Federal Reserve’s Next 3 Years Include Instant Payments ‘Easy Button’

The term “central bank” brings to mind thoughts of stability, resilience and trust, all things that have been part of the Federal Reserve’s DNA for more than a century. Many people are less aware that the payment systems operated by the Fed facilitate the electronic movement of trillions of dollars between financial institutions every day. And most people may not realize the work underway to leverage cutting-edge technology to further increase the speed of payments, enabling instant payments between people and businesses.

Mark Gould, chief payments executive for Federal Reserve Financial Services at the Federal Reserve, told PYMNTS that the Fed is fine-tuning its focus to streamline the embrace and use of digital, speedier payments.

The launch of the FedNowSM Service mid-next year is a signature milestone as the instant payments system is set to debut, allowing individuals and all manner of businesses access to real-time transactions through their financial institutions.

In the background, the Fed also is working to reorganize its financial services as an integrated enterprise of payment services. That marks a significant shift for the central bank, he said. Historically, the central bank has organized itself separately around specific product lines and locations.

“That served us well, at least for a period of time,” he said.

But now, with the advent of instant payments, and with the first new payment rail in 40 years, there’s the need for, as he put it, “an easy button for customers and an easy button for payments … particularly for the small- and medium-sized financial institutions in this country.”

The goal is to make it possible for any American consumer or business to get, and send, money instantly, whether to/from a friend, a family member, a business or to pay a bill, and likewise, to enable participating financial institutions the ability to instantly clear and settle those payments.

“That’s completely revolutionary in payments,” he said, adding that the Fed expects that FedNow will be used as a platform for future innovation.

For a parallel, consider the iPhone — upon its debut in 2007, no one would have thought that the phone would become a conduit to everything from buying coffee to boarding a plane.

Payments rails, including the FedNow Service, can evolve in similar fashion, he said. ACH payments are being used in ways that no one would have envisioned 20 to 30 years ago (for instance, P2P payments over app-based mobile platforms).

The FedNow Service will publicly launch in the middle of next year, and after that the Fed will be making continued investments in the platform to add new features and functionality. Scale and reach will help bring those new innovations to the market at large, as the Fed already has electronic connections to every financial institution (FI) in the country.

Initially, key FedNow features (already in pilot) will include bill pay and request for payment, or RFP. In the case of the latter, with additional technology in place, a cellphone, utility provider or other biller could send a consumer a text with a link to click to complete the transaction. FedNow RFP will enable the exchange of rich data, such as underlying transaction details, which can serve as a useful record and allow billing organizations to streamline their reconciliation processes.

Other initial FedNow features and use cases will include account-to-account transfers and liquidity management transfers.

Gould underscored that innovation is needed to deliver FedNow instant end-to-end payments, saying: “It’s imperative that each of us — from central bankers to bankers to FinTech entrepreneurs — to break out of their respective comfort zones, and be open to new ideas and use cases. It is only then that we will truly realize our vision to make instant payments accessible to all.

“The sky’s the limit,” he told PYMNTS, “and we can say with certainty that the next three, five, 10 years are going to be among the most exciting years in payments we’ve ever seen in our history.”