The Federal Reserve recently announced that it would launch its real-time payments system, FedNow, in 2023. This revised timeline accelerates the Fed’s initial estimated launch of 2023 or 2024 citing significant progress to date from the FedNow team.
What exactly is FedNow? What do we know about it? What don’t we know about it? In this short Q&A, we answer 10 key questions regarding the much-anticipated FedNow Service.
1. What is FedNow?
FedNow is a new payments service with clearing functionality, which will facilitate instant payments in the United States. FedNow will operate 24 hours a day, 7 days a week, 365 days a year (i.e. 24x7x365).
This new payments rail is intended to support banks' provision of end-to-end instant payment services, and will provide infrastructure to promote universal, safe, and efficient instant payments in the United States. It is intended to support a variety of payment types (e.g., P2P, B2B, B2C, etc.).
2. Who can use FedNow?
Any of the 10,000+ depository organizations in the United States that hold a Master Account with the Federal Reserve will be eligible to use FedNow. For organizations that do not have a Master Account, such as payments companies and nonbank lenders, it will only be possible to use the service via a participating bank or through a designated service provider or agent. In many ways, this will be similar to how non-banks partner with banks today to access the automated clearing house (ACH) and card networks.
3. What is the timeline for rolling out FedNow? What functionality will be available upon launch?
The new target launch date for FedNow is 2023. However, the Fed anticipates a phased approach for implementing the FedNow Service. It is yet unclear precisely how FedNow will be phased in, but we will continue to update this document as additional information becomes available.
On January 25, 2021, the Fed did announce a pilot program involving 110 selected organizations to support development, testing, and adoption of the FedNow system. The list of initial institutions includes banks of all sizes, credit unions, core banking processors (e.g., Fiserv, Jack Henry, Temenos), and other players in the payments space.
The first release of the FedNow Service will provide baseline functionality that will support market needs and help banks manage the transition to a 24x7x365 service. For example, certain banks may initially implement the service using a 9am-5pm service window before eventually moving toward 24x7x365 service.
FedNow intends to offer additional features in the initial period following launch to support alias-based payments such as directories, as well as fraud prevention, error resolution, and case management tools. Subsequent features may include support for bulk payments, or enhanced remittance information.
4. How will settlement work?
FedNow will rely on real-time gross settlement in Master Accounts held between depository institutions and the Federal Reserve Banks. Settlement is intended to be near real time (i.e. in a matter of seconds), and a bank will be required to credit the recipient of funds immediately. (Note that other near real-time payments services, such as Zelle, currently rely on a process of deferred settlement vs. near real-time settlement.)
Completed payments will be final, meaning they are irrevocable, similar to the Federal Reserve’s FedWire Funds Service. Banks will be responsible for implementing procedures to resolve erroneous payments, or provide the ability for the receiver to send a new transaction to return funds in certain circumstances. Ultimately, near real-time settlement means that short-term credit risk is greatly reduced relative to other payment methods, which is one of the most significant features of the FedNow service.
5. How will FedNow manage liquidity and liquidity risk?
The FedNow Service will also provide a liquidity management tool, FedNow LMT, which will support instant payment services and enable participants in the FedNow Service to transfer funds to one another to support liquidity needs related to payment activity. For example, banks with account balances beyond their current needs will be able to supply liquidity to those facing a shortfall.
6. What is the proposed payment flow for FedNow?
In its 2020 Federal Register Notice, the Fed provided a conceptual illustration of a credit push transfer (i.e. payments initiated by a sender to an intended receiver) sent over the FedNow Service, with steps 1-8 intended to take place within a matter of seconds. For readability purposes, we have recreated the Fed’s diagram below and summarized the primary steps of the FedNow process.
7. What is FedNow’s fee structure? What limits will there be on transactions using FedNow?
The Fed has not yet determined the final fee structure for the FedNow Service. However, in order to comply with the Monetary Control Act of 1980, the Fed must price FedNow services in a manner that appropriately recovers costs over the long term.
Similarly, the Fed has not yet determined transaction limits for the FedNow Service. In its 2019 Federal Register Notice, the Board of Governors proposed that the FedNow Service would include a transaction value limit of $25,000, with the potential to increase the limit over time. The Fed has since backtracked, stating in its August 2020 Federal Register Notice that it will make a determination based on “market practices and needs at the time [of launch].”
After speaking with industry experts, we expect that FedNow’s transaction limit will likely be closer to the average daily transfer limits for ACH payments rather than the typically higher average daily limit for wire payments. Banks will also have discretion in establishing lower transaction value limits than those set by the Federal Reserve.
8. What technology will FedNow be built on?
This is still to be determined. We understand that the Fed issued an RFP in 2020 to help develop the technology behind the FedNow Service with a primary goal of “future-proofing” any technology selected. Additional information is not yet available.
9. In what ways is FedNow similar to or different from the Real Time Payments (“RTP”) network already offered by The Clearing House (TCH)?
FedNow will be a competitor to TCH’s RTP network launched in 2017. Banks will have the option of joining FedNow, RTP, or both. From a competition perspective, this is analogous to the ACH payments system in the US, where the Federal Reserve operates FedACH and TCH operates the Electronic Payments Network (EPN).
An important distinction between the two services is that FedNow will be using the ISO 20022 messaging standard for electronic data interchange between financial institutions, whereas RTP relies on TCH’s proprietary specifications. ISO 20022 is rapidly becoming the global standard for messaging frameworks. For example, Australia’s real-time payments service, the New Payments Platform (NPP), which launched in 2018, uses this standard.
Similar to ACH, there is an expectation that the FedNow and RTP systems will be interoperable. However, the Fed and TCH will need to work together to develop a form of message translation across ISO 20022 and TCH’s own specifications.
10. Where can I learn more about the FedNow Service? How can I get involved with the FedNow community?
You can find the most up to date information on the FedNow Service here on the Federal Reserve’s FRB Services website.
The Federal Reserve has also published three Federal Register notices to date, which contain useful information on the FedNow Service. The most recent notice, published on August 11, 2020, which is focused on its features and functionality, is available here for reference.
To get involved in the FedNow Community, you can sign up here on the Fed’s website.