As the Federal Reserve's FedNow instant payments and settlement system enters into testing and use-case development phases, an emphasis on speed to market, ubiquity and compatibility with other systems remains in the forefront.
The COVID-19 pandemic has not derailed plans to launch
Even though the pandemic hasn't slowed plans, the Fed is keenly aware of the changes in payments needs for businesses and consumers because of the global health crisis.
"We continue to hit all of our program milestones, even though we continue to work in a remote and collaborative environment," Montgomery said Tuesday at the virtual Chicago Payments Symposium. "But we recognize the pandemic has given rise to other use cases that have come up as a result of the pandemic, so certainly emergency payments and others related to people wanting to not use other methods and do payments all digitally is something we see occurring with this."
Developers are also examining ways in which FedNow would be interoperable with The Clearing House Real-Time Payments service, a system it essentially would compete against for transaction volume and bank interaction.
"Interoperability is a question that we receive frequently," Montgomery noted. "As we are looking at initial implementation of FedNow, we are saying interoperability will be achieved through routing."
The Fed will be looking for participation from those who will select the best way to get routed for the particular message based on cost and user, he added. "It raises questions about what if everyone isn't on the same network or using the same instant payments provider, does it mean organizations have to be on both services?"
The Same-Day ACH and the current FedWire operate in a manner in which users are engaged with multiple services, Montgomery said. "Over time we want to see other opportunities, in where the focus is on message exchange. A reason we are focused on the ISO 20022 standard is the fact that we can have compatibility with the other private sector service providers. We have had conversations and will continue to have conversations with The Clearing House on this particular issue," Montgomery added.
Past concerns that it would compete against The Clearing House's RTP rails may have generated more interest overall in faster payments. With the Fed's program a few years away, The Clearing House executives actually reported a significant uptick in
Initially, FedNow would likely have a $25,000 threshold for payment size, and is hoping to have a transaction delivered within five seconds. Over time, those elements could be adjusted as other features are added and improvements are made to the system, Montgomery said.
The complexities of launching a major new payments system from the Federal Reserve is not lost upon Montgomery, but he expressed confidence that the bank will continue to hit its development milestones.
"There are a lot of moving parts to this," Montgomery said. "There is much to do with a complicated deployment and development effort and system integrations effort to get a product to market that is going to have the safety, resiliency, feature and function we want with all of this."
In an effort to get the word out about the service, the Fed has to have an extensive outreach program to the banks and fintechs that would ultimately be involved in the FedNow system
FedNow will be a platform combining internally developed code, vendor products and "other relationships in terms of service provisioning," Montgomery said.
As testing continues on specifications and projections are set for desired transaction volume and the number of banks involved, the Fed will have a better idea how it will establish pricing for the product, Montgomery noted.
The FedNow service will be subject to the Monetary Control Act, which requires that aggregate revenues match costs over the long run and requires the board of governors to adopt pricing principles specifically to avoid unfair competition with the private sector.
