The world is moving at a fast pace, and people expect payments to move just as fast, if not instantaneously. There are a number of faster payments networks in the United States that are responding to this need by clearing payment transactions between payers and payees instantly or in near real time.
With so many options, how will the FedNow ServiceSM 1 fit in, and how will it help support the development of secure, reliable and broadly accessible instant payment services in the United States?
Unlike services like Paypal, Venmo or Square Cash, which are nonbank “closed loop” systems, the FedNow Service will provide an interbank faster payment system. Interbank systems typically enable payers to pay much wider groups of payees, even those who have an account with a different financial institution. In these systems, payments are routed and settled among the various participating financial institutions through a common network. In addition, because it will clear and settle payments simultaneously, transaction by transaction, in near real time, the FedNow Service, like the Clearing House’s RTP® network, will be an interbank instant payments system.2
At present, the RTP® Network is the only instant payments infrastructure in the United States, but the FedNow Service will soon offer financial institutions choice in 24x7x365 instant payment services.
In doing so, the FedNow Service will foster nationwide reach, with features to support payment integrity and data security.3 The Federal Reserve believes generating competition can result in efficiencies related to pricing, service quality and innovation, benefitting service providers and end users. In addition, by operating alongside the private-sector instant payments service, the FedNow Service will promote resiliency in instant payments by allowing banks to connect to more than one service for contingency purposes.
The launch of the FedNow Service is consistent with the Federal Reserve’s role of providing core infrastructure for payment and settlement services to depository institutions. In this role, the Federal Reserve has promoted an accessible, safe and efficient payment system in the United States for more than a century.
The FedNow Service is designed to be a foundation for the broader payment ecosystem to develop a wide range of modern, innovative and safe instant payment services supported by real-time gross settlement. Vendors and application providers in the broader payments ecosystem can leverage the FedNow Service features and functionality as a springboard for developing new use cases and new services including, for example:
Market innovation in use case capabilities such as these can benefit the country as a whole, and that is why the involvement of financial institutions, technology service providers, end users and others plays a vital role in making the FedNow Service broadly accessible. Through the FedNow Community, the Federal Reserve is engaging with a wide range of industry stakeholders to solicit input on service design, functionality and use-case enablement to support innovation, among other priorities, within this space. Furthermore, the Federal Reserve plans to support market engagement and readiness through its FedNow Service pilot program.
A goal of this ongoing dialogue and interaction is to establish a robust ecosystem that will drive development of instant payment capabilities across the value chain. And the feedback received through the community will help drive which additional features should be included in subsequent releases. For example, additional functionality related to fraud prevention, error resolution, case management and support for person-to-person payments that use the alias of a receiver are under consideration for subsequent phases.
At launch, the FedNow Service will provide a strong foundation for innovation, with capabilities that include, among other things:
In addition, a liquidity-management tool (LMT) will be available to participants in the FedNow Service or the RTP network to support funds transfers for the round-the-clock liquidity needs of instant payments.
Now that the payments industry has an idea of what the initial capabilities will be, there are many things industry participants can do to position themselves as drivers of innovation and successful builders of functionality that will leverage the FedNow Service. Here are just a few suggestions:
1FedNow is a service mark of the Federal Reserve Banks. Other service marks noted in this article belong to the organizations listed.
2In contrast to open, interbank systems, closed loop systems require transferring money out of the system for transactions that involve payees that do not also have an account with the closed loop system operator.