Thursday, March 16, 2023
Plans are to begin a formal certification process for FedNow participation in April that includes a testing curriculum. A production validation process to confirm readiness will begin in June.
"We couldn't be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution," Ken Montgomery, the Boston Fed first vice president who has been heading up development of FedNow, said in a statement. "With the launch drawing near, we urge financial institutions and their industry partners to move full steam ahead with preparations to join the FedNow service."
FedNow joins RTP, a real-time payment network developed by The Clearing House, which is owned by many of the nation's largest banks. TCH counts 312 financial institutions (FIs) receiving payments over RTP, with a majority of those banks and credit unions accessing the network via core processors. Far fewer FIs are sending payments. "Sending is a lot more complex," said Keith Riddle, CEO of the Americas at banking technology firm BankiFi.
More than 10,000 FIs are eligible to use FedNow, and all of those already have electronic connections to the Fed via its FedLine service. FedLine is a web-based service FIs use to access Fed services, like ACH and wire transfer payments, as well a central bank applications.
"All financial institutions at a minimum should turn on receive only," said Tede Forman, president of the payments solutions group at Jack Henry. "We really think this will bolster deposit acquisition, payments orchestration and competition in the payments industry at large," he added.
Both RTP and FedNow are credit networks, as neither FIs nor regulators want to deal with the potential risks created by instant real-time debit transactions. The two networks also have transaction caps. The Fed has set $500,000 as the transaction cap on FedNow. RTP won't handle real-time payments over $1 million.
Availability of FedNow marks the beginning of a new era, Montgomery said. He added that a growing network of participating FIs will be key to increasing availability of instant payments for consumers and businesses across the country.
Research has consistently shown that consumers and small businesses want faster payments. A survey by Aite-Novarica, for example, found nearly three-quarters of adults would switch FIs for access to real-time payments. The Fed said its research found nearly three-quarters of micro businesses and 60 percent or more of larger businesses believe real-time payments will help them better manage cash and working capital.
The Fed and others are betting consumers will switch at least some bill-payment activities from the ACH and credit/debit card networks to FedNow and/or RTP. The Boston Fed published an analysis in February 2023 suggesting lower-income households could save billions of dollars a year in overdraft fees if they received money (like paychecks) instantly and in turn use that money to pay bills instantly.
Account-to-account transfers are expected to be another major use case. The Fed and TCH each have initiatives underway to broaden the appeal of real-time payment networks to additional applications.
"With the FedNow service, the Federal Reserve is creating a leading-edge payments system that is resilient, adaptive and accessible," said Tom Barkin, president of the Federal Reserve Bank of Richmond. "The launch reflects an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy."
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