The Federal Reserve’s FedNow instant payments system, set to launch this year, may eventually have cross-border capabilities, an official with the central bank said last week.
While that real-time system will only be available in the U.S. market at first, Fed officials are already considering ways the technology can be upgraded, said Nick Stanescu, a Fed senior vice president overseeing FedNow.
FedNow officials are starting to “think ahead in terms of how this could support instant payments, not just in the U.S., but also for cross-border types of use cases,” Stanescu said March 23, during a FedNow town hall webcast. “July is just the beginning.”
The new real-time system will be the most significant upgrade to the U.S. payments system since automated clearing house payments became available in the 1970s. FedNow will operate 24 hours a day, seven days a week and on holidays, allowing for almost instantaneous settlement of transactions.
Enabling cross-border transactions is also a goal of the RTP network, FedNow’s real-time rival operated by the country’s biggest banks. The Clearing House, which is owned by about 20 big banks, launched the RTP network in 2017 and has been expanding its services ever since.
The ‘holy grail’ of real-time payments
TCH began exploring a cross-border offering with the pan-European payment provider EBA Clearing and the Society for Worldwide Interbank Financial Telecommunication last year. They developed a link between their networks that was operationally feasible, but the legal and administrative aspects of the system haven’t been worked out yet, said Jim Colassano, senior vice president of TCH’s product development and strategy.
“We’re trying to push it as quickly as possible because this is one area where if you talk to the market, if there’s one thing they would like to see coming out of all the instant payment work that everybody is doing, both for us and FedNow, it’s the ability to make cross-border payments instantaneously,” Colassano said. “That is the holy grail, so we do want to get there as quickly as possible.”
Colassano wouldn’t comment on exactly when TCH and the two partners would embark on a full pilot of their cross-border effort.
FedNow plans for alias directory
FedNow officials are planning for other enhancements, as well. The nationwide real-time payments system will be able to accommodate evolving technologies, release new features, pursue system updates and undertake “periodic, large-scale enhancements,” Stanescu said. Financial institutions participating in the FedNow system will be able to choose whether to adopt additional features, he said.
In particular, FedNow planners are focused on security aspects. “We’re very much focused on those enhancements that are supporting the safety of the system,” Stanescu said.
Specifically, FedNow officials have received feedback that some “high-demand” FedNow use cases would require the ability to originate payments on the basis of a phone number or email identity, what the industry refers to as an “alias” that doesn’t reveal other personal information.
To accommodate that interest, the central bank is reviewing the development of a FedNow “alias directory” for financial institutions so they could manage accounts in such an environment. The only extensive alias directory that exists today is offered by the peer-to-peer electronic payment system Zelle, Colassano said. Zelle is operated by the company Early Warning Services, which is owned by seven big U.S. banks.
“We received strong feedback from financial institutions, and from other organizations, that an alias directory should be considered as part of the service,” Stanescu said. “So, looking ahead, post-July, we are exploring various approaches to supporting alias-based payments natively in a future release of the FedNow service.”
That alias service would require FedNow participants to build functionality on top of the new system to meet end-user needs, the Fed official said. Other value-added services the Fed is considering could include application programming interfaces used for informational purposes, for reporting purposes and for sending and receiving credit transfers, he said.
FedNow takes on RTP
The Fed lined up 120 financial institutions and payments processors to participate in developing the FedNow system over the past two years. A group of about two dozen early adopters are now gearing up to be a part of taking the new system live in July.
Smaller community banks and credit unions have been especially eager for the arrival of FedNow because many have been reluctant to sign up with RTP, given its operation by their larger bank rivals.
Even though FedNow will be a competitor to the RTP network, the “megaphone” that the Fed has used to publicize real-time payments has been a benefit to The Clearing House system, too, Colassano said.
He’s not worried about the competitive threat from FedNow — at least at the start — because he understands, based on TCH’s experience, that real-time payments systems take years to develop. So, FedNow won’t catch up to RTP’s reach and services anytime soon, he asserted.
It’s also not clear which participants will be onboard when FedNow rolls out in July. That’s a key factor, Colassano said.
“You need to really compare what FedNow is going to be delivering in July versus what you can get through the RTP network on that same day, and when you draw that comparison, there are some very stark differences,” he said.
Five years from now, those differences will have narrowed and the decision for banks will likely be a draw, but for banks deciding over the next year or so, Colassano said RTP has more to offer.