Economy Matters

The Atlanta Fed urges widespread adoption of instant payments to help bring people who typically use cash to buy goods and services and to pay bills into the formal economy.

Instant payments can address an aspect of the emerging structure of the economy cited at a recent forum by Atlanta Fed president Raphael Bostic. "The way that our financial system is evolving, it runs the risk of excluding some people," he said.

Financial inclusion is a function of the Federal Reserve's role in administering payments. The Fed focuses on financial inclusion because it can help "make families across the United States more economically resilient and economically mobile," according to a paper by Bostic and five Fed colleagues released at the forum, "Connecting the Dots: How Adoption of Instant Payments Can Lead to a More Inclusive Economy."

Instant payments enable almost immediate settlements, rivaling the speed of cash and faster than a debit or credit card. Instant payments provide cost savings, convenience, and the potential to raise credit scores. These measures can increase the financial inclusion of consumers who sometimes manage cash-flow problems with overdraft fees and costly loans from sources such as payday lenders and pawn shops. Financial inclusion can also result in greater access to financial tools and advantageous rates for commercial loans for homes, education, and retail purchases.

The relation between instant payments and financial inclusion was the subject of the Atlanta Fed's recent Payments Inclusion Forum: Breaking Barriers. The half-day hybrid program reviewed reasons people continue to transact in cash, explored steps financial institutions and fintechs can take to attract the unbanked, considered the security and fraud concerns involved in payments inclusion, and discussed educational outreach on financial literacy.

The Atlanta Fed's forum coincided with the launch of the FedNow® Service, the Federal Reserve's instant payments system that complements existing commercial instant payment innovations. FedNow is the latest step in an effort the Fed began in 2013, when it began exploring with the private sector ways to improve the speed and security of the nation's payments system.

Fed chair Jerome Powell explained and endorsed the FedNow Service in testimony to Congress in March. "What FedNow will do is it will enable all the banks, any bank in the United States, not just the big ones, to offer…instantly available funds and real-time payments to their customers," Powell told the House Financial Services Committee. "That's a great thing."

The Payments Inclusion Forum began with a fireside chat with Bostic and Mark Gould, chief payments executive of Federal Reserve Financial Services. Before an in-person audience of about 300, they discussed three topics: how financial inclusion fits into the Fed's mission and mandates, a definition of payments inclusion, and what the Fed expects of shareholders to advance the goal outlined at the conclusion of the program:

To truly be successful, we need financial institutions, processors, service providers, and fintechs to collaborate with the Federal Reserve to achieve widespread availability of instant payments. We invite everyone to work together to make this a reality. Our call to action is for these organizations to learn, innovate, experiment, and promote instant payments.

Bostic said cooperation among these partners is needed to increase financial inclusion through instant payments. Responding to Gould's question about how progress and success are to be measured, Bostic said, "It's a hard thing, because in many regards we're talking about these complex systems and, in order to be successful, you need to have various institutions all working well and pointing in the same direction."

The segment on the reasons cash remains popular reaffirmed research results that have explained why people like to use cash for certain transactions. Two panelists observed in "Cash-Reliant Populations and Associated Policies" that cash is final, offers privacy, is familiar, and requires no involvement from a third party. "On top of that, not everyone is digitized," said Felipe Chacon, an economist with Block Inc., which operates through Square and Cash App.

Three of the Atlanta Fed's private sector partners in the payments inclusion effort fleshed out Chacon's observation in "Designing Inclusive Payments: What Can Financial Institutions and Fintechs Do?" Asked what they would do if money were no object to innovation, all three offered the same response: enhance broadband access.

"Connectivity," said Courtney Robinson, global head of financial inclusion and policy development for Block Inc. "Broadband," said Kate Danella, senior executive vice president of Regions Corporation. "Broadband for everyone," said Dondi Black, executive director and chief product officer of TSYS Issuer Solutions.

The respectful terms in which the panelists described the unbanked are a component of the cooperation and collaboration cited by Bostic and the paper. "Financial inclusion is not relegated to one single socioeconomic group," Black said. Robinson noted that Square was created to enable artisans and entrepreneurs to accept card payments by using their phone or tablet as a sales register. Danella spoke of "cleansing information" on billing statements so that transactions are identified in easy-to-understand terms, such as a "gas station in Tuscaloosa," as opposed to a string of letters and numbers.

All three cited security and fraud as a concern. This extends to opening bank accounts on a landscape of federal rules that require banks and other covered financial institutions to help deter and detect money laundering and other crimes. Covered institutions are required by an arm of the Treasury Department to identify and verify all account holders and all who could benefit from an account.

Robinson described challenges that rules implemented by Treasury's Financial Crimes Enforcement Network present to financial inclusion goals. "Looking at some of the barriers for documentation, for regulatory compliance, how do I get people into the system without needing a Social Security number?" Robinson said.

Chris Colson, director of innovation with Federal Reserve Financial Services, expounded on the security issue in "The Elephant in the Room: Security and Fraud Concerns." He presented a video that showed him delivering his remarks as if he had filmed them in case he'd be unable to deliver them in person. The video was generated by artificial intelligence, and Colson's point was that even he, with what he described as average computer skills, was able to fabricate a believable depiction with AI.

"What's Our Story? Financial and Technology Education, Literacy, Capability," a segment on the Fed's role in education, ended the program. Princeton Williams, a senior outreach adviser with the Atlanta Fed, outlined the Bank's efforts to help teachers deliver lessons on economics and finance, including the difference between saving and investing, the effect of interest rates, and the Federal Reserve's role in setting interest rates.

David Pendered

Staff writer for Economy Matters