Governor Lael Brainard, the distinguished Governor of Federal Bank, United States of India unveiled the acceptance by Federal Reserve Board of Fed Now Serviceâ€™s proposal, a revolutionary one for enabling banks of every size and in every community in America to provide safe and efficient instant payment services around the clock, every day of the year. He connoted that Fed Now Service would facilitate end-to-end payment services for consumers, businesses, and government departments, increase competition, and ensure equitable access to banks of all sizes nationwide.
The whole speech delivered at the Fed Now Service Webinar, Washington, D.C. (via webcast) on 6th August, 2020 heralded the beginning of Fed Now Service which was initiated a year ago after undergoing below the satisfactory level of distribution of COVID-19 emergency relief payments authorized in the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act which was intended to provide a vital lifeline for many households. The need to disperse the funds at the earliest opportunity with least delay was embarrassing all the more when after delayed receipt of funds, it was found out that the expenditure which started immediately after receipt of funds continuing for 10 days was the greatest for households with lower incomes, greater income declines, and lower liquid savings.
Let me quote the actual speech as well as the details of the scheme of 50 pages in two web sites separately.
Federal Reserve announces details of new 24x7x365 interbank settlement service with clearing functionality to support instant payments in the United States.
The urgency with which emergency payments were spent drew the attention of authorities to develop a system for instant access to funds. The actual situation quoted by the Governor saddens the picture.
â€ś The Federal Reserve, acting as Fiscal Agent for the U.S. Department of the Treasury, processed most of the CARES Act payments to households using direct deposit, prepaid debit cards, and checks, which can take several days between the time the funds are sent and the time recipients get access to their funds. By contrast, the ability to disburse funds via instant payments could have helped reduce the strain for those who needed the funds quickly in order to meet financial obligations. The same is true for other payments intended to provide immediate assistance, for example, in the wake of natural disasters.â€ť
This disastrous performance forced the authorities to evolve the Fed Now Service under which instant payments would be available to American households and small businesses rather than waiting for days to get the checks cleared.
The Governor noted with sadness that unusual delay in transfer of funds some time got the business to avail temporary overdraft from financial institutions and individuals missed their timely payments.
With detailed preamble as above, now we can indulge in meaningful deliberations.
How do the expected instant payments work and can we refer to 50 pages note from the authorities?
â€śThe Board of Governors of the Federal Reserve System (Board) has approved the FedNowSM Service as described in this announcement. The FedNow Service is a new interbank 24x7x365 real-time gross settlement service with clearing functionality to support instant payments in the United States. The new service will support banksâ€™ provision of end-to-end instant payment services and will provide infrastructure to promote ubiquitous, safe, and efficient instant payments in the United States.â€ť
Let me give you an actual situation to understand from a laymanâ€™s perception.
A narration so clear and easily understandable has been given on page 22 and 23 of the webs which is a bit lengthy but just believe me, the whole process under the best technique involved, millions of exchanges among financial institutions, or others connected to them would be in a matter of seconds. Shocked!
A bit lengthy but an essential futuristic happening before your eyes.
In step 1, a sender (that is, an individual or business) initiates a payment by sending a payment message to its bank through an end-user interface outside the FedNow Service. The senderâ€™s bank is responsible for screening the payment according to its internal processes and requirements.
As a condition of the FedNow Service, the receiverâ€™s bank must agree to make funds available to the receiver almost immediately after step 7.
This crediting to the receiverâ€™s account as well as the debiting of the senderâ€™s account by their respective banks happens outside the FedNow Service.
In a lay manâ€™s language, the senderâ€™s bank, Fed Now, receiverâ€™s bank, the customer, or business are involved in the transaction but without explaining in a lengthy or elaborate scale the process canâ€™t be understood thoroughly.
Further interesting information
The Road Ahead
Fed Governor promised to continue their engagements with a broad set of stake holders to gain input from them, work with banks and service providers on preparations to adopt the service, and also announced in May the formation of Fed community of 500 members from all segments of payment ecosystem. Engagement with fintech and software providers who work on providing the top-notch tools to banks and other involved institutions has started so that they would take care of the needs of their customers.
I am producing his concluding observations showing optimism and commanding tone to lead the future.
â€śWe are committed to building an instant payment system that delivers the payment speed that users want without bypassing the legal and regulatory protections they have come to expect from banking relationships.
Ultimately, the FedNow Service can be a catalyst for innovation in the market by providing a neutral platform on which the private sector can build to offer safe, efficient instant payment services to users across the country. The promise of the FedNow Service is that it will provide a modern payment infrastructure for the future, bringing the benefits of instant payments to communities across America.â€ť
Being enamored by the introduction of the most sophisticated system of instant payments elaborated by the respected Governor of Federal Bank, United States, I described the whole scheme with passion.
I am also impressed with the experience of India in providing financial/material relief to 800 million people affected by the suspension of the whole economy that raised the bar of the world higher to help its people. India established the systems, educated its vast multitude of its even illiterate people the utility of a banking account, and ensured the benefits reach them at the earliest time in the world.
But as an admirer of the latest systems and disbursal of either economic benefits or scientific knowledge to the common man, India like the U.S.A., needs to have an instant payment system for all banks or other stakeholders like NBFCs, Postal banks or other private remittance giants liked with RBI so that 24*7*365 services could be given in the near future.
RBI is already showing enormous willingness to change with time at an alarming scale.
Disclaimer: These are my personal views. Neither taxguru.in nor Federal bank, U.S.A. is responsible for my views. Any stakeholder can view the web sites quoted above and also contact fed authorities for guidance.