedNow Prices Unveiled

January 31, 2022
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The U.S. Federal Reserve has released its planned pricing for its upcoming instant payments service called FedNow.

The U.S. Federal Reserve (Fed) has released its planned pricing for its upcoming instant payments service called FedNow.

The Fed has published its pricing for the long-awaited launch of FedNow next year. This approach is based on industry input and insights from the FedNow Pilot Program.

The announcement shows that the monthly participation fee for a routing transit number (RTN), which enables financial institutions to transfer funds, will cost $25, while sending parties will have to pay $0.045 for each transaction, including returns.

Request for payment (RFP) messages will cost $0.01, to be paid by the requestor, including both requests for a new payment or funds to be returned.

The default limit for a credit transfer transaction will be set at $100,000 but financial institutions will be able to adjust it up to $500,000 based on their needs. These caps will be later re-evaluated by the Fed on an ongoing basis.

This default is similar to the €100,000 limit for a SEPA Instant Credit Transfer. By contrast, UK consumers can send individual transfers of up to £250,000 using Faster Payments, although the scheme allows organisations to set their own limits.

The anticipated FedNow prices align with the prices set by its private counterpart, The Clearing House (TCH), for its instant payment RTP service.

RTP participants also pay $0.045 for a credit transfer and $0.01 for an RFP message.

Falling fees

In recent years, the transaction fee charged by payment infrastructure providers has generally fallen in many markets around the world. This fall is partially driven by the efficient modern technologies being deployed, the growing scale of the payments market, and in some cases directly and indirectly through competition.

The 4.5 cents charged by FedNow and TCH to participants for their respective instant payments services, however, is significantly higher compared to many of its peers.

India has reduced the usage fee across some interbank payment systems to virtually cost price, while in the EU there has been a significant downward trend over recent years.

For example, when Target Instant Payments Service (TIPS) announced itself in the EU as a not-for-profit instant payments service back in 2017, it did so with the headline rate of just €0.002 for an instant transfer. Or to put it another way, roughly 20 times cheaper than the FedNow service.

This low fee was not without controversy, causing issues among many domestic processors, as it curtailed what these providers could effectively charge and be able to compete.

Official data of fees is typically not available in most markets, but as one insider told VIXIO: although rates can vary, a typical fee for instant payments is probably around 1 to 2 cents ballpark.

As well as rates not being published, in some cases contract arrangements will vary, making it difficult to calculate average fees. For example, UK’s Faster Payments is based on a set contract fee rather than a per transaction rate. This contract is regularly renegotiated upon renewal, factoring growth in market volumes.

The impact of TIPS has, nevertheless, shaken things up. Many new pan-European services, such EBA Clearing’s RT1, have followed TIPS in charging similarly low prices. It is also likely to act as a benchmark rate for many forthcoming instant payments projects in Europe, including P27 and the UK’s New Payments Architecture.

However, these fees are not always comparable as it does not always reflect the richness in the layer of service that is offered or the technologies deployed.

At the same time, market expectations in different regions around the world can vary. The fees charged to banks and other participants will in most circumstances be passed on to consumers and business in terms of charges. A point that the Consumer Financial Protection Bureau (CFPB) should consider as it continues its broad review of fees charged to consumers for different financial service products.

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