As financial institutions look ahead to 2023, “change” is the name of the game.
The FedNowSM Service is due to launch mid-year, leaving financial institutions just months to prepare. To that end, the Federal Reserve Banks recently published Operating Circular 8, which sets the terms and conditions governing the FedNowSM Service alongside its “FedNow Service Operating Procedures.” Also important to note is the Fed's new amendments to Regulation J, which will significantly impact financial institution operations.
Nacha also announced the release of its “New Risk Management Framework for the Era of Credit-Push Fraud,” which provides a new way of thinking about fraud detection, prevention, and recovery. “All participants in the payments system, whether the ACH Network or elsewhere, have roles to play in working together to combat fraud,” according to Nacha.
Fortunately, NEACH is at the forefront of these changes and remains committed to supporting its members by providing them with the information, tools, and resources they need to respond strategically and tactically to shifting norms. With that in mind, NEACH will host a 2023 Industry Update webinar on Jan. 26, 2023, from 2:00 to 3:30 (ET). You can find additional details at the end of this article.
Let's start with an overview of some of these issues to provide context.
The FedNow Service Launch
The target launch date for the FedNow Service is May to July 2023. The Fed’s response to the increasing demand for instant payments will tip the scales, making instant payments the norm. As the Federal Reserve adds new features and use cases, financial institutions can expect a heightened demand for real-time payments and begin preparing now to meet that demand.
When it comes to the FedNow Service launch, certain questions loom large. For example, which instant payment service will best serve your financial institution—the Clearing House’s Real-Time Payments® (RTP) Network or the FedNow Service? Should your financial institution implement both or just one of these solutions? Does your financial institution plan to send or receive instant payments? What will be the implementation costs? Should your organization partner with a third-party service provider to help? If you don’t plan on offering real-time payments through the FedNow Service or the RTP Network, what is your long-term plan for satisfying what appears to be a clear need for instant payments in the industry?
As you might expect, answers to these questions vary, depending on your financial institution. During the webinar, NEACH will examine various considerations and help you determine what to take into account when identifying strategic next steps.
Operating Circular 8 for Funds Transfer through FedNow and the FedNow Operating Procedures
In its ongoing efforts to help the industry prepare for the FedNow Service launch, the Federal Reserve has released numerous resources, most recently, Operating Circular 8 for Funds Transfers through FedNow and the FedNow Operating Procedures. Both documents contain clearly defined fraud reporting procedures and error resolution procedures on the FedNow platform.
For example, included in the FedNow fraud procedures is the use of an optional negative list. As a financial institution, you can maintain a negative list of accounts, limiting FedNow Service access. The Federal Reserve will review the list before sending a payment. Indeed, the list has its advantages, but it will take time and resources to maintain.
This is just one of many topics discussed in Operating Circular 8 and the FedNow Operating Procedures. During the webinar, we will also bring additional topics to light to guide your decisioning and planning process when considering implementation.
New Amendments to Regulation J
New amendments to the Federal Reserve’s Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) work alongside UCC4A and Reg E concerning consumer FedNow transfers. But how that plays out practically requires careful consideration. For example, if there is a conflict between UCC4A and Regulation J, it appears that Regulation J supersedes UCC4A, or does it? It also seems that Regulation J supersedes UCC4A but not Regulation E regarding error resolution.
The amendments raise significant questions for financial institutions. Indeed, education will play a primary role in helping financial institutions understand and apply these new amendments to their institution, and we will talk through some of those considerations in January’s session.
Nacha’s Risk Management Framework
Nacha recently published a new Risk Management Framework that will have a significant impact on financial institutions. To level-set, “Nacha’s new risk management framework calls for a new way of thinking about fraud prevention, detection and recovery, and a cultural change in the industry about fraud information sharing,” said the organization’s website. “Nacha’s previous risk management strategies for the ACH Network have focused on protecting consumers and organizations, and their account-holding financial institutions from fraud to unauthorized debits . . . Now, however, the most significant fraud threats to bank account holders involve frauds and scams that result in money being sent out of their accounts.”
The document raises several questions. For example, will there be some form of ODFI resolution when there is a fraudulent credit? Will Nacha add additional warranties to the Nacha Rulebook?
We know that financial institutions will now have to educate and inform their customers about how not to accept fraudulent credits. To that end, financial institutions must invest in customer education programs, fraud controls, and fraud prevention services. On a practical level, that’s just more tools financial institutions will need to implement and pay for.
Fortunately, NEACH has spent months reviewing these issues and seeking answers to members’ most frequently asked questions and will be sharing what they learned in conversations with Nacha during its 2023 Industry Update webinar.
NEACH 2023 Industry Update Webinar
During this interactive, fast-paced session, Mark Dixon, AAP, APRP, NCP, Vice President, Education, NEACH, and I will recap the changes that occurred in 2022 and provide an overview of the 2023 landscape. We will also dive deeper into Operating Circular 8, the FedNow Operating Procedures, Nacha Rules changes, and Regulation J.
Our goal for this webinar is to provide an introduction to the FedNow Operating Procedures and Operating Circular 8 and discuss how to utilize FedNow in terms of downtime, the fraud report, and daily reports. We will also do our best to outline what may be implied in Nacha’s Risk Management Framework, what this could mean, and what may be coming down the pipeline.
As we’ve said many times before, our members are our highest priority. It is our goal to ensure that our members have the most up-to-date information available about the changes occurring in 2023 and their impact on their financial institutions.
To learn more or to register for the webinar, click here.
AUTHOR: Sandy Ortins, AAP, APRP, NCP
Senior Vice President
Sandy Ortins is the Senior Vice President of Operations for NEACH. As Senior Vice President for NEACH, Sandy oversees the NEACH Products and Services, Membership, and Advocacy areas. As such, she manages the organization’s member resources and tools; provides quality service to membership; and represents NEACH and its membership in relevant councils and task forces to drive understanding of and ensure support of the needs of its diverse membership base. Connect with Sandy to read more of her blogs, articles, and posts.