There is no dearth of faster payments initiatives — and no certainty that there will be one faster payments scheme to rule them all.
In an interview with Karen Webster, Boston Federal Reserve Chief Operating Officer and FedNow Program Executive Ken Montgomery said the central bank’s ambitious payments initiative remains on track — and will inject competition into the instant payments market.
As reported in August, the Fed had announced some additional details of the 24/7 year-round interbank settlement service through a program that began to take shape in 2019, geared toward speeding processing times tied to instant payments (and featuring a clearing function).
The overall goal has been to design and implement a way to eliminate the three-day settlement program for checks to clear and provide immediate access to funds. Along the way, not surprisingly, we’ll transition more fully to digital payments across modernized (and streamlined) rails, flowing domestically and eventually across borders.
The recent conversation with Webster comes a year into Montgomery’s tenure leading FedNow — where his initial responsibilities have so far included devising a roadmap and gathering industry input from stakeholders into the features and functionality they desire.
Even during the pandemic, he noted, “industry input has remained consistent with what we’ve heard from stakeholders since before the pandemic.”
Back in August 2019, he said, the Fed’s initial efforts had garnered roughly 200 responses tied to the Federal Register commentary period.
“These comment letters highlighted the need for features to address accessibility, interoperability, security, liquidity, and fraud prevention,” Montgomery said. He noted there has been additional input from the FedNow Community of 700 members.
The comments and insight across the past year-plus has led the Fed to ready a FedNow pilot program — an effort that will seek additional guidance from financial institutions (FIs), including payment processors, to help the service evolve moving forward.
Upon launch, FedNow will operate alongside other payment rails, offering FIs and service providers “an additional choice in terms of infrastructure to support instant payments.”
In other words: There’ll be more competition when it comes to payments rails — with a bit of differentiation, including an opportunity for unparalleled reach by integrating with the more than 10,000 FIs the Fed already has customer relationships with.
Having an efficient onboarding process will be key to ubiquity, he said. As part of the pilot, he said, the Fed is currently working with financial institutions and processors to identify and design the mechanisms for that easy access.
He said there are going to be some institutions that will want to connect with both instant payment services — FedNow and The Clearing House (TCH)’s real-time payments (RTP) network — in a desire to ensure resiliency and redundancy to support outages in one system to the other, if they were to occur.
FinTechs are interested in providing value-added services to FIs — and can conceivably connect their offerings to the FedNow platform via participating depository institutions.
Looking Toward Interoperability And Scale
“Interoperability is a core component” of FedNow, said Montgomery. “We'll look to have interoperability with RTP so that we can start to get that reach.” Interoperability, he added, will be fostered through the use of ISO 20022, for standardized messaging.
The FedNow design, he said, allows end users to receive funds at any time around the clock and around the calendar year, including immediate settlement of interbank payments.
“We think that’s a bit of a differentiator, including where that would fit into solving problems,” he said. Solving problems, of course, would increase traction and adoption of speedier payments.
Though FedNow is at least on the surface like RTP, the platform is one that is extensible, and he said services can be layered on top of the basic clearing and settlement activities.
The Fed has publicly stated that it has committed to a 2023/2024 timeframe for FedNow, and added that “as we look at the delivery of the service, we’re going to be very transparent. As we have more experience with our development efforts, then we’ll more publicly identify what we think are specific dates for product launch.”
Core clearing and settlement functions will be delivered in that initial 2023/2024 timeframe.
Montgomery noted that in terms of initial use cases, the Fed has been focusing its instant payments efforts on low- and moderate-income individuals and families that have a need to make sure that, for instance, rent and other payments are settled in a timely manner.
There are also opportunities to serve the underbanked — using instant payments to avoid using money orders or other cash-based mechanisms.
“We can also see opportunities for small and medium businesses. If they have a big order and need to be paid immediately, it could come in that way [through instant payments]. Larger companies, he said, could leverage instant payments for better liquidity management, as they juggle payroll or invoices.
Digital Dollars, Too?
Much has been made of central bank efforts (the Fed is no exception) to explore the creation and management of digital fiat. Montgomery said that though the FedNow effort is not expressly tied to a digital dollar, observers are “looking for a way to make immediate payments and make them a little more frictionless. Certainly FedNow is addressing the instant payment component of that.”
But there are questions, too, noted Montgomery: How does the Fed get those digital dollars to move throughout the banking system? How does one then turn that into cash? And then, what would be some of the consumer protections that would come along with that?
Looking ahead to FedNow’s debut in 2023 or 2024, he told Webster, “We believe choice is beneficial and generates competition — and create efficiencies related to pricing, service and features, as well as innovation.”