FedNow Pilot Maps Features for Instant Payments
24-hour real-time payments are often credited to Venmos and PayPal around the world. But next year, the nationwide introduction of the Federal Reserve’s FedNowSM service will provide 24/7/365 availability of funds to help all types of financial institutions go beyond use cases. person-to-person (P2P) that FinTechs have popularized.
The FedNow service will expand access to instant payments functionality and use cases by clearing and settling payments between financial institutions 24 hours a day, every day, in a primary Federal Reserve Bank account. This always-on instant payment functionality also reduces interbank credit risk and liquidity risk for participating institutions, increasing the appeal of current and new use cases.
Boston Fed Senior Vice President and FedNow Service Chief Commercial Officer Nick Stanescu recently spoke with Karen Webster about his organization’s progress with the FedNow pilot program, which began with a feedback and feedback phase at the early 2021 and recently moved into an operational, pre-launch phase.
“During the first few weeks of our first phase of testing, several pilot organizations successfully connected and sent test messages on the pilot version of the FedNow service,” Stanescu said, “including small and large banks and some of the biggest service providers”.
See also: Federal Reserve onboards first participants in FedNow pilot, including Square
FIS, Jack Henry and Fiserv, among other companies, have already connected and are beginning to test the messages. More than 120 organizations are part of the FedNow pilot program, including Square Financial Services, other FinTechs and processors.
The main areas of pilot interest and feedback center on integration, 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 the creation of the FedNow service and a basis for broad interoperability in the national ecosystem and across borders at the coming. 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 online payments. timely. Underlying these latest use cases is a much-requested feature of the FedNow service called Request for Payment, or RFP.
“Payment demand is absolutely fundamental to our instant payments value proposition,” Stanescu said of the FedNow service.
Common themes among FinTechs and financial institutions (FIs) are that the FedNow service will improve their ability to serve businesses and consumers who are increasingly pushing to ensure their payments are faster – and so fast that they are instantaneous.
Read also: Disbursements Tracker: increasingly popular instant payments
“We are seeing huge demand,” Stanescu told Webster. This claim is backed up by a recent Federal Reserve survey which found that nine out of 10 companies expect to be able to initiate and receive payments faster by 2023 and that many are ready to do so now. Another recent survey found strong demand for faster payment options to accommodate consumers always-on digital lives.
Of course, instant payments go further than faster payments due to immediate settlement and near real-time availability of funds to the recipient. “You send me money and I can immediately see it’s in my bank account,” Stanescu said.
“We take a phased approach to delivering the FedNow service,” he said, “so we can expand functionality over time and meet changing industry needs.”
Not just for consumer use cases – instant settlement can make a difference in the enterprise sector as well. For example, instant bill payment can be of immeasurable benefit to businesses that want to pay suppliers in real time, get paid in real time, and operate more efficiently by matching funds to the correct invoice. “These features will improve efficiency and cash flow,” he said.
Ultimately, the FedNow service will serve as a platform for financial institutions, processors and FinTechs to develop new innovative services. Stanescu expects to see a natural migration of payments between ACH and wireline rails and FedNow over time.
“We are also very likely to see new types of payments as we continue to move away from cash,” he said, which could increase overall payment volumes. Early feedback indicates that payroll may be an early adoption use case, as pay-as-you-go models place fewer demands on batch processes.
Fighting Bad Actors
Conventional wisdom holds that with faster funds comes the threat of faster fraud. Webster raised concerns that when consumers initiate payments, those instant transactions may not reach the correct recipient.
“It’s something I hear a lot about when I talk to the industry,” Stanescu said, but he cited a “strong set of controls and multi-layered capabilities” in the initial release of the FedNow service to support fraud management, risk mitigation and assistance. IFs as they fight bad actors.
FedNow service features will help participating financial institutions investigate and refund funds related to fraud and error. Beyond mitigating fraud through service design, Stanescu noted that the Fed is exploring opportunities to collaborate with industry on consumer education and awareness programs to help identify and prevent scams and to promote strong registration and authentication processes. In the meantime, the value proposition inherent in irrevocability remains intact: recipients have protection and a guarantee that the correct funds have reached their account and can be used immediately.
As more FIs adopt the FedNow service, a positive network effect should emerge, driven in part by the Overview of FedNow Service Providers that can help banks and other businesses – including challengers and digital-only businesses – flesh out their end-to-end visions for new and faster payments.
“We don’t just ‘push’ information to pilot participants, but we also pull it back, so we can make sure the FedNow service evolves and we all stay on top of user needs,” Stanescu said.