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Fed vice-chair urges private sector to prepare for instant payments

Lael Brainard: "the time is now for all key stakeholders – financial institutions, core service providers, software companies and application developers – to devote the resources necessary to support instant payments" | Global Government Fintech screenshot

The US Federal Reserve’s vice-chair has called on the private sector to “devote the resources necessary” to support instant payments in the central bank’s latest update on its under-development real-time payments system FedNow.

The Fed announced plans for FedNow – the first new business line for the Federal Reserve System in 40 years that aims to be transformative for US payments – in 2019 and completed the first set of tests four months ago.

In a webcast this week (29 August) during which she described FedNow’s launch date as being “between May and July 2023”, Lael Brainard urged that “the time is now for all key stakeholders – financial institutions, core service providers, software companies and application developers – to devote the resources necessary to support instant payments.”

“This means upgrading back-office processes, evaluating accounting procedures to accommodate a seven-business-day week, arranging liquidity providers, deploying a new customer-facing application and promoting instant payments for key use cases to customers,” Brainard explained in a remarks delivered by video to an ‘early adopter’ workshop.

The US market for faster payments is still in relatively early stages of development – a state of affairs that the Fed has acknowledged and is seeking to address by creating FedNow. The current Fed payment rails are only available on weekdays, with transactions potentially taking several business days to be finalised. When FedNow goes live, any financial institution with an account at one of the Fed’s regional banks will be able to use the service to process payments at any time.

‘End-to-end testing’ scheduled

The Fed announced in May that ‘a few’ organisations had successfully connected and delivered test messages over a pilot version of the service and that pilot organisations would continue onboarding with the service during the next few months. This would involve establishing connectivity and performing technical and operational tasks that would ‘lay the groundwork for full-scale, end-to-end testing later this year’.

It was also announced in May that more than 120 organisations were participating in the FedNow pilot programme.

FedNow pricing details were announced four months previously, along with an online ‘FedNow Service Provider Showcase’ to connect financial institutions and businesses seeking to adopt FedNow with service providers offering instant payments solutions.

When the central bank announced its plans for FedNow, it said the service would launch to financial institutions in ‘2023 or 2024’. In February 2021 it amended the launch timing to 2023, narrowing the delivery timeframe by up to 12 months.

“I want to particularly thank the early adopters for the important investments they are making to prepare for the day when the FedNow Service goes live next year,” said Brainard this week.

“We have been working hard to deliver on time, but ultimately the number of American businesses and households that are able to access instant payments will depend on financial services providers making the necessary investments to upgrade our payments infrastructure. Together, we can ensure that all Americans have access to a modern and reliable instant payment system.”

FedNow’s ‘cloud-first design’

Brainard said in her remarks that the Fed had “made a substantial commitment to the FedNow platform” and that it had a “cloud-first design, unique among central bank instant payment services” that “positions us for the future by enabling not only the throughput and scalability required for high-volume retail transactions but also broad geographic points of resiliency to ensure continuous service.”

She also described cloud as “afford[ing] other key technology components such as self-healing processes and automation, which add to operational resiliency”.

“Just as the Federal Reserve has made a substantial commitment to our new instant payment infrastructure, we are calling on industry stakeholders to do the same,” she said, adding that the shift to real-time payment infrastructure “requires a focused effort, but the shift is inevitable”.

“Parts of the industry have already seized on the opportunity to build new services and capabilities that support instant payments,” she added. “These efforts will increase competition in the market for end-user services and promote innovation – key benefits from providing the FedNow service as a neutral platform, accessible to financial institutions of all sizes nationwide.”

In an interview with American Banker published in February last year, FedNow programme executive Ken Montgomery (first vice-president and chief operating officer at the Boston Fed), said: “It’s not just a matter of developing a core clearing and settlement engine. It really is having the resiliency, the security, the integration with back-end systems and then the ability to service 10,000 financial institutions across the United States… if I compare us to other central banks, if I compare us to other instant payment providers globally, nobody has the scale and reach that FedNow has to achieve.”

*** FIS, a Florida-headquartered company, has announced the launch of what it describes as a central infrastructure payment solution called RealNet Central to ‘help central banks transform their markets to digital-first, real-time payment economies’. It has also launched a Central Bank Digital Currencies (CBDC) Virtual Lab that, it says, will ‘allow countries to experiment, pilot and accelerate live CBDC implementations’.

FURTHER READING

‘US real-time payments service FedNow testing underway’ – our news story (4 May 2022) on the first set of FedNow tests

‘US instant payments system FedNow to launch in 2023’ – our news story (10 Feb 2021) on the Fed announcing that FedNow would launch in 2023

‘US Federal Reserve to launch instant payments system FedNow’ – our news story (19 Aug 2019) on Lael Brainard’s announcement of the service