FedNowSM Service: A foundation for an instant payments world
The world is moving at a fast pace, and businesses and consumers expect payments to move just as fast, if not instantaneously. In fact, nearly two-thirds of businesses would factor access to faster payments into future decisions on whether to switch banks.1
To help meet this growing demand, the Federal Reserve is developing the FedNow Service to foster nationwide reach of instant payments. These payments can help your organization attract and retain customers, generate new revenue streams, and remain competitive in an increasingly fast-paced world.
A new instant payment infrastructure
At its most fundamental level, the FedNow Service provides interbank settlement that enables funds transfers from a sender’s bank account to a receiver’s bank account immediately and at any time.
The service will use the widely accepted ISO® 20022 standard and other industry best practices to make it easier to integrate with back-end systems. Additionally, the FedNow Service will include a wide array of features that will:
– Support flexible adoption, including support for service providers and correspondents and an option to enroll as a “receive-only” participant.
-Provide request-for-payment capability and other value-added tools to support participants in their handling of payment inquiries, reconcilements and certain exceptions.
-Provide an interface to support data needs and the ability to have access to balance information 24×7.
-Support payment integrity and data security, and tools to help participants combat fraud, such as a transaction value limit and reporting features.
Liquidity-management transfers (LMTs) will also be available to participants in the FedNow Service to support funds transfers for the round-the-clock liquidity needs of instant payments.
FedNow Service Use Cases
Financial institutions and service providers can work together to leverage the FedNow Service features and functionality as a springboard for developing new instant payments use cases and services. Use cases include immediate payroll, e-invoicing, funding brokerage accounts and making claims payments as a few examples.
Through account-to-account (A2A) capabilities, for example, the FedNow Service can allow consumers to transfer funds between accounts at two different financial institutions to meet a loan payment deadline or cover incoming charges to avoid an overdraft fee. Businesses can use A2A transactions to maximize liquidity and interest income by providing real-time transfers between accounts across subsidiaries.
With bill pay capabilities, your customers – both consumers and businesses – can move money immediately from their own accounts to biller accounts, potentially limiting service disruptions and late fees.
Supporting Your Instant Payments Journey
Financial institutions interested in adopting the FedNow Service, or wanting to learn more about it, should start conversations with vendors such as service providers, correspondents and core vendors.
Providing instant payments to include acquiring applications to support FedNow is a big decision. Please know, MIB will be here to settle activity on FedNow and to help onboard your institution when you are ready. For community banks concerned they may be behind in preparing for faster and instant payments, please do not worry. There is plenty of time to watch the market and see what solutions surface that will best serve you and your customer base. It is much more important to be methodical and deliberate in your payment strategy versus being “first to market” with something as new as instant payments. We anticipate seeing many value-added options for commercial clients as well as fraud prevention tools come to market in the next 2-3 years. If you feel you need to jump on the bandwagon right away, it would be advisable to not sign a long-term application or processing contract as there will be much change in this space in the coming years, and you will not want to be locked into something that may not best serve your market long term.
Connect with Us
Planning for instant payments may seem daunting, but we’re here to help. Contact one of our experts today.
Lyndsay York 573-556-1396.
You can also learn more about FedNow at FedNowExplorer.org and by reviewing the FedNow Service Readiness Guide.
“FedNow” and “FedACH” are service marks of the Federal Reserve Banks. A list of marks related to financial services products that are offered to financial institutions by the Federal Reserve Banks is available on FRBservices.org. “ISO” is a registered service mark of the International Organization for Standardization.
1. Federal Reserve, Businesses Look to the Future with Faster Payments (August 2021)
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