The Central Bank’s Guide to Instant Payments

In today’s fast-paced economy, people expect things to happen instantly— specifically when related to money. Whether it is paying for groceries, sending money to a friend or getting paid by an employer, no one wants to wait for a long period of time. That is where instant payments come in.

Instant payments have changed the way we deal with money and how we transfer it. For central banks, this shift brings more opportunities and responsibilities. Accordingly, they have a unique role to play in making sure these systems are fast, secure and available to everyone.

Understanding Instant Payments

Instant payments, also referred to as real-time payments, are transactions where funds are transferred and settled within seconds, 24/7 year-round. Unlike traditional batch processing or delayed settlement systems, instant payments deliver finality immediately and allow users to send and receive money within seconds.

For everyday users, this means they can:

• Send money to a friend or family member within seconds
• Get paid by an employer instantly
• Pay bills on time from anywhere
• Enable e-commerce payments

This does not only pertain to everyday users since businesses and governments can benefit as well.

Central Banks’ Role in Instant Payment Platforms

In any financial system, the central bank involved is responsible for keeping those systems safe and stable. This makes them a natural fit to develop and oversee instant payment systems. Their involvement ensures that:

• Everyone can use it, not only larger banks but also smaller banks, fintech companies, payment service providers and digital wallets
• The system remains secure and trustworthy
• It operates smoothly even during peak times or outside regular banking hours
• New players can participate, fostering innovation and competition
• Financial inclusion is improved through wider access to financial services for unbanked customers

Some central banks operate their own instant payment systems, such as the European Central Bank’s TARGET Instant Payment Settlement (TIPS), while others collaborate with the private sector through public-private partnerships to achieve similar goals.

Key Responsibilities and Considerations

When guiding or developing an instant payment ecosystem, central banks must take several key design considerations into account:

1. Settlement Mechanism

   Instant payments require settlement in central bank money to minimize credit and liquidity risks. Most systems operate using Real-Time Gross Settlement (RTGS) models, often incorporating pre-funded accounts or liquidity buffers to ensure smooth and secure operations even outside regular banking hours. This approach enables accurate and timely settlement between participants.

2. Interoperability

   To make instant payments truly effective, systems must introduce interoperability across different banks, payment service providers and other financial platforms. This requires standardizing communication protocols and messaging standards, such as ISO 20022 and Open Application Programming Interfaces (APIs), to enable new players to integrate easily into the instant payment ecosystem.

3. Risk Management

   The rapid and irreversible nature of instant payments increases exposure to fraud. To mitigate this, central banks must implement robust frameworks for identity verification, real-time transaction monitoring and effective correction mechanisms.

   Additionally, the central bank must deploy continuously active risk management tools to ensure participants do not exceed established fund limits. Setting maximum and minimum thresholds for different types of payments is also essential to ensure compliance with central bank regulations.

4. Regulation and Rules

   The legal and regulatory framework needs to support innovation while protecting users, which includes:

   • Data privacy rules
   • Anti-money laundering controls
   • Rules on who can participate and under what conditions
   • Consumer rights

Implementing a Successful System

Launching an instant payment system can be challenging and complex, as it requires the entire financial sector to participate and engage. At the end of the day, it is about transforming how a country handles money. Here is how it works:

• Start small, then grow: Begin with simple person-to-person payments, then gradually expand to include bill payments, businesses and even tax refunds.
• Get early adopters on board: Start with two or three early participants to encourage others to join.
• Involve everyone early: Bring in banks, fintech companies, merchants and consumer groups from the outset.
• Spread the word: People won’t use something they don’t know about. Launch awareness campaigns, especially targeting remote or unbanked communities.
• Test before going live: Use pilot programs or "sandboxes" to test the system and address any issues before full-scale launch.

Global Examples

• USA – FedNow: Launched by the Federal Reserve in 2023, FedNow is a real-time payment service available 24/7 to banks and credit unions across the U.S. It facilitates instant transfers between financial institutions, supporting both businesses and consumers.
• Europe – TIPS: The European Central Bank’s TIPS system supports instant payments in euros, even across borders. It prioritizes safety, speed and reliability.

Each of these systems varies slightly in terms of functionalities and supported payment types, but they all demonstrate how central bank leadership can drive significant change, showcasing how instant payment systems have rapidly transformed the financial landscape.

What’s Next?

Instant payments are just the beginning. They are closely linked to other major trends in finance:

• Central Bank Digital Currencies (CBDCs): Many future digital currencies will likely be built on similar technology or work in conjunction with instant payments.
• Cross-Border Payments: New global initiatives are connecting national instant payment systems, enabling fast and easy international transfers.
• Open Banking: As banks open access to their systems, instant payments will be integrated into everyday apps.

Final Thoughts

Instant payments are not just about speed or a quick way to send and receive money; they represent a shift toward a more efficient, inclusive and responsive financial system. Central banks are called upon to lead this transformation by establishing standards, setting rules and regulations and ensuring these solutions are implemented universally.