Preparing for FedNow℠ and the Power of Instant Payments

After three years of anticipation, the FedNow Service has officially launched. The first real-time payments platform owned and operated by the Federal Reserve could see a wave of adoption among the 10,000 banks and credit unions in the U.S.

But adopting a new payments rail is obviously a big decision for any financial institution. As a full service provider for FedNow, Narmi has put together this short guide to help you understand how FedNow works  and put a plan to integrate it at your institution.

How the FedNow Service Works

FedNow is a new government-backed payment rail that allows financial institutions of all sizes to enable their customers to send and receive money instantly (specifically, within 20 seconds). For now, it will be available only for domestic transactions. FedNow was built on ISO 200022 standards which support the low-cost, efficient movement of money and uses an open loop, interbank system which routes and settles transactions via a shared network 24/7/365.

Transaction costs for FedNow are anticipated to be between 4-5 cents per transaction, and it will have both “push” and “request for payment” functionality. FedNow will have a $500,000 transaction limit, though institutions can set limits as low as $100,000 if they wish.

How the FedNow Service Could Drive the Future of Real-Time Payments

The FedNow Service could potentially catalyze real-time payment usage in the U.S., which currently ranks 33rd in global adoption of real-time payments. There are a few reasons that could explain why the U.S. is lagging the rest of the world when it comes to real-time payments. For one, countries like Japan and India have had government-backed real-time payments rails for many years. By contrast, real-time payments only came to the U.S. in 2017, when a consortium of large U.S. banks launched the Real-Time Payments (RTP) Network by The Clearing House. Since then, real-time payment usage has been steadily rising in the U.S., but is still nowhere near levels seen in other countries. Meanwhile, U.S. consumers have gravitated towards peer-to-peer (P2P) platforms like Venmo and Zelle while businesses have been shifting towards ACH. Both of these options are similar to real-time payments, but not quite the same thing.

But a federally-backed real-time payments network could be a game-changer. In the United Kingdom, for example, instant payment adoption surged 35% in the first five years after the launch of a government-backed payment network. Furthermore, smaller U.S. institutions have been ready to embrace real-time payments; they’ve just been waiting for a more accessible platform.

Benefits of Instant Payments

Globally, instant payments are expected to grow at 23.6% CAGR between 2020-2025 - looking at the potential benefits for all parties involved, it’s not difficult to see why.

• Benefits for Consumers: Real-time payments will allow individuals to transfer money to friends and family, pay bills, receive funds or reimbursements instantly. As we’ve seen from the mass adoption of P2P and ACH in the last few years, faster and more efficient payments are quickly becoming table-stakes for the digital user.
• Benefits for Businesses: Real-time payments can bring a lot of efficiency to the way businesses manage their operational expenses. With the FedNow Service, businesses will be able to issue requests for payment or bill customers or vendors directly for their services, giving them greater visibility into and control over their cash flow. At the same time, having the ability to instantly distribute payments or refunds will help them maintain healthier business relationships. 
• Benefits for Financial Institutions: As banking interactions continue to shift towards digital channels, real-time payments are a powerful new avenue for institutions to create stickiness and drive engagement within their digital banking platform. In addition to providing a better digital user experience, real-time payments can help them drive more opportunities to cross-sell or upsell customers into different banking products.

‍Four Areas to Address as You Consider Adopting the FedNow Service

Whether you’re on the fence or ready to test the waters with FedNow, it’s important to have a thoughtful rollout strategy. Adding a new payments rail can add layers of complexity into your banking experience and carry underlying risks, which is why many institutions are favoring a phased approach to rolling out the FedNow Service.

Here are four critical areas you’ll want address and some steps you can take now  to start preparing:

1. Product and Technology - You never want to roll out a new digital technology without first understanding how it works and integrates with your existing platform.  Now is the time to get familiar with FedNow’s operating model, including the different processes involved receiving payments, sending to linked and unlinked accounts, and issuing requests for payment. To avoid service disruption or a subpar user experience, FedNow will need to tightly fit into your existing transaction processing framework. You’ll want to review SLAs with your core processor(s) and analyze any maintenance or outage windows that could disrupt 24/7/365 availability of real-time payments for your customers. 
2. Fraud and Compliance Risks - Faster payments can lead to faster fraud. Integrating real-time payments can potentially increase your institution’s vulnerability to account takeovers or fraudulent payment requests that erode customer trust. It’s important to start working with your fraud and risk compliance teams to map out different fraud scenarios and formulate strategies to address them.
3. Treasury and Liquidity - With the FedNow Service, settlement happens instantly between FRB Master Accounts. This means your institution needs to maintain liquidity in its Master Account and ensure transactions can settle under a 24/7/365 window. It’s also worth noting that the timing of the FedNow cycle will run from 7:00 am - 7:00 pm daily, meaning transactions settled outside of that window will clear the following or previous day. Additionally, Fed reports are being updated to now include FedNow transactions. Now is the time to take a look at your institution’s treasury and liquidity practices to see what (if any) changes need to be made to ensure compliance with these  standards.
4. Communication and Customer Service - Your customers may have varying degrees of familiarity with or comfort using real-time payments, which might require multiple touchpoints of communication prior to product launch. Specifically, the level of visibility FedNow gives the government into customer transactions is currently subject to a lot of miscommunication. Therefore, you’ll want to have a clear communication strategy for how you’re rolling out this service to your customers and how it changes their banking experience. Anticipate you’ll receive a lot of questions and requests for support, which is why it’s important to adequately train your staff and customer support team on how to talk about your FedNow product.

‍Partner with a Trusted Service Provider

There’s a lot to digest when it comes to FedNow, particularly as the Fed’s rollout plan continues to evolve. 

As a full-service FedNow Service provider, Narmi is in the process of integrating FedNow natively into our digital banking experience through a phased rollout. However, we are also here to answer questions and provide support to financial institutions that are still getting their bearings.

Explore the potential benefits of the FedNow Service.

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