The partners that can help Fed speed launch of real-time payments
More than a year has passed since the Federal Reserve announced plans for a real-time payments system, and some of its staunchest advocates are eager to get it off the ground.
While community banks strongly support the Fed's decision to launch FedNow to maximize access to instant payments, there is a growing push for the central bank to speed up implementation of the service.
As the program itself attests — speed matters. Consumers have already begun to expect to transfer funds instantly. To accelerate the launch of FedNow and ensure it is ready for users on day one, the Fed must provide more information to future users and engage key stakeholders in the development of the system.
So far, the Fed is off to a good start. The agency last month said it will take a phased approach that will introduce FedNow's features over time to get it up and running as soon as possible. Under this plan, the first release will focus on core clearing and settlement features, such as fraud mitigation, a liquidity management tool and common standards to make interoperability with private-sector payment services possible.
Further, the Fed's plan to limit access to Reserve Bank account holders is consistent with existing Fed processes and will safeguard FedNow from systemic risks.
While this strategy makes sense and would help banks manage the transition to the 24/7, 365-days-a-year payments service, it came a full year after the Fed announced its intention to build the system.
Further, the strategy doesn't appear to be speeding up the agency's timetable, which continues to forecast a 2023 or 2024 launch. Fortunately, many expected FedNow users are available and eager to help the Fed move quickly.
The first step the Fed can take to expedite FedNow is expanding transparency in the system's development. The more information the Fed can release to allow community banks and other users to plan for the launch, the faster and smoother it will be.
This means building out the FedNow website with clear information about onboarding, fraud prevention, liquidity management, overdraft prevention and pricing. Robust educational programming for account holders and toolkits for end users will help ensure all are ready in advance for a swift and seamless launch.
But the release of information cannot be a one-way street. The Fed must engage with future FedNow users as part of the development process. Including community banks in FedNow pilot programs will ensure the technologies and processes under development align with community bank requirements and capabilities.
The Fed should also follow the usual notice and comment process for developing FedNow rules, which will help prepare the industry and avoid unintended consequences, without allowing the rulemakings to create delays or slow implementation.
In last month's announcement, the Fed said it is planning pilot programs, focus groups and work groups on various aspects of FedNow. This inclusive strategy is commendable, but now is the time to act on these critical components to prepare for and expedite the launch.
Engagement must also extend to core processors and digital banking vendors to ensure integration with existing systems. For many community banks, core processors will be the technology provider that enables connectivity to FedNow.
The Fed should work openly with these and other relevant technology providers early and often to integrate these platforms ahead of the FedNow launch, which will be instrumental in ensuring it gains a foothold in the marketplace and ultimately achieves ubiquity.
The need for interoperability also extends to FedNow's private-sector competitor: The Clearing House's Real-Time Payments network. Real-time ubiquity requires interoperability and cooperation between the public- and private-sector services. Collaboration will benefit all parties.
Further, the Fed and TCH can also work together to provide for a common set of rules to support a frictionless experience and simplified compliance that doesn't overburden entities that use both systems.
For instance, dollar thresholds — an important risk-mitigation tool — are set at $100,000 for RTP but not yet defined for FedNow. A consistent set of guidelines would go a long way for the institutions deploying these services while supporting interoperability.
While the Fed has taken initial steps with 2023 or 2024 in mind, the above suggested approaches need to start now to accelerate the launch.
The Fed decided to develop FedNow to ensure instant payments are available at the nearly 11,000 financial institutions the agency already serves in an operational role. This need is not only essential, but urgent.
Community banks have focused much of their attention in recent months on responding to the coronavirus pandemic and implementing the Paycheck Protection Program, but they haven't lost sight of the need for swift implementation of FedNow.
Faster payments is critical to the future of community banks and their customers. The Fed can help speed up the rollout of this essential payments system by openly engaging community banks to the benefit of Main Street communities nationwide.