How to prepare for the FedNow Service: A Guide for Financial Institutions

The Federal Reserve is creating the FedNow^SM Service, an instant-payments system planned for release sometime in 2023.

All U.S. Financial institutions that are eligible for Federal Reserve Financial Services will be able to use the FedNow Service to enable their customers to instantly send and receive money any time of day, any day of the year.

According to the Federal Reserve, this new system will provide the following benefits:

In some ways, the FedNow Service is similar to payment apps such as Venmo, but FedNow will be ubiquitous, easily available to everyone who has an account at a bank that participates in FedNow. And the FedNow Service will be able to handle a much higher volume of instant transactions.

Features of FedNow

The FedNow Service provides both a robust feature set and challenges for your institution to take full advantage of these features. The following paragraphs will give you an idea of what FedNow can do.

It’s available around the clock, including weekends and holidays. Because of this, financial institutions need to be more proactive about Fed account balance management.

FedNow is a “Credit Push” system, so money can be sent to other institutions but cannot be retrieved from other institutions. The service can be used to send a payment, return a payment, and request that a payment be sent.

FedNow can also be used to request additional information about a payment, request that a payment be returned, and even to request that a payment be sent on a future day.

There will be a global transaction dollar amount limit, but institutions can set their own limits that are lower.

Liquidity Management: Payments settle 24x7x365, so financial institutions need to be more proactive about Fed account balance management. FedWire Funds will not be available 24x7, so FedNow will provide facilities for liquidity management during hours when wires are not available.

Reporting will include account balance, account activity details, and account activity totals.

FedNow uses seven-day accounting, which will have similar challenges to ATM/POS systems when balancing.

Why Preparing Now Is Critical

In order for your financial institution to reap the benefits of FedNow, you need to prepare now to take advantage of this new technology. Otherwise, you run the risk of falling behind the competition.

We offer the following five steps as a guide to begin preparing for FedNow:

1. Understand the trends in the market.
2. Learn more about the FedNow Service.
3. Assess the needs of your customers.
4. Build a business case.
5. Make necessary changes to your technology, services, and software.

Read on for more information about each of these five steps.

Understand the trends in the market.

To understand how customers will use FedNow and how important it will be to them, consider the following questions in your planning.

• How many of your individual customers and business customers will want to use instant payments?
• How many of them would switch to a different institution to get access to instant payments?
• How many of them are using alternate payment services like digital wallets and mobile payment apps?
• Have customer deposits and accounts been declining at your institution?

Learn more about the FedNow Service.

• Review FedNow education tools and resources at https://www.frbservices.org/financial-services/fednow.
• Learn about the various use cases, such as account-to-account transfers, bill pay, p2p transactions, and more.
• Consider whether you are going to develop a solution in-house or find a third-party provider to implement the FedNow Service.

Assess the needs of your customers.

Look at available customer data, conduct surveys, and talk to customers. Do their needs and wants relate to the FedNow Service? Will the FedNow Service deliver what they want?

Build a business case.

Develop estimates of potential instant payments use, make revenue projections, and analyze potential growth in your deposit base.

Make necessary changes to your technology, services, and software.

Before you can use the FedNow Service, you will need to make some changes to your technology, services, and software. Such changes include internal systems and those managed by external partners. FedNow readiness publications also warn that you “should consult with your legal counsel to determine compliance with applicable consumer protection laws and regulations.”

Review the following as you make decisions on these technologies:

• Internal and vendor solutions
• Customer-facing and internal interfaces
• Internal and external systems
• FedNow Service connectivity and bandwidth considerations

In order to make FedNow work seamlessly in your organization, you may need to contract with a vendor that can provide a ready-made technology solution. Before you choose a vendor, be sure they can address the following issues.

Questions your institution should answer before contracting with a vendor include:

• Does the vendor solution provide back-office support tools like reporting, research, balancing, and reconciliation?
• FedNow requires 24x7x365 availability. Can the vendor solution handle real-time processing around the clock?
• Does the vendor have systems set up to alert customers of payments received or other status messages?
• How good is the vendor’s user experience? Is the interface easy to use?
• Does the solution have security and resiliency for around-the-clock activity?
• Does the vendor solution have excellent customer service to support you when the inevitable challenges arise?

Conclusion

Although the Federal Reserve is providing FedNow to all banks, you need to be ready to implement it efficiently and effectively. Now is the time to start strategic planning at your institution. The issues to consider are complex—too complex to cover in detail here. We’ve given you a brief overview of some of the challenges involved in preparing for FedNow. Visit www.fpsgold.com/fednow-resources for a list of resources that go into depth on FedNow preparation.