While the Covid-19 pandemic has raised the issue of speeding stimulus payments and other relief to consumers and businesses, The Federal Reserve system is staying with its planned 2023 or 2024 launch date for its FedNow real-time payment service, officials said Thursday in an update that comes almost exactly one year since the central bank announced the service.
“We look to be on track for 2023 or 2024 but I expect over the coming year we will be able to get a little more precise about when we’ll be able to deliver the service,” said Kansas City Fed president Esther George, who spoke during a Web presentation that included Fed governor Lael Brainard and Kenneth Montgomery, the Boston Fed executive who has been heading up the FedNow effort for the past year.
FedNow, which represents the central bank’s entry into a business that has been served so far by private-sector players such as The Clearing House Payments Co., is “designing a pilot program as we speak,” Montgomery said. The goal is to recruit participants later this year for pilots that could launch early in 2021, he added.
But when what the Fed is now calling FedNow Instant Payments launches, it will not include cross-border payments or a so-called alias capability that would enable, for example, peer-to-peer payments to phone or bank-account numbers, George said. Aliases will come “at a later phase,” she noted, as the Fed concentrates on launching core functionality. As for international payments, “we need to laser-focus on getting the service to function domestically,” she added.
At the same time, tokenization “likely won’t be available in the early implementation but we are looking at it for later,” Montgomery said. Tokenization replaces live account data with random strings of characters that can be decoded by participating institutions in an effort to thwart data theft.
Still, while the service may not come online soon enough to distribute further relief funds now being contemplated by the federal government, Brainard stressed the importance of real-time delivery in such emergencies as an alternative to checks and debit cards through the mail. “The pandemic is taking a tremendous toll on households across the country,” she said. “Instant payments would allow households to get instant access to funds rather than waiting for a check to clear.”
From the start, she said, the new service will support fraud tools with parameters set by banks; a liquidity management tool to enable banks to ensure they have sufficient funds to support instant settlement; and interoperability, allowing links to other faster-payments services using the ISO 20022 electronic data interchange standard. “We are committed to interoperability to ensure nationwide reach,” Brainard said. “We can’t do it on our own.”
While the launch may be three or four years off, financial institutions should be drawing up plans now for how they can “serve their customers,” George said. “Given how fundamentally different this product is going to be, it’s not too early to start thinking about it now,” she added. “What will it mean for accounting, operations, staffing? It will involve hard work to ensure this platform serves the country for many years to come.”
One factor in that planning process that may be hard to pin down for some time is cost. “We don’t have a number right now,” George said. “We’re still settling on the tech strategy, which will determine the cost.” Still, she added, pricing will be based on a “mature volume estimate” and the Fed’s mandate to recover its costs.