Round-the-clock, real-time payments often are credited to the Venmos and PayPals of the world. But next year, the nationwide introduction of the Federal Reserve’s FedNowSM Service will offer 24/7/365 funds availability to help all types of financial institutions move beyond the person-to-person (P2P) use cases that FinTechs popularized.
The FedNow Service will broaden access to instant payments features and use cases by clearing and settling payments between financial institutions around the clock every day in a Federal Reserve Bank master account. This always-on instant payments functionality also reduces interbank credit risk and liquidity risk for participant institutions, increasing the appeal of current and new use cases.
Nick Stanescu, a Boston Fed senior vice president and FedNow Service business executive, spoke with Karen Webster recently about his organization’s progress with the FedNow pilot program, which began with an input and feedback phase in early 2021 and has recently shifted into an operational, pre-launch phase.
“In the first weeks of our early testing phase, several pilot organizations successfully connected and delivered test messages over the pilot version of the FedNow Service,” Stanescu said, “including smaller and large banks and some of the largest service providers.”
FIS, Jack Henry and Fiserv, among other firms, already have connected and are starting to test messages. More than 120 organizations are part of FedNow’s pilot program, including Square Financial Services, other FinTechs and processors.
Key areas of pilot interest and feedback center on onboarding, operational controls, documentation and the most important attributes needed in the ISO 20022 message format, Stanescu said.
The use of ISO 20022, a global standard for payment message specifications, was a strategic decision in building the FedNow Service and a foundation for broad interoperability across the domestic ecosystem and across borders in the future. The FedNow Service will leverage the FedLine network for secure connectivity, which today connects 7,000 financial institutions and processors to the Fed’s critical payment and information infrastructure, services and applications, such as ACH, wire payments and Federal Reserve accounts.
Initial use cases for instant payments powered by the FedNow Service noted by Stanescu include account-to-account (A2A) transactions, digital bill presentment and payment, and disbursements for insurance claims and other timely payouts. Underlying the latter use cases is a highly requested feature of the FedNow Service called request for payment, or RFP.
“Request for payment is, absolutely, foundational to our instant payments value proposition,” Stanescu said of the FedNow Service.
Common themes for both FinTechs and financial institutions (FIs) is that the FedNow Service will improve their ability to serve businesses and consumers that increasingly are pushing to make sure their payments get faster — and so fast that they are instant.
“We see a tremendous amount of demand,” Stanescu told Webster. That demand is borne out by a recent Federal Reserve survey that found that nine in 10 businesses expect to be able to initiate and receive faster payments by 2023 and that many are ready to do so now. Another recent survey found strong demand for faster payment options to fit consumers’ digital, always-on lives.
Of course, instant payments go a step further than faster payments due to immediate settlement and near real-time availability of funds to the beneficiary. “You send me money and I can immediately see it’s in my bank account,” Stanescu said.
“We are taking an incremental approach to delivering the FedNow Service,” he said, “so we can expand functionality over time and meet evolving industry needs.”
Not just for consumer use cases — instant settlement can also make a difference in the business sector. For example, instant payment of invoices can be of immeasurable benefit to companies that want to pay their suppliers in real time, get paid in real time, and operate more efficiently by associating funds with the correct invoice. “Those functionalities will improve efficiencies and cash flow,” he said.
Ultimately, the FedNow Service will serve as a platform for financial institutions, processors and FinTechs to develop innovative new services. Stanescu expects to see some natural migration of payments between the ACH and wire and FedNow rails over time.
“We’re also very likely to see new type of payments as we keep moving away from cash,” he said, which may expand overall payments volumes. Early feedback indicates payroll may be an early adoption use case as pay-on-demand models place less demand on batch processes.
Battling the Bad Actors
The conventional wisdom is that faster funds come with the threat of faster fraud. Webster noted concerns that as consumers initiate payments, those instant transactions might not make their way to the right receiver.
“This is something I hear about a lot when I talk to the industry,” said Stanescu, but he cited a “strong set of multilayered controls and capabilities” in the initial version of the FedNow Service to support fraud management, mitigate risk and assist FIs as they battle bad actors.
FedNow Service features will help participating financial institutions conduct investigations and provide returned funds connected to fraud and errors. Beyond mitigating fraud through the design of the service, Stanescu noted that the Fed is exploring opportunities to collaborate with the industry on consumer education and outreach programs to help identify and prevent scams and promote strong enrollment and authentication processes. In the meantime, the value proposition inherent in irrevocability remains intact: receivers have protection and a guarantee that good funds have hit their account and can be used immediately.
As more FIs adopt the FedNow Service, a positive network effect is expected to take shape, spurred in part by the FedNow Service Provider Showcase that can help banks and other firms — including challenger and digital-only firms — flesh out their end-to-end visions for new and faster payments.
“We’re not just ‘pushing’ information to pilot participants but getting it back as well, so we can make sure the FedNow Service evolves and we all stay current with user needs,” Stanescu said.