6 October 2020
Instant Payments in the US: ‘A design that can adjust when change is needed’
The Federal Reserve Banks announced plans for an instant payment system last year. The FedNow Service will enable financial institutions of all sizes and in every community in the United States to provide secure and efficient instant payment services in real time, around the clock, every day of the year. COVID-19 has not yet delayed the Fed's plans, which are based on the widely accepted ISO 20022 standard. The launch is scheduled for late 2023 or early 2024.
During a virtual session at Sibos 2020, Brian Cheung, Reporter for Yahoo Finance, interviewed Esther George, President of the Federal Reserve Bank of Kansas City and FedNow Executive Sponsor, about their upcoming plans for providing an instant payment system.
Countries like Mexico and Thailand already have a real-time payment infrastructure. The United States are seen as a frontrunner in innovation, so why did it take so long before we had a real-time payment infrastructure of our own?
George: “It's a legitimate question and many people, including myself, are frustrated because it takes a long time to get there. Our approach differs from other countries because we differ in size, in the number of institutions and the complexity that this entails and the scale of our economy. We have a market-driven approach that steers change and innovation. This differs from other parts of the world, where you sometimes have a central authority that regulates or can dictate the way. We have more than 10,000 financial institutions and are a country that has multiple types of payments. It is a complex environment. We work with many stakeholders in this system, which is encouraging: in a way, we are united and know which direction this country needs to go and where we need to improve the payment system. We see good cooperation and are moving in the right direction.”
How does the Fed communicate with the private sector to avoid friction and also to cooperate with them so that no strange asymmetries arise once everything is set up?
George: “If you look at the reason why the Fed was established, the traditional task is to improve the processing of payment checks by working on the existing payment structure to make those payments more efficient and accessible. That role continues to exist today and is just as important. Our approach is as follows: the Fed watches and waits for the reaction of the private sector. The bar for the Fed to get involved – especially with new services such as instant payments – is really high. The bar is set at a level where the general public benefits from this service in terms of cost and the ability to connect. Even with a private player, there are bumps that we can remove. One of them is the number and diversity of financial institutions; the Fed already has a network with full access. When the Fed comes in, it is a way to complete the efforts already made by the private sector. History has been positive in this respect.”
It is known that there will be a phased rollout. Not all functionalities are available immediately. Is the target date, sometime in 2023 or 2024, the start of the launch with a few functionalities or the completion of this infrastructure?
George: “What we are going to roll out on the first day is a functional system. This must be a system that is resilient, so that financial institutions can connect and have a functioning system immediately. There are a number of things that go beyond that, which we will have to develop later on. In my opinion, it is a better way of doing things: creating a system that is functional at an early stage and then you start adding a number of functions, depending on how you look at adoption, and depending on how you look at use cases. It gives you the opportunity to see what other innovations are taking place in the private sector. So, on day one we are sure that financial institutions can meet the customer's need for faster payments. In addition, we have also made a commitment that we will be very agile in further developing the system.”
You said earlier that we need to look across the border. Could you elaborate further on that, what would a cross-border payment infrastructure look like according to the Fed? And how difficult would that be with different standards in different corners of the world?
George: “You want to come up with a design that has the kind of flexibility so that it can adjust when change is needed. I think standards are very important. That's why we are committed to the international standard ISO 20022. That's how we're starting to think about the future of global transactions and how everyone can adopt the same standards. It's the right place to start. Another important point of attention is how to align different regulations and different jurisdictions. Where can we be flexible and where are we going to resolve a number of issues? That takes more time, but we can now focus on a technology platform that will give us flexibility in the future.”