"The world we live in right now is changing rapidly. Access to information and goods and deliveries has gotten faster, including the pace of change. What really hasn't caught up is payments." These words, spoken by Erik Van Bramer, SVP and National Sales Director of the Federal Reserve Bank of Chicago, during his Payments Management Conference session, "The Time is Now: Prepare for Instant Payments and the FedNow Service," highlight the need for faster and instant payments.
The demand for instant payments is growing in the U.S., says Van Bramer, due to a culture of on-demand services, transparency, and fulfillment. Statistics from the Federal Reserve's 2019 Survey of Consumer Payment Choice bear out this truth:
- Fifty-nine percent of consumers adopted mobile banking.
- Seventy-five percent of consumers adopted online banking.
- Half of consumers adopted at least one online payment method, such as PayPal, Venmo, or Zelle.
The last statistic is particularly telling. Consumers want faster payments.
In response, the Federal Reserve is creating an instant payment solution, the FedNow Service, set to launch in 2023. A request from the Faster Payments Task Force to assess offering an instant payment service and industry comments prompted the Fed to develop an instant payments solution that would benefit the industry and its stakeholders.
But the Federal Reserve acknowledges it's going to take collaboration across the entire ecosystem to make it work. A dynamic network of stakeholders, from financial institutions and end-users to third-party service providers, is needed to enable instant payments.
FedNow Features & Use Cases
"We had an idea what a perfect instant payments service would look like," said Van Bramer, "but we wanted to balance that with getting the product to market in a timely way."
To that end, the Federal Reserve is staggering the addition of various features to be available through the service. Core clearing and settlement features for the initial launch include:
- ISO® 20022 message standard
- Network access via FedLine
- 24/7/365 availability
- Maximum dollar transaction limits
- Reporting features
- Credit push
- And more
Other value-added features at the initial launch include the ability to lower transaction limits, positive/negative lists, liquidity management, and request for payment, to name a few.
As Van Bramer pointed out, future product releases will continue to improve the FedNow Service's overall product capabilities, efficiency, and safety. These could include:
- Enhanced remittance information to support B2B payments
- Improved reporting for more transparency
- Support for alias-based payments through a directory
- Integration of contemporary interfaces, such as Application Programming Interfaces (APIs) for reporting
- Support for additional use cases
- Fraud mitigation tools
Use cases for the new service are varied and growing.
"We like to think of it [the Fednow Service] as use-case agnostic," Van Bramer said. "Payments from person to person, consumer to business, consumer to government…instant payments will help facilitate those payments."
Getting the Industry Ready
"Within our role at the Fed, it's not only about designing a solution but also getting the industry ready for the solution," said Van Bramer. "We're investing pretty heavily down that path."
The first initiative was the FedNow Service pilot program. Late last year, the Federal Reserve put a call out to the industry and were overwhelmed by the response. They selected more than 120 diverse organizations across various industry segments to participate in the pilot program. Learning and activities from the program will inform the build.
The pilot program consists of three distinct phases. The advisory phase meets every two weeks and takes deep dives on current thinking and how to build the service. "This is the time for us to get confirmation that we're building a solution that makes sense," Van Bramer explained. In phase two of the program, the Federal Reserve kicks off ISO 20022 testing and assesses feedback. In the final phase, participants send live transactions to other participants, participates in resiliency testing, and validates the end-to-end payments flow.
Another Fed initiative created to help prepare the industry for the FedNow Service is the FedNow Community. Through the FedNow Community, industry leaders with various levels of expertise can engage in the interactive community through focus groups, workgroups, surveys, and one-on-one conversations. To join the FedNow Community, click here.
Instant payment education efforts are also underway.
"We are going to be publishing our FedNow Readiness Guide later this year," Van Bramer said. "It highlights what financial institutions need to be thinking about. The readiness guide is going to walk you through the process almost in a cookbook-type fashion. We feel this education is incredibly important."
Other 2021 educational initiatives will include:
- Innovative use cases
- Explanations of key technologies
- Progress updates and lessons learned
- Highlights of FedNow Service product features
"It's not a small lift, but we want to make it as easy as possible for financial institutions," said Van Bramer.
NEACH-Your Strategic Partner
For more on what's happening in faster and instant payments, visit our Innovating Payments website.
As always, consider NEACH your strategic partner. We are here to support you. For questions, call our payments hotline at 855-NEACHQA.
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AUTHOR: Joe Casali, AAP, NCP
Executive Vice President
As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.
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