Federal Reserve to Launch FedNow Service in July

  • June 2, 2023
  • Quantivate

FedNow, the first government-developed instant payments system, will enable participating U.S. financial institutions to offer real-time bank transfers. Joining the ranks of other money transfer options like Zelle, Paypal, or Venmo, FedNow “allows financial institutions of every size across the U.S. to provide safe and efficient instant payment services” for businesses and individuals, according to the Federal Reserve.

The Federal Reserve started certifying early adopters in April 2023. Certification for early adopters encompasses a comprehensive testing curriculum with defined expectations for operational readiness, including the ability to send, receive, and process ISO 20022 messages and meet the requirements to successfully operate in a 24x7x365 instant payments environment.

In June, the Federal Reserve and certified participants will conduct production validation activities to confirm readiness for the July launch. It’s estimated that approximately 120 banks and service providers will be able to offer the FedNow Service in July 2023.

What Is the FedNow Service?

The Federal Reserve’s Fed Now Service FAQs explain that the initial launch in July will focus on core functionality, with additional features planned for future releases:

The Federal Reserve will take a phased approach to the FedNow Service. The initial launch in July 2023 will focus on core functionality to meet market needs and help financial institutions transition to 24x7x365 operations. Initial features will include:

  • Core clearing and settlement capabilities to support a range of transaction types and use cases.
  • Use of the widely accepted ISO 20022 standard and other industry best practices to support interoperability.
  • Fraud prevention tools such as the ability to set lower transaction value limits and specify conditions under which transactions would be rejected.
  • Receive-only participation, which will allow financial institutions to receive payments through the FedNow Service, but does not require them to have the ability to originate payments.
  • A liquidity management tool that will allow participants and others to transfer funds to each other to support the liquidity needs of instant payments.
  • Reporting to support financial institutions and their correspondents with transaction monitoring, account balance inquiries and reconciliation.

Banks and credit unions should also note that:

  • The FedNow Service is available to all eligible depository institutions in the U.S., regardless of size or location. There is no requirement that financial institutions offer the service, and doing so requires certification.
  • Fintechs will need to partner with a participating financial institution to provide this service.
  • It will be a credit-push system, initially. The FedNow system cannot be used to take money out of anyone’s account.
  • Using it will require a bank account and online/mobile banking.
  • It will be interoperable with other instant payment systems, but not with the existing ACH (automated clearinghouse) system.
  • The cost to users will depend on the financial institution and/or service provider.
  • The maximum transaction value is $500,000, defaulting to a $100,000 limit. Participating financial institutions or service providers can increase the default credit transfer limit up to $500,000 or even lower to another amount.
  • The U.S. Treasury is participating in the FedNow Service.
  • The FedNow Service will be provided via the Federal Reserve’s existing FedLine® network.

What the FedNow Service Is Not

  • The FedNow service is not an app. Consumers and businesses must use FedNow through a participating financial institution or service provider.
  • It is not a blockchain.
  • It is not a central bank digital currency.
  • Contrary to some online rumors, this FedNow system has no functionality to track one’s funds transfers. There is no monitoring of FedNow transactions beyond the typical monitoring of all transactions through a bank for BSA/AML/OFAC and/or fraud purposes.
  • No one can remove funds from anyone’s accounting using FedNow. It can only be used to transfer funds in.

FedNow Use Cases

In general, if the sender and receiver of the funds are using financial institutions participating in FedNow, the receiver will see the funds in their account instantly, eliminating the lag time between requesting a transfer and having it fulfilled. The service will be available every day of the year, around the clock, enabling use cases such as:

  • Instant payments for day laborers.
  • Instant transfer of funds between individuals, even if they bank at different financial institutions.
  • Instant transmission of government funds for emergency relief payments (via the participation of the U.S. Treasury in the FedNow Service.)
  • Bill pays can be made the day a payment is due.
  • E-invoicing for businesses, which is an electronic request for payment. When the other party responds and initiates the payment, the remittance detail will be pulled from the e-invoice, making it easier for the business to post the payment.
  • Merchants no longer have to wait for incoming payments to clear.

FedNow Regulatory & Compliance Information

As with all new financial services, there are also new rules and regulations. In October 2022, Regulation J was amended with Subpart C and Operating Circular 8. This is very important for the operations staff in a financial institution, as well as risk and compliance teams.

Financial institutions will also have to rethink how to perform OFAC screening and clear potential hits within seconds, even after hours, on weekends, and on holidays. But note that FedNow transactions are only domestic transactions between individuals and organizations with a U.S. bank account, which lowers risk.

Participating institutions will need to enhance real-time fraud mitigation measures. Fraud prevention tools for FedNow available at launch will include:

  • A transaction value limit for all FedNow transactions and the ability for participating banks to set lower value limits.
  • The ability for financial institutions to specify certain conditions under which transactions would be rejected, such as by account number.
  • Reporting features and functionality, including reports on the number of payment messages that were rejected based on a participant’s settings.

Why the FedNow Launch Matters for Financial Institutions

FedNow will be available to more than 10,000 financial institutions that operate in the Federal Reserve’s network.

“Saying FedNow would be a game changer is almost downplaying the potential impact,” Forbes reports. “Because the Fed has had the largest banking universe housed within its current, slower payments setup, its thousands of participating financial institutions have waited years for a real-time system supported by the government.”

Eligible institutions will be able to choose from and combine different participation types that the service enables to best meet the needs of their organization and its customers or members, including:

  • Send and receive
  • Receive only
  • Liquidity management transfers
  • Settlement services

“The benefits of instant payments are increasingly important to consumers and businesses, and the ability to provide this service will be critical for financial institutions to remain competitive,” said Ken Montgomery, Federal Reserve Bank of Boston first vice president and FedNow Service program executive, in a press release. “Financial institutions will be able to use the FedNow Service as a springboard to provide innovative solutions to their customers.”

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