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Education

their larger competitors—even with RTP promising that Preparing for real-time settlement
all network participants would be treated equally (that
is, no special treatment for the larger banks that own It will be important for participants to decide where their
The Clearing House and RTP). So, institutions that have FedNow transactions will settle. Settlement may occur in
been reluctant to commit to RTP may choose to commit to an FI's own master account with a Federal Reserve Bank,
FedNow because they consider the Fed to be a fair broker or the FI may choose to designate a correspondent, such as
that will treat all members equally. a banker's bank or corporate credit union.

Potential roadblocks for FI adoption of FedNow include the If an FI decides to settle in its own Federal Reserve Bank
increased cost and operational complexity, as well as the account, the appropriate processes will need to be in place
issue of interoperability. While FedNow has implemented to manage account balances and ensure compliance with
the same basic ISO 20022 message set adopted by RTP, the Payment System Risk (PSR) policy under an expanded
the two networks are not interoperable. Unless a sending window to process transfers on a 24/7/365 basis. When
bank or payments company has links to both networks, using a correspondent to handle a settlement, institutions
it cannot complete a credit transaction to a receiving will also need to consider the specific agreements that
institution unless they are both on the same network. may be required for this settlement, such as thresholds or
liquidity management considerations.
The expectation is that the two networks will derive
standards to overcome this in the near future. Alternatively, Additionally, institutions that send credit transfers or
a third-party routing hub could be created to accept provide settlement services through FedNow will need
credit transactions from either network and route them a strategy to maintain liquidity for instant payments. As
accordingly. with settlement, this may involve either making internal
adjustments, sourcing liquidity from the Discount
Technical considerations for FedNow adoption Window, another FI or via a correspondent. Participants
will be expected to manage their master accounts in
All prospective FedNow participants should consider compliance with Fed policies, including the PSR policy
which of their internal and external solutions may be on intra-day and overnight credit. FedNow will support
impacted by instant payments and whether they would FI-to-FI liquidity transfers in support of instant payments.
need to have 24/7/365 availability. Concerns for systems
integration include knowing the additional capabilities, if Considering the potential for shorter processing times for
any, that would be needed to handle real-time processing. instant payments, prospective users should review their
Systems must also be set up to alert customers of payments back-office processes that require manual oversight and
received or other status messages and to meet anticipated intervention. Any operations that can be automated will
requirements to make funds available immediately. significantly help streamline all relevant workflows.

It is also important to know the desired customer Participants should also consider how FedNow may
experiences and functionality, along with the security impact their processes and reports for accounting and
and resiliency implications to support around-the-clock reconciliation. Account balance management will become
activity. For FIs ready to adopt FedNow, the FedNow more complex in a 24/7/365 environment where payments
Service Readiness Guide, https://bit.ly/3hMF4yA, is a settle continuously in master accounts. Organizations
valuable informational resource. should consider how they will monitor balances around
the clock, deal with issues during nonstandard business
FIs and payments companies must also consider how hours, and for reconciliation, if their current windows will
interaction points for their customer-facing and internal work with instant payments.
staff might be impacted by the FedNow service. This
includes online banking, mobile banking, text banking While many FIs and organizations may still be weighing
and Interactive Voice Response (IVR) systems. For FIs, the costs of adoption versus their needs, the future of
this may mean teller and/or customer care interfaces payments is real-time, and FedNow provides a viable
for initiating transactions and accessing information pathway to that future. Regardless of the network, those
about transactions, dispute investigations or requests for that wait are only delaying the inevitable and will likely
payments may also need updating. find themselves playing catch-up and at a competitive
disadvantage later.
What will the reporting needs be for customers in a
24/7/365 environment, and how can FedNow transactions
be incorporated into this reporting? Understanding the Dr. Jack T. Baldwin is chairman and CEO of BHMI, a leading provider
alerts, notifications and/or other information relative to of product-based software solutions focused on the back office process-
instant payments that will be made available to customers ing of electronic payment transactions and creator of the Concourse
will be helpful to answering these critical questions. Financial Software Suite®, www.bhmi.com/concourse_financial_soft-
ware_suite/.

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