FedNow: The Future of the US Banking System?

In today’s rapidly changing payment environment, most customers are driven by having access to enhanced, instant payment capacities from their financial institutions. In 2021, the Federal Reserve Bank commissioned a survey that will get to know the interest of consumers related to faster payments. The survey’s key findings show that 62% of surveyed participants expect financial institutions to offer faster payments in the future, and 70% of participants feel the great importance of faster payment capabilities.

These findings triggered the government to take action to satisfy American citizens’ needs and make payments faster, safer, and more efficiently by developing a new instant payment service that is called  FedNow.

In this article, we will learn about the governmental project intended to change the banking systems and benefit both consumers and businesses. So, let us start by explaining the definition of the FedNow payment service.

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What is FedNow?

The FedNow is a governmental instant payment rail developed by the Federal Reserve Banks that is intended to empower the functionalities of financial institutions of every size in any community while providing safe and efficient payment services at a near-real-time level. The service will be available in real-time, at all hours of the day and night, and every day of the year (24/7/365).

This payment service is going to be a predecessor of the out-of-date Automated Clearing House (ACH), which processes payments longer and not on an everyday basis because of weekends and holidays.

One more alternative solution for a real-time gross settlement system that processes instant transfers of digital funds between financial institutions is the Fedwire Funds Service. However, the payments are only possible on designated business days and only during working hours.

The inability to make an uninterrupted payment 24/7 by the ACH network and Fedwire Funds Service can cause delays, and consumers want to have better and faster options for transferring their funds from point A to point B. Nevertheless, in 2021 alone, the ACH network processed over 29 billion payments worth about 73 trillion US dollars. On the other side, FedNow promises to work uninterruptedly and process payments instantly and in the needed time.

FedNow is based on the standards of ISO 20022, which is designed for digital data interchange between financial institutions.

Some people have misleading thinking and name the service - FedNow blockchain. To bust this misconception, it is worth stating that FedNow is not a blockchain and does not have a relation to it (yet). The only relation to the crypto world is that Ripple’s partner Volante Technologies (a payment company based on cloud technologies) is a part of a pilot program organized by FedNow. That is why there are a lot of requests on the topic of FedNow Ripple and FedNow Cryptocurrency.

On the other hand, this instant payment service will break fresh ground for the crypto industry while giving crypto users a shot at faster and more seamless onboarding to Web3.

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How does the FedNow instant payment service work?

As the essential goal of FedNow is to enable individuals as well as businesses to send instant payments through their depositary institution accounts, it is always exciting to know how the service works.

The FedNow instant payment service is going to settle obligations between the depository institutions to make the data about the balances of their master accounts at the Reserve Banks easily accessible. Putting this in simpler words, according to the terms of the use of the service, all the contributors of the FedNow instant payment service should make the funds, which are associated with individual payments, easily available and accessible to the end-users.  

This data must be available right after getting the notification from the service related to the settlement to make it possible to process and settle payments in a quick double time, meaning instantly.

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What does a FedNow payments flow look like?

To understand the working algorithm of the FedNow instant payment service, it is worth getting to know you and showing what its payments flow looks like.

The standard payments flow of FedNow will consist of 7 stages and look as follows:

1. A sender (it can be an individual as well as a business) initiates a payment process to the financial institution. In general, the initiation of payment can be done through an end-user interface, which is not related to the FedNow network.
2. The financial institution submits the received request for payment to the FedNow network.
3. FedNow validates the request received from the financial institution.
4. The FedNow instant payment service sends the received request for payment to the financial institution of the recipient. During this stage, FedNow is looking for the confirmation of the request by the recipient’s financial institution.
5. The financial institution of the recipient forwards the positive response to FedNow, indicating that the recipient is going to accept the payment. (IMPORTANT: the 4th and 5th stages play a crucial role in reducing misdirected payments).
6. After getting a positive response, the FedNow Service credits and debits the designated master accounts of the financial institutions of the recipient and sender.
7. The FedNow instant payment service sends the funds to the financial institution of the recipient and informs the sender about the success of the settlement.

To summarize all the information, the payments flow is similar to any other flow, which is related to instant payments. It involves a sender, the sender’s financial institution, the network of FedNow, and the recipient’s financial institution. The possibility of instant payments is available around the clock and every day of the year (without having weekends and holidays). Plus, the FedNow instant payment service has a bunch of beneficial features that your business can take advantage of.

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Expected key features of FedNow

Before understanding the importance of the FedNow Service and its perspectives for both individuals and businesses, it is worth considering all expected key features of FedNow.

The first obvious advantage of the service is the near-real-time speed of the processing and settling of payments between a sender and a recipient. The service makes it possible to settle instant payments 24/7 and 365 days a year.

The second FedNow benefit is the settlements in financial institutions’ master accounts without the need for prefunding. This benefit provides assurance that all payments are completed and irrevocable.

Liquidity management transfers will enable liquidity management in an around-the-clock operating environment.

The FedNow Service provides individuals and businesses with an option to report for transaction monitoring, account balance inquiries as well as reconciliation. The reporting feature intends to better the participants’ management and monitoring activities.

The additional tools of fraud prevention (optional tools) will assist individuals and businesses in combating fraud and illicit financial activities.

The default limit of the planned credit transfer transaction value is $100,000, which can be adjusted up or down.

Another beneficial feature of the FedNow payment service is the request for payments (RfP). Individuals, businesses, as well as financial institutions can request a payment from a recipient.

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The benefits of FedNow

Along with the beneficial and expected key features of the FedNow instant payment solution, the service can boast a variety of benefits. Among the essential ones are:

• Provide easier access to instant payments technology to a wider audience that includes smaller community banks;
• Give individuals and businesses better control of cash flow management;
• Give access to full traceability of transactions;
• Make all payments safe and secure with the help of the optional fraud prevention tools;
• Reduce the payment processing cost for financial institutions of every size in any community.

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FedNow pricing

The officials have not revealed the pricing for the FedNow service. However, as the service is a non-profit, governmental project, it should offer competitive pricing for business owners. The FedNow pricing is anticipated to include the following fees:

• A monthly fee of $25 for participation (for financial institutions);
• A $0.045 fee per credit transfer, which is paid by the sender;
• A $0.01 fee for each Request for Payment message (RfP).

Compared to the pricing of other payment systems, like wires, the FedNow pricing is relatively low. The low price of processing and settling payments has become possible since the service FedNow is being operated by the Federal Reserve, which does not look for a profit. With the help of low pricing, small businesses and financial institutions can count on cutting expenses and making a profit.

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How does FedNow differ from popular payment systems?

Compared to the popular payment systems, like PayPal, Square Cash, and Venmo, the FedNow instant payment service is going to provide financial institutions with an interbank faster payment system. The difference lies in an opportunity for payers to process and settle payments to a wider group of payees, including those payees that have accounts in different banking institutions.

All the transactions are made between a variety of financial institutions that are participating in the FedNow service within the FedNow network.

On top of that, since clear and settled payments are going to be approached simultaneously, FedNow, like its outdated alternative solution the Clearing House’s RTP network, will give its consumers a shot at an interbank instant payments system.

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The biggest issues of FedNow

One of the greatest hurdles that FedNow is currently facing is adoption. The implementation of such a service will take years because there is a need for a completely new infrastructure for payments.

One more problem that is obviously noticed is the aspect of security. As mentioned earlier in the article, the FedNow payment system does not allow to make reversal payments as well as a chargeback. On the one hand, the absence of such payments can be beneficial. But on the contrary, fraudsters can also take advantage of it.

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The initial launch of FedNow

The officials announced that the initial launch of the FedNow payment system is planned for mid-2023. There is no specific day or month of the scheduled launch. However, the press release of the governmental project should take place between May and July of 2023.

According to the statement of Federal Reserve Vice Chair Lael Brained, the pilot phase of the FedNow Service has already started in September 2022. Over 120 organizations have been participating in the phase. The pilot phase intends to show financial institutions the benefits they will get by using the service.

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Will FedNow be the future of the US banking system?

At present, it needs to be clarified whether the FedNow instant payment service will be able to replace the current banking system of the United States as the governmental project is in the pilot phase. However, over 120 organizations have already been participating in this pilot program while testing all the benefits of the service.

Nevertheless, FedNow will bring a new experience of processing and settling instant payments on the governmental level that will be better, faster, cheaper, and way more effective for businesses than out-of-date ACH and wire transfers.

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Seamless and faster users’ onboarding to Web3

At Utorg, we believe that the new instant payment service FedNow will be a game changer for the crypto world while enabling crypto users to process and settle payments faster and seamlessly.

Without a doubt, we will enhance our innovative widget with this solution to provide our business partners with more options for seamless and effortless onboarding of users to the world of crypto and increase your conversion and retention rates.

As for now, your business can take the following advantages of our on-ramp widget:

• 175 countries coverage;
• 10+ payment methods;
• 26+ local fiat currencies;
• AI-powered KYC within 3 minutes;
• 24/7 live chat user support;
• Passive income from transaction fees.

One simple and no-cost integration within 24 hours will help you increase your revenue. If you have any questions, please, do not hesitate to contact us.

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FAQ

1. Who will be eligible to participate in FedNow?

As stated by officials of the FedNow instant payment service, it will be available for depository institutions that are eligible to hold accounts at the Reserve Banks and follow the rules, policies, and procedures of the Federal Reserve.

2. Will FedNow replace the ACH network?

Absolutely no! The FedNow payment service intends to complement the Automated Clearing House (ACH) network.

3. Who runs FedNow?

The Federal Reserve Banks has been developing the FedNow payment service and is in charge of the product.

4. Is FedNow a CBDC?

No, FedNow and CBDC (Central Bank Digital Currency) are not the same. While FedNow is an interbank instant payment system, CBDC is a digital form of the country’s fiat currency.

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