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Education

Countdown to FedNow – The challenges and impacts

significant impacts. The biggest shift for many is that
FedNow will operate on a 24/7/365 basis. Credit transfers
will require the sender to initiate payment, rather than the
recipient, and it will be for domestic payments only (no
cross-border payments at least initially).

Because it is a true, instant payments environment,
all transfers are irrevocable and will be restricted to
participants that maintain Federal Reserve accounts.
Current master Fed accounts will be used for interbank
settlement, and funds will be available in recipients'
accounts in near real-time.

Institutions will have the option to join FedNow as
"receive-only" banks and non-bank service providers,
By Dr. Jack T. Baldwin and correspondent banks can process for banks. Though
BHMI the transaction size limit is still being determined,
participants can choose to set a lower limit for themselves.
s we head into 2023, there is speculation on Account activity reporting (including intraday balances)
how the FedNow launch will ultimately unfold and other similar capabilities will be provided by FedNow
and impact our faster payments landscape. For for detection and fraud prevention, with a seven-day
A payments organizations and financial institu- accounting regime as the standard.
tions (FIs) that have been hesitant in their adoption strate-
gies, the impending launch could mean real pressure to Future updates that are planned or considered include:
make quick decisions on what to choose, but they must additional fraud fighting tools; use of alias directories to
also consider how that choice could impact them, espe- simplify transaction routing; APIs to assist in the creation
cially when it comes to their back-office operations. of overlay services; and, ultimately, interoperability with
RTP. Other potential additions could include debit pull
Recently, the Fed updated its timeline for the FedNow transactions and cross-border payments.
launch, estimating it will now go live sometime between
May and July of 2023. In anticipation, it seems likely the The real world impact of FedNow
FedNow group will continue to carry out an organized
approach to educating FIs and potential service providers FedNow provides an alternative to traditional payment
with webinars, educational materials and sessions channels that will have some real world applicability. This
discussing FedNow features. The group has also organized could include individuals who need to make payments
pilots to give FIs and service providers an opportunity to quickly to avoid overdrafts (or other penalties) or
start testing interfaces and applications prior to launch. individuals who need to move money that can be accessed
immediately.
With the advantage of having access to an already-existing
infrastructure in the Federal Reserve network itself, the Recipient businesses could receive unrestricted funds
team seems poised to hit their date. Additionally, they immediately, which improves their cash flow and reduces
have also leveraged processing functions inherent in the the need for borrowing. Other businesses that need
existing network, such as settlement, within the master to dispense large numbers of payments quickly, like
accounts of banks. insurance companies paying damage claims, would be
obvious beneficiaries of an instant payment network.
Another advantage supporting adoption is that many of
the FIs, and most of the service providers, have already Perhaps most importantly, FedNow may motivate a
gone through a similar implementation effort with the number of FIs that have been sitting on the "instant
competing RTP network that went into production in 2017. payments fence" to finally commit to instant payments
In fact, the ISO 20022 messaging for FedNow is essentially support. The Clearing House's RTP network has been in
the same as that for RTP. production since 2017, so an instant payment option has
been available for years (not to mention other similar
FedNow features, functionality and requirements options like Visa Direct).
While FedNow will offer many benefits, new real-time But some banks and credit unions, particularly smaller
core functions and capabilities represent some of the most ones, have been loath to join a network controlled by

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