Almost everyone in the payment world is aware of the suggested strike of the Federal Reserve Board into real-time payments (RTPs). On August 5, 2019, the Federal Reserve Board declared that they would introduce a new round-the-clock real-time payment and settlement service.
This service is known as the FedNowSM Service (FedNow). It is developed to ensure faster payments in the United States. Therefore, the Federal Reserve Board appointed Kenneth Montgomery, the vice-president and the COO of the Federal Reserve Bank of Boston, to lead the team of FedNow’s development on August 15, 2019.
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What Is FedNow?
FedNow refers to the 24x7x365 real-time payment and settlement service that will integrate the functionality of clearing and settling the payments. It will authorize the financial institutions to share information required to make the deposit and withdrawal to the customer’s account. Moreover, it will allow them to inform the customers about the failed or successful payments.
At present, the Federal Reserve Board facilitates payment and information services to over ten thousand financial institutions. However, after the implementation of FedNow, it will offer access through the FedLine networking both directly and through agents.
Therefore, FedNow may launch in 2023 or 2024 and will continue to exist, exclusive of the RTP network initiated by The Clearing House in 2017. Thus, the services of FedNow will be released in phases, followed by additional features and service enhancements.
How FedNow Works?
The payment procedure will take place between the financial institutions in real-time, and the recipient will receive the money within seconds. With the help of FedNow Service, the financial institutions can fulfill the emerging needs of the customer and give cutthroat competition to the other institutions.
The most significant features of the working of the FedNow’s multi-year build phase are as follows:
- The FedNow will only be responsible for domestic transactions and not for international payments and debit authorizations.
- The FedNow members are only authorized to participate directly. However, they can appoint an agent or a service provider to submit and accept the instructions of payment on their behalf or settle grants to a corresponding bank.
- Like the latest ACH system in the US, the non-bank financial technicians will examine the FedNow indirectly with the help of financial institutions or their agents or service providers.
- The limit of the primary pre-transaction is USD 25000 (nevertheless, participating banks can lower the payment ceiling they send).
- The FedNow’s interbank messages will comply with the ISO 20022 standard and contribute to the request for payment messages and non-value message types, along with the clearance content.
- The FedNow will make the credit facility available 24x7x365 to assist the participating banks in ensuring continuous liquidity for real-time payment and settlement.
- Fees have not been declared but will constitute the fixed fee for participation and the per-item charges that are required to be paid by the sender and receiver’s bank.
In simple form, the completed payment over the FedNow will be processed through the following steps:
- Through an end-user interface independent of the FedNow Service, the sender (individual or business) sends a payment message to its financial institution. The financial institution will do the payment screening as per the requirements and internal processes.
- After all the processes, the financial institution proposes the payment message to the FedNow Service.
- The FedNow Service then verifies the payment message with the format specifications.
- They send the specifications of the payment message to the financial institution of the receiver, seeking the approval of the receiver’s financial institution towards the payment message. During this time, the financial institution has the right to accept or deny the maintenance of the specified amount.
- The receiver’s financial institution confirms the acceptance of the payment message by sending an affirmative response to FedNow. The above two steps are conducted to minimize the number of ineffective payments and the following exception cases that may lead to vast volume systems.
- Now, the FedNow Service will deposit and withdraw from the delegated master accounts of the financial institutions of the sender and receiver, respectively.
- The FedNow Service sends the completed payment message both to the sender and receiver’s financial institution.
- Therefore, the respective amount is credited to the receiver’s account immediately.
What Is The Advantage Of FedNow?
The FedNow provides the following benefits to both the financial institutions and the public at large:
Safe Instant Payments
The safe payment system is significant to the financial stability and economic growth of the US. It is because efficient market operations for every online goods and service depend on the effortless functioning of the country’s banking and payment systems.
Thus, the FedNow Service will ensure the safety of the US payment system in several ways. The growth and development of FedNow’s instant payment services will authorize the Federal Reserve Board to engage its capacity to offer support and stability to the banking system and, most importantly, to the economy in times of crisis.
The Federal Reserve will have the authority to promote the implementation and development of broad industrial standards for wrangling fraudulent instant transfer payments.
Additionally, the growth of the FedNow Service will promote the safety of the payment system in the US through redundant resilience. It will allow the depository institutions that connect to the multiple services to initiate backup relations if the services have an operational disruption or any other issues.
More Effective Payment System
An efficient payment system initiates and inspires economic activity by making it more convenient, cheaper, and faster for businesses and individuals to transact for goods and services.
FedNow Service will help the payment system to function smoothly. This will happen by generating a base on which depository institutions throughout the country and a vast payment system can establish safe, innovative, and modern instant payment services.
With the development of instant payments across the nations, the FedNow Service will enhance the growth of new instant payment services. It will improve the efficiency to innovate and face the tough competition in the market for end-users.
The existence of numerous real-time gross settlement (RTGS) services for prompt payments, the private-sector RTGS services, and the FedNow Service offer supplementary efficiency advantages that lead to higher service quality and lower prices. So, it will benefit the US payment system and its customers on the whole.
Assist Small Depository Institutions
It is beneficial for the participants of the payment systems to offer payment systems to all the US depository institutions. Hence, it authorizes the businesses and individuals to initiate payments to the other parties for multiple purposes.
The Federal Reserve Board is distinctively placed to assist in the development of safe and efficient nationwide settlement services for instant payments through settled customer service relationships with over 10000 depository institutions and its existing payment infrastructure.
Since its foundation to provide countrywide access, the Federal Reserve Board has expanded to assist depository institutions of all sizes on fair and justifiable terms. The FedNow Service will promote access to the real-time gross settlement infrastructure for instant payments for their serving communities and the depository institutions.
Support Liquidity Management
The FedNow Service will constitutionally support fund transfers on a 24x7x365 basis. The Federal Reserve understands the needs of the industry concerning instant payments. So, they assert that offering a tool for liquidity management is the efficient way to acknowledge those needs.
This tool will be given to FedNow’s traditional liquidity providers and participants in private-sector services for instant payments (applicable to the services that have a joint account at the Reserve Bank).
These participants may opt to use the tools for the restricted purpose of liquidity transfers. This option is available to them without fulfilling the requirement of the participant in the FedNow service.
Can FedNow Be The Next Thing In The Payment Gateway Ecosystem For VARs And The US?
With the launch of FedNow, the adoption of IP services will speed up in the United States. It has been evident from the ACI research that the nation expects a five times growth by 2024.
Further development can be seen, because of the current global pandemic situation. The pandemic brought an urgent need to minimize America’s resilience on paper-based payments and transformation to a more considerable digital payments ecosystem.
It will not only minimize the physical interactions but also stimulate the speed of disbursed funds, such as wages and government benefits. It is a common belief that FedNow would help to achieve success as it facilitates the transaction between banks, businesses, VARs, and credit unions.
The VARs have the benefit of faster and easier bill payments for their value-added services. It will provide improved control to both consumers and VARs.
The Key Takeaway
If we look from a broad perspective, FedNow should benefit the finance industry. Several merchants, VARs, FinTechs, and technology companies solicited direct access to the network that could further expose banks and payment networking.
It offers a considerable opportunity for continued innovation in banks. This is where organizations want to transform offerings to meet the payment needs of merchants, VARs, FinTechs, and technology companies.
Several questions remain unanswered about the implementation of the FedNow (which is expected to launch in 2023 to 2024), pricing, and interoperability within the nation and across the globe.
If the nationwide momentum and the demand of consumers for instant payments are stated, the financial institutions should acknowledge their intraday liquidity abilities and their cash flow forecasting to prepare for and take part in the emerging payments landscape.
