Brainard: Fed’s ‘instant payments’ service will facilitate reserve transfers to cover outflows, more

Federal Reserve Board Gov. Lael Brainard describes the Fed’s outlook for its FedNow service, the core functionalities of which were approved this week by the Federal Reserve Board, during a video conference Aug. 6. She also discusses efforts by stablecoin networks, such as Facebook’s Libra project, and the risks inherent with those.

Key initial features of the Federal Reserve’s FedNow “instant payments” service were outlined Thursday by Federal Reserve Board Gov. Lael Brainard, who delivered a speech on the future of payments in the United States during a “FedNow Service Webinar” as the Fed released its draft Federal Register notice on the service.

Brainard, the board’s point person on the payments project, said the service – still not set to launch until 2023 or 2024 – will initially include fraud tools, will make it possible to transfer excess reserves between institutions’ reserve accounts when needed to cover outflows, and will use a current industry message standard to facilitate interoperability. In additional phases after launch, other elements will be introduced, including support for alias-based payments, she said.

Fraud tools: Brainard noted banks’ stated support for tools with FedNow to support their efforts to mitigate fraud risk related to instant payments. “Accordingly, upon implementation, banks will be able proactively to set parameters that limit transaction activity in the FedNow Service based on banks’ knowledge of their own customers,” she said. “As we gain insights from banks’ experience with the initial set of fraud tools, we will explore other tools that may be valuable, including centralized monitoring by the FedNow Service.”

Adequate funds for clearing: The Fed, she said, will develop a liquidity management tool that allows a participant with excess funds in its Federal Reserve account to transfer funds to another participant who needs the funds on weekends, holidays, and after hours. “Moreover, we will make the liquidity management tool available for instant payments broadly, including to banks that choose not to participate in the FedNow Service,” Brainard added. “Participants in a private-sector instant payments service will be able to use the tool to transfer funds from their Federal Reserve accounts to the joint account at a Reserve Bank that backs settlement in that service.”

Interoperability: Brainard said FedNow will operate alongside the private-sector Clearing House RTP network. In part to facilitate interoperability, she said the FedNow Service design will use the widely accepted ISO 20022 message standard and other industry best practices. “To the extent other instant payment services fully adopt the same publicly available, widely accepted standards, this approach would enable a form of interoperability where banks can route payments through either the FedNow Service or other instant payment services based on the available path to the receiver,” she said. “This is similar to the prevailing approach in payment card transactions, for instance.” Brainard said the Fed is also open to collaborating on a form of interoperability where messages can be exchanged between the FedNow Service and private-sector instant payment service operators, similar to the approach used in automated clearinghouse (ACH) systems.

Brainard said additional features of FedNow – such as alias-based payments – would be introduced in phases after launch in order to minimize time to market. “It will be important for the FedNow Service to support alias-based payments, whereby a payment can be sent to a recipient using an alias, such as an email address or phone number, rather than requiring an account number,” she noted. “But providing this feature securely requires addressing legal, operational, and security challenges that would increase the time to market for the core service. Balancing these considerations, we will explore the best ways to add a directory service or other approach to alias-based payments with the goal of providing this feature as a high priority following the initial launch.”

The Future of Retail Payments in the United States,” speech by Fed Gov. Lael Brainard at the FedNow Service Webinar, Washington, D.C. (via webcast)

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