Digital and mobile payments are here to stay. A McKinsey study shows that every 4 out of 5 Americans has used some form of digital payments in 2021. As with all other human inventions and the need for speed, this brings us to the question, what next? What will be the subsequent significant development in the financial services sector? The answer probably lies in FedNow.
FedNow is the next-generation payment technology developed by the Federal Reserve to help financial institutions in the U.S. offer safe and efficient instant payment services 24×7, 365 days a year.
The pilot program for FedNow services started in January 2021. The Fed has given a grace period to the community banks and other smaller financial institutions to begin preparations for processing payments through this service. FedNow is set to become the country’s most extensive instant payment service at the current pace of acceptance and training within the first few months of launch. In the previous blog on FedNow, we discussed the following:
- What is FedNow?
- Top features of FedNow services
- How does FedNow help you?
- Room for future developments
In this blog, we dive deeper into the world of FedNow to understand its practical applications.
Who Can Use FedNow?
The Fed is designing the FedNow service to be entirely use-case agnostic so that it can support the following types of transactions:
- Person-To-Person (P2P): Transferring funds between friends, family, and other individuals (pay for services like rent, meals, and outings)
- Consumer-To-Government (C2G): Paying federal fees and taxes.
- Consumer-To-Business (C2B): Paying for groceries, haircuts, gym memberships, etc.
- Account-To-Account (A2A): Transferring funds from one customer account to another (typically owned by the same person).
In the initial stages of rollout, FedNow will be available only for A2A and C2B transactions. However, with further developments and support from third-party service providers, the other two applications will unlock soon.
Payment Flow Via FedNow Services
The FedNow services will operate at the heart of the core payment systems set by the Federal Reserve bank. It will partner directly with the sender’s and the receiver’s financial institutions to facilitate faster payments. Moreover, it will also work with the individual service providers of both financial institutions. With a common global “language” offered by ISO20022, FedNow will aim to streamline the overall process for instant online payments. Learn more about ISO 20022.
Fraud Prevention with FedNow
The speed of payment transfer comes at the cost of security. With less time to verify the transaction details, faster payments are often more vulnerable than conventional payment methods like paper checks and cash. However, financial institutions and third-party service providers are actively developing ways to detect and minimize fraud while adopting faster payment systems.
The following fraud prevention techniques will be packed into the FedNow services from day one:
- Transaction Limits: Limiting the number of transactions and transacted amounts to accounts.
- Participant Negative List: Block transfer of funds to and from accounts specified by network participants.
- Fraud Reporting: Active fraud reporting and management by FedNow management.
- Profile Choices: To limit and manage users from using FedNow services in a corporate setup.
- Request for Information: Request and verify account information in real-time before transferring funds.
- Digital Signatures: Collect authorization for transfers digitally.
Pilot Program Updates
The financial institutions that participated in the FedNow pilot program gained the following knowledge:
- How to fine-tune organization-wide strategies to implement instant payments
- ISO 20022 specification details
- Information on FedNow profiles for service providers
- How to manage onboarding and credit and liquidity management transfers (LMT)
- Difference between in-house, outsourced, and hybrid options for instant payments
FedNow launch is scheduled to occur in the following phases:
- 2021: Advisory Phase
- 2022: Testing Phase
- 2023: Services Launch
We are currently in the testing phase and preparing for the launch of services in July 2023.
Some essential stats from the pilot program:
- Number of participating organizations: 120
- Pilot advisory sessions: 31
- Presenters: 77
- Questions asked and answered: 400+
- Breakout groups tested: 72
- Topics covered: 75
- Federal reserve session attendees: 225+
- External session attendees: 1090+
- Average participant satisfaction (as “very helpful”): 88%
Moreover, the Fed has built an active FedNow Community forum to collaborate with service providers and financial institutions. This community will evaluate the best strategies for seamless implementation of the FedNow services. You can stay up to date with the FedNow pilot program on the official website.
How to Get Started
The financial institutions that want to adopt FedNow and accept payments online should start with a reflective approach to identify their needs. They should ask the following questions internally:
- What additional capabilities will I need to handle real-time payment processing?
- Do I need to set up alert systems to inform customers of their payment status and other essential broadcast messages?
- What do I need to do to improve customer experience and functionality?
- What security and support measures should I take?
- What data and reporting capabilities do I need to make vital data accessible internally and to customers?
After they have finished the initial introspection, they should understand the following anticipated price points and transfer value limits:
- Anticipated Price Points:
- $25 monthly fee for each routing transit number (RTN) enrolled to receive credits
- $0.045 credit transfer fee for the sender of the transaction to pay
- $0.01 request for payment (RFP) fee for by the requester of the RFP
- Transfer Value Limits:
- Credit transfer transaction value limit: $500,000
- Default value limit for participants: $100,000 (can be increased or decreased)
The Fed will continually adjust these price points and limits based on various parameters. Moreover, the participants who want to learn more about FedNow can access the FedNow explorer page.
Final Thoughts
The FedNow service will bring exciting and efficient payment processes to the market. It will complement the current point of sale and card payment systems to offer various payment options. It will also help consumers, businesses, and the government save costs and time while carrying out financial transactions. Moreover, it will offer a new platform for the service and payment gateway providers to develop novel payment solutions. FedNow services are all set to change how we conduct business and look at real-time payments. Get in touch with our experts if you want to learn more about the latest innovative online and credit and debit card payment solutions, and help your business clients to join with FedNow.