FedNow

You don’t hear the phrase “the check is in the mail” that often anymore, but the situation it alludes to—waiting for an expected payment to arrive—is still very much a going concern. Internet technology has gotten pretty good at sending information across vast distances at incredible speed, but instantaneous money transfers and payments can still be challenging when more than one financial institution is involved.

A new potential solution is set to launch next year: FedNow, an instant payment service backed by the U.S. Federal Reserve. What do merchants need to know about the Federal Reserve’s soon-to-be-released FedNow service?

When it comes to transferring funds and making immediate payments, there are a lot of options out there, but most of them come with some sort of catch.

Wires and ACH payments don’t always clear right away, and platforms like PayPal charge extra fees if you want the funds you’ve received transferred to your bank account immediately.

Consumers (and businesses) want to be able to send money instantly and receive it without delay, but banks are obligated to look out for fraud and make sure the funds are really there before they make them available for withdrawal—which means you’ve either got to wait for them to do their due diligence or pay fees to cover the risks of providing immediate access.

The Federal Reserve was created to ensure trust and stability in the U.S. banking system, which puts them in a uniquely strong position to develop financial products that make it easier for banks to communicate and work together for the benefit of their customers. When FedNow launches next year, merchants will have a new option for purchases, bill payments, and other time-sensitive transactions.

What Is FedNow?

FedNow is an instant payment service that the Federal Reserve is developing for domestic use. FedNow will provide real-time 24/7 fund transfer services to financial institutions of any size, anywhere in the U.S., even on bank holidays. Unlike the existing ACH system, FedNow transfers will handle clearing and settlement simultaneously, making funds available to recipients without any delay.

FedNow is set to go live in 2023, with additional features and improvements expected to be phased in after the initial launch.

Financial institutions will have to opt in to participate in FedNow, and hundreds are already enrolled in the FedNow pilot program. By making a service like this available to a wide range of smaller banks, credit unions, and payment processors, the Federal Reserve hopes to give consumers and small businesses expanded access to instant payments.

How Will FedNow Work?

The base service scheduled for initial launch in 2023 will adhere to the ISO 20022 standard for financial messaging and include instant clearing and settlement capabilities, a back-end user interface for financial institutions, and various features and tools to support enrollment, inquiries, reconciliation, security, and reporting. 

Features that will be phased in later may include additional fraud prevention and error resolution tools.

The basic FedNow process will look something like this:

1. The sender initiates the payment through their financial institution.
2. The sender’s financial institution screens the payment request, and if approved, submits it to the FedNow service.
3. FedNow validates the request and sends it to the receiver’s financial institution.
4. The receiver’s financial institution verifies that the request is valid and that the recipient’s account exists. If everything checks out, they will send a confirmation message to FedNow.
5. FedNow applies the appropriate debits and credits to the master accounts designated by each financial institution.
6. The recipient’s financial institution credits the recipient’s customer account. This action takes place outside of the FedNow system, but as part of the terms of enrollment, FedNow will require the financial institution to complete this step immediately.

Banks will be able to use the FedNow service as the underlying basis for innovative, branded payment solutions for their customers. FedNow is primarily designed for account-to-account (transfers, card reloads, digital wallet funding, investment management) and consumer-to-business (bill pay, electronic invoicing) use cases.

How Much Will FedNow Cost?

While the price for FedNow services is not yet set in stone, preliminary pricing information was released in January, outlining the following fee schedule:

• $25 per month for each routing transfer number enrolled in FedNow as a recipient
• $0.045 per credit transfer (including returns), paid by the sender
• $0.01 per message for payment requests, paid by the requester

The default transaction limit is expected to be $100,000, with the option to adjust it lower or higher, up to $500,000.

How Will FedNow Handle Disputes?

Specific details about a FedNow dispute process have not been published yet, although there will be mechanisms for sending and requesting returns. As the FedNow system would not be covered under the laws that mandate the credit card chargeback process, FedNow payments would not be subject to that particular framework. The process for disputes might instead resemble the one used for ACH payments, which delineates a limited number of valid dispute claims for the bank to adjudicate.

The good news about ACH disputes is that banks tend to scrutinize them more closely, making friendly fraud harder to get away with. However, it is possible that FedNow could introduce its own layer of oversight into the system. The picture should become clearer once we get closer to the launch date.

As for criminal fraudsters, they target every active payment channel they can, and FedNow will be no exception. Fortunately, FedNow has announced that it will include security features at launch, which will be regularly updated in response to information about new cyberthreats. 

Conclusion

Fast payment solutions are in high demand, and the Federal Reserve already has the authority and infrastructure that could lead the way toward an affordable, widely-adopted service for instant fund transfers.

FedNow isn’t intended as a replacement for retail purchase transactions, so it is not likely to have a noticeable impact on the chargebacks landscape right away. However, the fact that banks will be able to build their own payment services on top of FedNow's foundation means that it is possible for this technology to expand into new spaces. As is always the case, merchants will have to be responsive to consumer demand while remaining vigilant about the risks of fraud and disputes that may come with any new payment method they adopt.

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