The FedNow Service - What is it and what makes it a unique opportunity?
Coming in July this year is a new service called FedNow. Understanding the capabilities and how it can help you is important. More details will be released closer to the launch. In this article we aim to give you an understanding around what this new platform is, how it works and the benefits it will offer…
So, what exactly is FedNow?
The FedNow Service is a new instant payment infrastructure developed by the Federal Reserve that allows financial institutions of every size across the U.S. to provide safe and efficient instant payment services.
It is the first U.S. government-created and backed portal allowing banks to send and receive funds almost instantly.
Prior to the launch, the Federal Reserve Board (‘The Fed’) had a payments portal, but it didn’t operate in real time like other money transfer apps (Venmo, PayPal…) that allow users to instantly send money between accounts. Sometimes, it took days to send a payment and a person would have to plan in advance of the due date to make sure funds were received on time. Not anymore. If you want to, you can send it on the due date without any issues and have your payment credited within seconds or minutes.
The main goal of FedNow is to facilitate nationwide reach of instant payment services by financial institutions, regardless of the geographic location. A 24/7 service. The first release of the FedNow Service will provide baseline functionality that will support market needs for a range of use cases, including those growing in demand such as transfers and bill pay.
A person can send funds in real-time. Think about paying your mortgage, utility bills, and other expenses. This not only goes for the general public but also Business owners.
FedNow has been years in the making, but its potential impact in the banking industry could result in financial institutions becoming more efficient and effective in the way they handle transactions.
When the FedNow service launches it will include a solid set of core clearing and settlement functionality and other features. The launch in July won’t include the full suite of functionality. It will be phased in over time.
In the first phase, The Fed will be wanting to measure the effectiveness of the system and then include features and enhancements for future releases to continue supporting FedNow. So at the core, FedNow provides clearing services for financial institutions to provide immediate end-to-end payments to customers.
As far as the number of financial institutions using the system, the Fed will make it available to more than 10,000 financial institutions that operate within the Fed’s network.
Ken Montgomery of the Federal Reserve said it best "We couldn't be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution," "With the launch drawing near, we urge financial institutions and their industry partners to move full steam ahead with preparations to join the FedNow Service."
With the FedNow service, there will be features that financial institutions can take advantage of. They include:
Payments will clear and settle between financial institutions in real time 24x7. A financial institution will settle payments in its own Federal Reserve Bank master account or designate a correspondent such as a bankers’ bank or corporate credit union. If designating a correspondent, payments will settle in the correspondent’s master account.
Reporting and reconcilement
Because the FedNow Service will process payments 24/7, every day of the year, consideration has been given to the timing of end-of-cycle activities for accounting and reporting purposes.
The FedNow Service’s cycle date will be from 7 p.m. to 7 p.m. ET the next day, seven days a week. As a result, the FedNow cycle date will differ from the calendar date for a period of time each day (from close until midnight).
The FedNow service will:
- assign the applicable cycle date to the transaction and include it in the advice of settlement message and notifications.
- send a daily broadcast message to participants advising them of the change in cycle date.
- And the Federal Reserve Banks will provide a variety of reports and tools to help financial institutions manage their account balances and reconcile FedNow activity.
FedNow-specific reports will include:
- Activity totals – FedNow summary totals of value and nonvalue messages (RFP, cancellation of RFP, additional information and return request) at the RTN level per cycle date.
- Activity details – Lists individual FedNow Service value and nonvalue messages per cycle date.
- Master account balance – Available on demand
Standard Federal Reserve Banks’ reports that will be updated to include FedNow information include:
- Daily Statement of Account – FedNow Service summary totals by RTN will be included.
- Financial Institution Reconcilement Date (FIRD) – Individual transactions will be provided in the report for master and subaccounts.
- Statement of Account in Spreadsheet Format (SASF) – Available for master accounts.
There are many more features that can help a financial institution. Managing liquidity is a big part of it.
Financial institutions that participate in the FedNow Service or their correspondents will need funds or available credit (liquidity) in their accounts at all times to process payments instantly.
To support financial institutions’ liquidity needs, the FedNow Service will allow financial institutions to transfer funds to each other within the service. Key requirements:
- Financial institutions set up to send and/or receive customer payments will automatically be enabled to send and receive liquidity management transfers, which are transfers between financial institutions in support of liquidity needs. Financial institutions can disable this feature if they prefer.
- Financial institutions that use a correspondent to settle FedNow activity will be allowed to receive liquidity transfers, which will be posted to the correspondent’s master account.
- Financial institutions can choose to participate in the FedNow Service for the sole purpose of supporting liquidity management transfers for FedNow participants, without needing to enable other capabilities within the FedNow Service.
- Financial institutions that participate in a private sector instant payments service backed by a joint account maintained by the Federal Reserve Banks will be able to use the FedNow Service for sending and receiving transfers to and from a master account and the joint account.
Benefits of FedNow
Instant peer-to-peer payments
When it’s implemented, FedNow will allow instant USD settlement between US residents on a peer-to-peer (P2P), business-to-business (B2B), and business-to-consumer (B2C) basis. It doesn’t matter if banks are closed or not. It’s a 24/7 operation.
This feature will eliminate the usual ‘three to five business days’ timing of legacy payment settlements. As a result, it will give payees who rely on cash flows reliable, intraday access to cleared funds.
FedNow will still connect the majority of US residents, as well as many wealthy USD users abroad. This will soon encompass hundreds of millions of people.
A selling point of cryptocurrencies was their promise to reduce transaction costs. FedNow promises lower costs than almost any blockchain in existence. The Federal Reserve will charge most financial institutions a small or de minimus $25 monthly access fee.
For payments up to $100,000, FedNow will charge just 4.5 cents per transaction paid by the sender plus 1 cent per transaction request paid by the requester. The fee schedule accounts for the complete transfer in fiat, with no on/off-ramping through any crypto exchange.
FedNow will eliminate all fiat-crypto fees, risks, and delays.
FedNow’s database will allow for highly scalable transaction processing. The advantage of an entirely centralized approach to digital payments. Scalability remains an issue for any digital asset that prioritizes decentralization. FedNow, in contrast, is 100% centralized and, therefore, scalable with nearly limitless throughput.
Unlike most stablecoins which regularly struggle to maintain their peg, FedNow will transmit an unchanging, guaranteed dollar value always without price fluctuations.
There is a fraud tool as well. FedNow offers tools to combat fraud. Tools include a maximum limit on transaction sizes (initially proposed at $500,000 per account, per day), the ability to flag accounts involved in suspicious activity, and reporting tools that include semi-automated as well as manual reviews.
As is the case with the implementation of new platforms, some confusion will arise until things become the norm. There are already questions floating out there in regards to the impact it will have: Such as:
- 1. Will FedNow replace cash?
- 2. Will FedNow create a digital currency?
- 3. Will FedNow replace existing cash apps?
- 4. Will FedNow dominate the payment space?
FedNow will not replace the dollar, or digital currency for that matter.
FedNow will allow financial institutions to make those transfers happen between bank accounts. The FedNow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash.
Critics have speculated that FedNow will create a digital currency, but the Fed has tried to dispel this false assumption by flatly stating:
“FedNow is not related to a digital currency.”Part of the confusion stems from separate discussions on whether the Fed should create what’s called a central bank digital currency (CBDC). The Fed has clarified that it has made no decision on issuing a CBDC, and that it would “only proceed with the issuance of a CBDC with an authorizing law.” Issuing a CBDC is “something we would certainly need congressional approval for,” Fed Chair Jerome Powell told the House Financial Services Committee in March.
There are other countries that have launched CBDCs, (Central Bank Digital Currencies) the US is not the only ones. This includes Bahamas, China, India and Nigeria have launched CBDCs, and other nations are exploring the idea. Some countries are looking at whether a central bank digital currency could be a safer, faster way of transferring funds between banks. Others are considering whether to offer a CBDC as fiat money for the public, with the accounts held at a central or commercial bank.
At this point in time, The Fed has made clear that FedNow is not intended to replace other money transfer options. Rather, it is meant to work alongside the current systems built by the private sector. But FedNow could be a game changer because thousands of banks already using the Fed’s current, slower payments system may see FedNow as a safe and faster option that has government backing.
FedNow will have a significant impact on the global payments system of money transfers among bank accounts throughout the world. Its not something that will be done in months, but years for the platform to be fully tested and adopted.
For Fed’s participating institutions, they must first opt in, then begin testing and finally adjust their own systems to fully adopt it.
Future capabilities of FedNow
The first release of the FedNow Service will provide baseline functionality that will support market needs for a range of use cases, including those growing in demand such as account-to-account (A2A) transfers and bill pay.
Alias-based payments, which could include a ‘Fed directory.’ Alias-based payments could eliminate the need to remember an account or routing number. The Ethereum Name Service (ENS) does the same thing for Ethereum by creating domain names, or ‘aliases’ for Ethereum addresses that look like long strings of numbers and letters.
The Federal Reserve will operate within a phased approach. This will help ensure the core features and functionality are brought to market as quickly as possible. Also, while providing flexibility to adjust and add features in response to industry demands or changes in technology. These are some of the additional features in future releases which include:
- A Fed directory and/or other approaches to support alias-based payments.
- Support for the use of application programming interfaces (APIs).
- The ability to support bulk payments, which will enable payroll use cases.
- Enhanced remittance information, which will support B2B use cases.
- And additional controls to improve safety and experience.
In summary -
The FedNow service will be available very shortly, with the first phase this coming July. Further stages will be phased in over a period of time
There will be many features available for consumers and businesses with features that will somewhat mimic what is offered through payment services like Venmo, PayPal and others. There are differences between the services and there will be a lot more once the future upgrades take place in the system.
Financial institutions should have been preparing for this already, but it’s not too late. Adoption of the service will be a process because of the setup that needs to be conducted internally within financial institutions. But once implemented, it will be a service that will offer a lot of conveniences.
Faster payments, cheaper payments, service around the clock (24/7, 7 days a week), liquidity management, fraud services and more.
For in-depth information - https://explore.fednow.org/