The Federal Reserve's FedNow(SM) Service, due to launch in 2023, is generating a lot of buzz - and raising a lot of questions. For example, "What exactly is the FedNow Service?" "Who is eligible to participate?" "What capabilities are available at launch?" On May 19, the FedNow Service product team held a 60-minute webinar to answer these questions and provide an opportunity to learn more about the launch of real-time payments.
FedNow Service Overview
To establish context, the Fed opened the session with a brief overview, describing the Service and identifying eligible participants.
"The FedNow Service is being developed by the Federal Reserve to enable financial institutions of every size, in every community across America, to provide safe and efficient instant payment services in near real-time, around the clock, 365 days a year," explained the Fed.
The Fed also felt it was essential to call out eligible users of the Service in their presentation:
- Financial institutions (FIs) eligible to hold accounts at Federal Reserve Banks can participate in the FedNow Service and connect directly or through a service provider.
- FIs can designate a service provider or agent to connect directly and send or receive payments on their behalf.
- End-users can access the Service through their financial institution as they do today with other payment systems.
- Other industry providers can work with FIs to create and offer a variety of instant payment solutions.
Two immediate benefits for FIs and service providers are attracting and retaining customers and reducing risk for interbank settlement. End users also experience significant benefits, namely, the ability to send and receive funds in near real-time with confidence.
FedNow Service Features
As far as use cases go, "the FedNow Service is use-case agnostic," explained the Fed, "which means that with innovation from the industry, [the Service] can support a range of use cases to solve your customer's instant payment needs."
That said, capabilities released during the initial launch will prioritize core clearing and settlement features that "enable use cases, enhance safety/security, and improve customer experience."
More specifically, the FedNow Service's clearing and settlement features will focus on these services:
- Access via the Fedline® Channel
- 24/7/365 access
- Real-time payments
- Basic reporting
- High availability
Transfer features will include:
- Credit push
- ISO20022 messaging
- Maximum transaction limits
- Remittance information
Settlement features available at launch will include:
- Master account settlement
- Correspondent/respondent features
- Seven-day accounting
- Intraday credit
The FedNow strategy behind these available features at launch and future capabilities are consistent with current and anticipated market needs and best practices. For example, the Fed decided on the ISO 20022 standard with direct input from The Clearing House to enhance compatibility. The Fed anticipates that the release of FedNow will be in "significant alignment with RTP."
Value-add features on day one will also include request for payment and final confirmation of posting features. To ensure safety and security, message security and basic fraud controls will be available, such as lists, limits, and reporting. And from the customer experience perspective, 24/7/365 account balance availability will be available at the initial launch and assess to a participant portal.
Also under consideration for release at a future date are a directory to support P2P payments, bulk messaging, extended remittance, enhanced fraud controls, resolution management, enhanced reporting, and APIs.
Market Research/A2A Use Cases
It's important to note that the features outlined at launch will support use cases driven by the market. According to the Fed, faster A2A transfers reduce credit and settlement risk for financial institutions and funding delays for new accounts.
In a survey conducted of approximately 2,000 corporations and customers, the top two benefits of faster/real-time payments were immediate funds availability and around-the-clock access to funds.
As stated during the presentation:
Corporations and businesses identified their top use cases as:
- Internal transfers (32%)
- Cash pooling to consolidate funds across subsidiaries (15%)
- Account sweeps (6%)
- Funding prepaid accounts (6%)
Consumers, on the other hand, identified their top use cases as:
- Transfers between accounts at the same FI (29%)
- Transfers between accounts at different FIs (28%)
- Draw/fund prepaid debit accounts (15%)
- Transfer funds between FI and brokerage accounts (14%)
Based on industry feedback, the Federal Reserve identified five A2A use cases:
- Me to me: funds transfers to accounts at two different financial institutions
- Me to you: funds transfers from my account to someone else's account
- On us: internal money movement at an organization
- Brokerage: immediate funding of brokerage accounts
- Mobile wallets: funding or defunding a mobile wallet
Initial and future features of the FedNow Service will focus on enabling these and other use cases.
FedNow participation types are "optional and configurable" to drive early adoption and maximize flexibility. For example, financial institutions interested in enabling credit transfers can participate at three levels:
- Receive only
- Send and receive
- Request for pay
Each level enables certain capabilities. For example, financial institutions electing to receive will be able only to receive or return customer payments and send requests for payments. However, FIs will not be able to initiate customer payments or receive request for customer payments.
Participants can also elect these same three levels of Service for Settlement and FI Transfers or Liquidity Management Transfer features. For example, settlement services only for FIs enable a correspondent to settle a respondent's FedNow transactions. In the case of Liquidity Management Transfers, FedNow enables FI to FI transfers to support instant payment liquidity.
For a visual summarizing the various participation types, see Slide 8 of the FedNow presentation,
Preparing for FedNow
Product and Capability Planning
With the above-mentioned use cases and participation types in mind, how banks and credit unions leverage FedNow will be up to them. But, in preparing for the launch, the Fed recommends answering a few key questions:
- Are there specific instant use cases that are of interest to your business and retail customers?
- Will you be ready to send and receive requests for payments on behalf of your customers?
- What participation types will meet the needs of your customers and use cases of interest?
- What additional payments capabilities or enhancements may be needed?
- Which service providers need to be engaged to support your targeted use cases?
- What interaction points for customer-facing and internal staff might be impacted?
For a deeper dive into these topics or listen to the webinar and view the slides, click here: Webinar Recap: FedNow Service: Capabilities at Launch (frbservices.org).
NEACH - Your Strategic Partner
As always, NEACH remains your committed partner and advocate. Our educational resource, "The Building Blocks of Faster Payments," lays an excellent foundation for understanding all types of faster payments and how they can benefit your financial institution and its customers and members. Our "Faster Payments Playbook" series also highlights and reviews some strategic considerations in building your faster payments plan.
Also, don't forget to visit our Innovating Payments website, which addresses these and related topics as the industry moves forward in the wake of COVID-19. As a staff, we are closely monitoring the developments and remain a trusted resource in finding the answers to your questions.
As always, please let us know how we can better support you with faster and real-time payments and as you prepare for the launch of FedNow. Contact us by phone at 781-321-1011 or by email at email@example.com.
AUTHOR: Joe Casali, AAP, NCP
Executive Vice President
As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.