FedNow Payments: Real Time, Any Time
What is FedNow?
The United States Federal Reserve made history by joining the real-time payment trend by launching FedNow Service, the agency’s new interbank, instant payment service, on 20th July 2023.
With heavily waived credit transfer and participation fees, FedNow is set to charge customers credit transfer and credit transfer return fees of $0.045 per item, $0.01 for payment requests, and a participation fee of $25 per routing transit number per month. In two months, the platform has already grown from fifty-seven early adopters, including banks, credit unions, and registered payment-process service providers, to seventy-two participating institutions, proving its potential to dominate the US payment landscape.
How Does It Work?
With every transaction update reaching the Federal Reserve in real time, it is interesting to understand the process behind each FedNow transaction.
When the sender initiates a payment, the bank screens and sends a payment message compliant with ISO 20022 standards to the FedNow Service using the Federal Reserve’s FedLine network. The platform then validates this message and forwards it to the receiver’s bank to confirm their intention to accept the payment. Following this, FedNow debits the sender’s account and credits the receiver’s account with the amount. The service then sends a payment message with an advice of credit to the receiver’s bank and notifies the sender that the settlement is complete. The receiver’s bank now credits the receiver’s account in near real-time, making the funds available. The supplier’s bank may then send a confirmation to the sender’s bank, indicating that the payment has been successfully posted.
How Do Banks Get Affected?
The FedNow service poses the perfect opportunity for US banks to flaunt their advanced digital capability to their customers. Banks that are already equipped with the latest digital banking innovations in the market, including AI and ML-powered security and customer engagement can easily join the growing list of participating institutions to leverage their digital power and pull customers from their competition.
The FedNow platform is anchored to create a huge impact on the way banks and credit unions identify themselves. Banks that refuse to expand their strategy by focusing on payment methods and user convenience are scheduled to fall further behind in this competitive landscape. By integrating with FedNow, banks must undergo a mindset change, with business hours becoming 24/7 365 days, real-time monitoring of cash flows, efficient balance sheet management, and unparalleled customer service. Therefore, identifying themselves not only as lending entities but also as mediums for creating superior financial experiences for their customers builds healthy competition and motivates the need for constant change and innovation.
The banks that await their customers to ask for FedNow before joining the platform as a participating institution are playing a dangerous waiting game. Real-time payment has already proven its potential as the people’s choice of payment from several examples across the world including that of India and its Unified Payment Interface (UPI). Through UPI, digital transactions in the country doubled, from 23% to 51%, within three years, with currently over 300 million active users. The success of UPI during a time of low digital literacy (less than 10%) and financial literacy (less than 24%) forecasts the high chances of FedNow’s success in a country like the US.
Therefore, banks must swiftly opt for a well-planned launch strategy with a quick time to market by leveraging the expertise of fintech to drive additional revenue and reduce operational costs. Choosing an in-house partner with prior experience in online payment gateway interfaces and real-time transactions like i-exceed’s Appzillon digital banking platform can guide banks in getting a return on investment in less than a year. Smaller financial institutions without experience in technological prowess can also seek help from fintech like i-exceed to build customized digital banking experiences.
Bringing a major improvement to the complex US payment landscape with its multiple rails and charges, FedNow modulates both clearing and settling, with banks no longer having to fund daily payment volume like in the case of the RTP network. This opens a wider opportunity for smaller financial institutions to adopt the FedNow payment service.
Faster Fund = Faster Fraud?
Parallel to the pace of money transactions, the chances of fraudulent activities are also accelerating. Real-time payments pose similar threats to any other payment method, but the swift and irrevocable nature of the transaction makes it impossible to recall the money transferred.
Participating Financial institutions (FI) of FedNow Service must lay out the first line of defense by holding a frequently updated knowledge system of the latest threats and a blacklist of fraudulent accounts along with regular employee training. Banks offering classes on the latest social engineering scams, advising quick actions to take against possible cyber-attacks, and regular check-ups to customers go a long way in securing finance and trust.
Along with these techniques, adopting suitable and secure technology creates a more statistical impact on creating a safe financial environment for customers. Partnering with fintech like i-exceed which offers safe ecosystems for real-time transactions can help maintain the transaction time minimum while conducting quick security check-ups and avoiding false positive draining.
This way banks can remove the initial fears of real-time payment from customers and help elevate themselves to the changing economic expectations.
In Conclusion
With more banks and credit unions set to join the initiative, real-time payment, which till recently accounted for only 0.09% of US payment volume, is guaranteed to expand its uses. With payment methods like UPI and PIX conducting easy, real-time payments at roadside shops using mobile numbers and QR codes, US banks must adapt quickly before real-time payments become the norm. Therefore, building swift, seamless, and secure platforms by collaborating with fintech is the right way to commence.
Ready to leverage yourself as a secure real-time payment service provider? Find the answers to your doubts and fears by scheduling a demo with us.
