What happens within a second? It’s such a brief measurement of time that not many things can happen. But that’s about to change in the realm of payments. In fact, it’s safe to say that a monumental change in how we process transactions is on the horizon thanks to the Federal Reserve’s FedNow Service.
You’ve probably already heard some of the hype about the FedNow Service going around, and for good reason. Within the next year, the United States’ biggest entity in the financial world will make it possible for payments to post in a matter of seconds – instantly and in real time. Monumental is right, because a second, which was once merely a snapshot in time, can now be the norm for transferring funds between people and businesses.
And with the Fed’s reach across the country, there’s no doubt in my mind that the FedNow Service will revolutionize the way we do business on a daily basis. While that’s an amazing thought, it probably also comes with some apprehension. How will the FedNow Service work? What does that mean for my credit union? What are the benefits and how can I implement it?
Not to worry, though, because the Fed has created some frequently asked questions (FAQs) that can help you be better prepared to understand and, ultimately, make decisions on how to mobilize the FedNow Services at your institution once it’s live in 2023.
Here is a snippet of some of those FAQs to answer your most burning FedNow Service questions as provided by the Federal Reserve.
- What are instant payments? Instant payments allow individuals and businesses to send and receive payments within seconds at any time of the day, on any day of the year, such that the receiver of a payment can use the funds almost instantly. This immediacy differentiates instant payments from traditional retail payment methods, including those that appear to occur within seconds from the sender’s perspective but can take many days before funds become available to the receiver. There is broad consensus within the U.S. payment community and among other stakeholders that, just as real-time services have become standard for other everyday activities, instant payment services have the potential to become widely used, resulting in a significant and positive impact on individuals and businesses throughout the country and on the broader U.S. economy.
- What is the difference between “faster” and “instant” payments? Although the term “faster payments” broadly describes what the FedNow Service will deliver (e.g., payments that can be sent and received within seconds at any time of the day, on any day of the year, such that receiver can use the funds almost instantly), it can also apply to other improvements to payment speed (e.g., same-day ACH). In the 2020 Federal Register notice, the Federal Reserve Board (Board) transitioned to using the term “instant payments.” Specifically, the board has used the term “instant payment” to refer to a payment in which an end user receives funds in near real time and at any time, with immediate interbank settlement of the payment also having occurred.
- What benefits do instant payments offer? Beyond speed and convenience, instant payments can yield real economic benefits for individuals and businesses by allowing them to make time-sensitive payments whenever needed and providing them with more flexibility to manage their money. This flexibility is especially important for individuals and households on tight budgets, for whom receiving a payment in real time could help avoid the need to use expensive check cashing services, engage in high-cost borrowing or incur overdraft or late fees that may throw off their carefully managed finances. Similarly, immediate access to funds and the ability to instantly make bill payments benefit small businesses who may otherwise need to seek costly short-term financing. Widely available instant payments would be the foundation for the next generation of payment services, catalyzing innovations that generate new economic activity.
- What is required to conduct a payment between depository institution accounts? What is clearing? Settlement? Payments typically require “clearing” and “settlement” between depository institutions. “Clearing” refers to the exchange of information about a payment and can involve additional activities such as fraud screening. “Settlement” refers to the debiting and crediting of accounts to transfer funds for a payment. Settlement services act as the foundation for most payment systems, as they provide a universal way for the sender’s depository institution to settle a payment by moving funds to the receiver’s depository institution. Payment services offered by the Federal Reserve, such as funds transfer, check and automated clearinghouse (for example, direct deposit) services, have historically provided clearing and settlement between depository institutions.
- How will the FedNow Service work? The FedNow Service will process and settle individual payments within seconds, 24 hours a day, seven days a week, 365 days a year. Like other payment and settlement services offered by the Federal Reserve, the service will settle obligations between depository institutions through debit and credit entries to balances in their master accounts at the Reserve Banks. Consistent with the goal of supporting instant payments, use of the FedNow Service will include, as a term of service, a requirement that participants make the funds associated with individual payments available to their end-user customers immediately after receiving notification of settlement from the service. A detailed description of the payment flow of a FedNow Service transaction can be found here.
- What features and functionality will be included in the FedNow Service? The FedNow Service will be released in phases and additional features and service enhancements will be introduced over time. At launch, the FedNow Service will be designed to maintain uninterrupted 24/7/365 processing of credit transfers with security features to support payment integrity and data security. The service will have a 24-hour business day each day of the week, including weekends and holidays. End-of-day balances will be reported on Federal Reserve accounting records for each participating depository institution on each FedNow Service business day. Access to intraday credit will be provided to participants in the FedNow Service during its business day under the same terms and conditions as for other Federal Reserve services. The first release of the FedNow Service will also include optional features: fraud prevention tools, the ability to join initially as a receive-only participant, request for payment capability and tools to support participants in their handling of payment inquiries. The FedNow Service will also provide a liquidity management tool to support instant payment services (see FAQ 10).
- When will the FedNow Service become available? The Federal Reserve intends to launch the FedNow Service as soon as practicably possible, with a target release date of 2023. The Federal Reserve intends to announce a more specific time frame for launch once additional work is completed. The build of the FedNow Service is ongoing and includes development of the necessary infrastructure, integration with existing Federal Reserve systems and continued engagement with industry stakeholders on features and design.
- Who will be eligible to participate in the FedNow Service? How will merchants, consumers or non-bank payment service providers access the service? As with current Federal Reserve Bank services, the FedNow Service will be available to depository institutions eligible to hold accounts at the Reserve Banks under applicable federal statutes and Federal Reserve rules, policies and procedures. Participants will be able to designate a service provider or agent to submit or receive payment instructions on their behalf. Participants will also be able to settle payments in the account of a correspondent, if they choose to do so. Merchants, consumers or non-bank payment service providers can access the service through depository institutions as they do today with other payment systems.
- Will cross-border transactions also be available in the FedNow Service? At launch, the FedNow Service will support only domestic payments between U.S. depository institutions.
- How will the FedNow Service support liquidity management needs in a 24/7/365 environment? Feedback in response to the 2019 Federal Register Notice indicated a need for the Federal Reserve to provide support for FedNow Service participants in managing their liquidity needs in a 24/7/365 environment. Given that the FedNow Service will inherently be able to support funds transfers around the clock at launch, the board determined that providing a liquidity management tool as a core feature of the service is the most effective way to address the industry’s needs for liquidity management related to instant payments. The tool will be available to FedNow Service participants and their traditional liquidity providers, as well as participants in private-sector services for instant payments that use a joint account at a Reserve Bank. Participants in such private-sector services may choose to access the tool for the limited purpose of liquidity transfers without needing to be a full participant in the FedNow Service.
- Is the Federal Reserve still exploring expansion of the Fedwire® Funds Service and National Settlement Service (NSS) hours to support liquidity management for instant payments? The Federal Reserve continues to explore expanded hours for the Fedwire Funds Service and NSS. Expanded hours for these services could bring broad benefits to stakeholders beyond liquidity management for instant payments. (See also FAQ 10) In light of the systemic importance of the Fedwire Funds Service and the Federal Reserve Board’s risk management expectations for the service, analysis is ongoing to evaluate more fully the relevant operational, risk and policy considerations for both the Reserve Banks and service participants. The Federal Reserve Board will announce any decision regarding the expansion of hours for the Fedwire Funds Service and NSS, including issuing a request for comment, if necessary, when that analysis is completed.
- What is interoperability? The Federal Reserve defines interoperability broadly to mean that payment messages are routed or exchanged and settled such that a sender may initiate a payment, and it will seamlessly reach the receiver. With interoperability, an individual or business with a bank account would be able to send a payment to another individual or business, without having to choose, understand or even be aware of the path taken by the payment. In a payment system with multiple operators, interoperability could take different forms. As noted in a paper by the U.S. Faster Payments Council, one model of interoperability is payment routing, which is used in card payments and wire transfers. This model relies on the sending depository institution routing payments through a specific service based on the path(s) available to reach the receiver; if there is more than one path, the sending depository institution may choose the service it uses based on specific criteria, such as price and features. Another model is message exchange across services, which is designed for bilateral exchange between two service operators. In this model, depository institutions can connect to either service operator, and those operators conducting message exchange with each other and providing settlement arrangements, among other things. Automated clearinghouse (ACH) payments use this model.
- Will the FedNow Service be interoperable with other private-sector services for instant payments to facilitate nationwide reach? The Federal Reserve Board views nationwide reach as a key objective for real-time gross settlement infrastructure for instant payments. Through engagement with the industry, the Federal Reserve has explored interoperability and other paths to achieving the ultimate goal of nationwide reach for instant payments. The Federal Reserve, however, cannot accomplish interoperability for instant payments alone. The industry — depository institutions and their service providers as well as service operators — must work towards this common goal, as it has in the past with other payment services. The model and timeline for achieving interoperability will depend on the level of commitment and engagement across the industry. The Federal Reserve is committed to using the widely accepted ISO 20022 standard and other industry best practices to remove unnecessary and burdensome incompatibilities that could be a barrier to payment routing, a model of interoperability. The Federal Reserve is open to the model of interoperability based on message exchange across services in the future, after introduction of the FedNow Service. However, the message exchange model poses several additional complexities (such as technical message exchange and common settlement) and would require the full commitment and active engagement of the existing private-sector service.
- How do I get involved to help inform the evolution of the FedNow Service? The Federal Reserve will continue to engage with industry stakeholders throughout the development process for the FedNow Service in order to understand, on an ongoing basis, the needs of depository institutions, other industry stakeholders and the public. The Reserve Banks have established the new FedNow Community, which represents a variety of expertise, viewpoints and industry segments and members, that will help inform the service design and provide insights on readiness for instant payments. The Reserve Banks will form working groups on a range of topics and will provide information on these groups through the FedNow Community and FRBservices.org.
- When and how will the Federal Reserve provide more information about the FedNow Service, such as technical specifications and pricing? As the development of the FedNow Service progresses, the Federal Reserve is committed to providing additional details in advance that will allow industry partners to take appropriate steps to ensure they are prepared to use the FedNow Service when it becomes available. Future communications about the FedNow Service, including but not limited to technical specifications, detailed product offerings, pricing and implementation timing, will be provided through established channels, such as FRBservices.org.
Even with all of these questions answered, you may still be wondering about Vizo Financial’s role in the FedNow Service. So, here’s one last FAQ:
What role will Vizo Financial play in the FedNow Service?
Currently, Vizo Financial is actively participating the FedNow Service Provider Showcase, and we’re also working to develop an automated software to assist our member credit unions with the FedNow Service once it is launched in 2023. Both of these measures are helping to position the Corporate to offer instant settlement on transactions through the FedNow Service on a 27/7/365 basis, as well as support with the FedNow Service transaction processing. In addition, Vizo Financial is looking for credit unions to help pilot the FedNow Service – if you’re interested in getting a head start on the FedNow Service, please contact us at (800) 622-7494.
Soon, instant payments will be available almost everywhere thanks to the FedNow Service. While transactions will happen in real time, preparing your credit union for this significant change in payment processing might take a little more time. Hopefully, the Fed’s FAQs will be helpful in giving your institution that head start. I’m excited for the FedNow Service to begin in 2023, and we at Vizo Financial look forward to sharing more information with you as we get closer to that time. I hope you’re excited too!
Jeff Stoner currently serves as Vizo Financial’s chief strategy and technology officer. In this role, he directs the development of strategic plans for Vizo Financial products and services. His area also evaluates and implements new products and services. In addition to product strategy, Jeff oversees Vizo Financial’s project management office, internal software administration and member online access system, Zephyr.