FedNow, the Federal Reserve Board’s new payment system that enables individuals and businesses to send instant payments, is live as of July 20, 2023. The growing consumer demand for convenient, speedy payment services means it’s only a matter of time before enrollment in FedNow becomes a staple of financial institutions. These organizations should take the time now to familiarize themselves with the service in order to maintain compliance and ensure a seamless transition to the new payment system. This system can also be built upon, allowing financial institutions to offer additional value-added services to customers.
KEY TAKEAWAYS:
- The FedNow payment system enables funds to be transferred from the account of a sender to the account of a receiver almost in real-time and at any time, any day of the year due to interbank clearing and settlement
- FedNow is available to all depository institutions in the United States
- There are three types of FedNow participants, giving depository institutions a chance to select their level of participation in the program
- Depository institutions can build on this fundamental capability to offer value-added services to their customers
- A trusted third party can provide technical expertise, risk management, process improvement and compliance support services to banks related to FedNow
FedNow enables the transfer of funds from one United States depository institution account to another in near real-time, at any time of day and any day of the year due to interbank clearing and settlement. While other fund transfer platforms, such as ACH or wire-transfers, offer same-day services, there is an increased consumer demand for both speed and convenience, which FedNow provides.
FEDNOW FEATURES AND FUNCTIONALITY
No matter the participant type, FedNow is a credit push only service. There are only credit transfers, so each payment must be initiated by the sender. Debit transfers are not supported. A Request for Payment (RFP) is the mechanism that replaces debits. Account holders who receive an RFP can decide to either receive or deny the credit.
There are three types of FedNow participants:
- Credit Transfer Receive Only
- Credit Transfer Send/Receive
- Send/Receive with receive RFP
Since FedNow is a 24/7/365 service, there will be an instant settlement. The activity can be monitored and reconciled through reports from a service provider, similar to that of other 24/7/365 services like ATMs and debit card services. It’s recommended that financial institutions reach out to their service provider in preparation for using FedNow to understand the reports and notifications that will be made available to them.
Payments are sent through secure channels using the ISO® 20022 standard, which is the messaging standard that exchanges data between financial institutions using one at a time messages, not files or batches. Customers access the service through these secure channels, which include financial institutions’ websites and associated banking apps. The FedNow service also includes optional fraud prevention tools.
Another detail to work out with the provider is whether to integrate this service into the banking app or if a separate app will be used. The amounts that can be sent are subject to limits. The Fed sets the sending limit at $500,000 but limits can be tailored to individual account holders.
Faster payments, RFP capabilities, security features that support 24/7/365 processing and fraud prevention tools are just some of the services that financial institutions can use to create additional value for their customers. These features can give a financial institution a competitive edge and allow for the creation of new products. The Fed also plans to introduce additional features and service enhancements over time.
TAKE A FEDNOW TEST RUN WITH RECEIVE-ONLY
Despite the benefits of FedNow, some financial institutions may be hesitant or choose not to enroll in the service. The reasons why may include concerns about the cost of implementation, lack of customer demand for instant payments or preference for other payment systems. Financial institutions with these concerns can consider the optional feature of becoming a receive-only participant in FedNow.
A receive-only participant will be able to test the system and become familiar with FedNow’s features and capabilities without having to make any changes to their existing payment system. This participation type can receive payments from other financial institutions to meet liquidity needs, as well as return payments received, but won’t be able to initiate customer payments. This can help prepare for the full implementation of FedNow, which includes the ability to send payments and the ability to receive RFPs.
HOW TO PREPARE FOR FEDNOW
When assessing your institution’s readiness for FedNow, a review of the current payment systems is recommended to identify any gaps that should be addressed. Develop a roadmap for implementation, making sure to include timelines and key performance indicators. Employee training and system testing should ensure any issues are addressed before full implementation.
A trusted third party can play an important role in helping banks, credit unions and other financial institutions prepare for the implementation of FedNow, ensuring an effortless transition to the new payment system. Along with helping to assess their readiness, a third party can provide guidance on how to mitigate risks related to fraud, cybersecurity and compliance. Notable areas of compliance planning include:
- Regulation J
- Federal Reserve Operating Circulars OC 1, OC 5, OC 8
- Regulation E
- UCC 4A
- Risk Assessments
The Anders Banking and Financial Institution team advisors offer industry insights and expertise to help you navigate complex compliance requirements and evolving regulations. Learn more about how we can help your institution prepare for a seamless transition to FedNow, and the associated fees, by contacting Anders below.
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