The Federal Reserve will launch its new instant payment service, FedNow, during the second quarter of next year.  

At its core, FedNow is a 24/7/365 real time credit transfer service.  Like Fedwire, FedNow will process and settle payments one transaction at a time, settling each item to the sending and receiving banks’ designated Fed accounts essentially in real time.  Unlike previous Fed payment services such as Fedwire and FedACH, FedNow will require the receiving bank to make the funds from a payment available to the beneficiary immediately.  

New Challenges Posed by 24/7/365 Outgoing Credit Transfers

Operating a payment service 24/7/365 will create some new challenges for the Fed and for financial institutions.  For example, an institution that has been accustomed to managing its liquidity positions on the basis of traditional banking days and banking hours will need to manage its liquidity 24/7/365 if the institution agrees to originate FedNow credit transfers.  

Liquidity Management Built into FedNow

The Fed has built a liquidity management functionality into the FedNow service.  A financial institution that participates in FedNow will be able to manage its liquidity positions by using liquidity management transfers.  Smaller financial institutions may want to explore how they can use the liquidity management services of third parties together with FedNow liquidity management transfers to support 24/7/365 real time payment services to end users. 

Settlement and Liquidity Management Using a Correspondent Bank

The Fed has also made settlement and liquidity management easier for smaller financial institutions by providing for settlement in Fed accounts held by correspondent banks.  Rather than settling to its own Fed account, a financial institution may agree with a correspondent to settle the institution’s FedNow transactions to the correspondent’s Fed account.  Effectively, this kind of arrangement may be used to shift the liquidity management function from the respondent bank to the correspondent bank.  

Request for Payment

Although FedNow does not support debit origination, the new service does include a Request for Payment functionality.  A biller or merchant can send a request for payment, and if the recipient agrees to pay in response to that request, FedNow will process a credit transfer from the customer to the merchant or biller.

What Does the FedNow Rollout Mean for You?

Should your institution jump on the real time payments bandwagon by signing up for FedNow when it rolls out next year?  It depends.  FedNow is not mandatory, so your institution is not required to participate.  You can wait and see.  Or you may feel that the time has come to offer real time credit transfer service to your depositors.  If you do decide to offer FedNow to your accountholders, you have homework to do.  FedNow requires each participating institution to go through an enrollment process that may require some time to complete, particularly if your institution will be using third party agents to access the FedNow service or a correspondent bank’s Fed account to settle your FedNow transactions.  In addition, FedNow requires participating banks to have agreements with end users to authorize the Fed to access and use certain transactional data.  Before you agree to participate in FedNow, your institution will need to review and update your account agreements and payments services agreements with your accountholders, adding FedNow specific content to your existing agreements or creating a FedNow specific customer agreement.  You should also consider how your institution will adapt its risk management functions related to compliance, consumer protection, and anti-fraud (e.g. OFAC, BSA/AML, UDAAP, real time fraud detection and prevention) to comply with existing laws and regulations plus FedNow’s requirement that each participating bank have reasonable compliance programs in place.