The US Federal Reserve has come out with an instant payment facility it has developed for use by the financial services institutions for the benefit of their customers:
The US Federal Reserve has very recently commissioned FedNow, a new instant payment service, after 4 years of catch-up game with several countries, including some of the less developed ones, which have implemented such infrastructure for the benefit of the general public. The service allows financial institutions across the U.S. to provide safe and efficient instant payment services.
Businesses and individuals across the US can now send and receive payments in real time, round the clock and 7 days of the week through the participating financial institutions. The financial institutions and their service providers can use FedNow to provide innovative instant payment services to customers and recipients will have full access to funds immediately. It is a totally secure payment network.
The Fed has, however, said the service will be deployed in phases.
The first phase will see the service providing baseline functionality that includes account-to-account transfers and bill pay. The Fed has said banks and credit unions of all sizes can sign up and use this tool to instantly transfer money for their customers, any time of the day, on any day of the year. According to Jerome H. Powell, Chairman of the Fed, the service is intended to help make everyday payments over the coming years faster and more convenient. As more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a pay cheque, or a company to instantly access funds when an invoice is paid, he added.
FedNow is virtually a clearing service for financial institutions’ transactions. The key difference between FedNow and the Fed’s previous system is that FedNow will be online 24×7, processing transactions in real time.
35 PARTICIPANTS NOW
Some 35 financial service institutions and the U.S. Department of the Treasury’s Bureau of the Fiscal Service have introduced FedNow and 16 other service providers are ready with the required infrastructure to offer the service. Among the top financial services institutions are JPMorgan Chase, Bank of New York Mellon, US Bancorp and Wells Fargo. The Fed has said it is committed to working with more than 9000 banks and credit unions across the country to support the widespread availability of this service for the end-customers over time.
What is envisaged under the service is to facilitate instant payments for consumers and businesses. Individuals will be able to instantly receive their pay cheques and use them the same day, and small businesses will be able to more efficiently manage cash flows without processing delays. In future, customers of banks and credit unions that sign up for the service will be able to use their financial institution’s mobile app, website and other interfaces to send instant payments quickly and securely.
Financial institutions participating in FedNow can opt for several different services within the system, including sending funds back and forth across financial institutions or choosing to only receive funds. They can also opt into settlement service transfers and high-dollar-limit credit transactions called liquidity management transfers.
It is essentially an interbank payment system, operating alongside other payment services like Fedwire and FedACH. The Fed has clarified that FedNow will not compete with apps like Venmo or Zelle, which act as middlemen for peer-to-peer transactions. The main difference between FedNow and these services is that FedNow does not require any app to be downloaded and installed. It operates between the banks or credit unions.
The Fed has put a cap of $500,000 as the amount of money one can send through FedNow, participating banks and credit unions have started with a default limit of $100,000.
For the last 5 years, financial institutions in the US had to rely on The Clearing House (TCH) Real-Time Payment Network (RTP) rails for their payment transactions, or the Automated Clearing House. FedNow is a competitive alternative now.
BENEFITS, PAYMENT TYPES
In short, the benefits that FedNow will bring are:
Reduced costs (interbank settlement fees/late fees), better risk management and efficient payment processing/settlement for the financial service institutions; and ability to transact and have funds available instantly, real-time cash flow management and enhanced fraud/cyber security operations for the customers.
The payment types that FedNow can support are: Person to person (P2P), Consumer to Business (C2B), Consumer to Government (C2G), Government to Consumer (G2C), Business to Consumer (B2C), Business to Business (B2B), Business to Government (B2G), Me to Me (Account to Account, or A2A).
This article has been compiled based on publicly available information on the web, particularly the bank’s own website.