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5 Things You Need to Know About FedNow

November 14, 2023

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The Federal Reserve’s instant payments platform, FedNow, is live and has opened fresh revenue streams for businesses. Here’s everything you need to know.

The world’s largest economy did not feature among the world’s top 5 or even 10 leading real-time payments (RTP) initiators till 2022. Following in the footsteps of Brazil’s Pix, Australia’s New Payment Platform, and India’s UPI, the US Federal Reserve launched the FedNow Service on July 20, 2023. The service is the “first step to a multi-year journey to build an instant payment network that is accessible to all Americans,” said Ken Montgomery, a FedNow executive and the First VP of the Federal Reserve Bank of Boston.

Source: Federal Reserve Bank of Cleveland

Source: Federal Reserve Bank of Cleveland

Here are 5 things you must know about the FedNow Service to make the most of it for your personal and business use.

1. FedNow offers “Real-Time” Benefits to Consumers, Businesses, and Financial Institutions

FedNow aims to transform the American payments ecosystem with a three-dimensional approach:

  1. Driving the evolution of payment platforms.
  2. Eliminating transaction friction.
  3. Creating new opportunities for every participant in the economy.

Given the sheer expanse of the service, instant payments are set to become ubiquitous in the US. With access to cutting-edge technology at lower cost, smaller financial institutions will benefit from reduced payment expenses while being able to offer competitive services to their customers. Through conformity with the ISO 20022 standards, payment authentication facilities, and fraud prevention best practices will ensure high-end security.

2. FedNow is NOT a Digital Currency or Replacement of the Mighty Dollar

This is the first step to understanding the purpose of FedNow. It is an infrastructure and not a currency. It is a service for financial organizations across the US to build consumer-facing applications and empower their customers to transact in real time via a convenient interface.

FedNow has nothing to do with the Fed’s CBDC, although the technology infrastructure does have the potential to evolve into a crypto-supporting platform. In the words of Fed Chair Jerome Powell, “FedNow is not related to a digital currency” and the Fed will “only proceed with the issuance of a CBDC with an authorizing law.”

FedNow is similar to the pioneering FedWire and FedArch payment settlement systems, with the only difference being that FedNow works in almost instantaneously or in real-time. It makes way for building a cashless ecosystem of payments.

3. FedNow is NOT a Mobile Wallet or App

Much like The Clearing House’s RTP, FedNow is back-end infrastructure that banks, credit unions, and financial services providers can use to enable their customers to transact in real-time. The Fed has done rigorous testing since 2021 and has been marketing the service since 2019, which has helped it garner a lot of attention. Using the platform does involve costs and transaction limits, but with the novel opportunities it opens for businesses to generate revenues, the benefits outweigh the costs.

Did you know?

RTP has been trademarked by The Clearing House. So, no organization can use the acronym for their products/services,’ although real-time payments has become a household mode of transaction.

Banking service providers can add FedNow as a feature to their existing digital-transaction-ready tech stack or mobile applications and allow transactions NOW. All they need to do is connect with the FedLine Solutions network and gain access to the FedNow Service.

4. FedNow Can Work alongside PayPal, Venmo, and other Private Sector Systems

Total real-time payments completed are forecasted to reach a value of $11.7 billion annually, expanding at a CAGR of 21.3% between 2022 and 2027. For the US, FedNow will certainly be a game-changer in catapulting instant transactions. However, as clarified by the Fed, it is aimed at empowering smaller banks and credit unions that have limited access to modern technologies to participate in the cashless economy. With government backing, it provides a safer and trustworthy option to transition to real-time payments.

While the likes of PayPal work as intermediaries between banks, FedNow will allow banks to directly interact through a nationwide rail, similar to the Real-Time Payments (RTP) network used by Zelle. The operator of the payment will have the flexibility to choose the network they trust and find most suitable for their needs. You can connect to both the rails, FedNow and RTP, to optimize deposit opportunities.

Source: Federal Reserve Bank of Cleveland

Source: Federal Reserve Bank of Cleveland

5. Even Digital Commerce Businesses Can Benefit

Although the legal terms and conditions issued by the Fed pertain only to banks and credit unions, digital marketplaces and eCommerce companies can also take advantage of the service. They will be able to do so if they have an account with any of the banks that leverage the FedNow instant payments platform. Digital businesses can enable instant payment options on their online platforms at checkout.

Digital wallet platforms can also take advantage of the nationwide network to improve customer offerings. This will provide a cost-effective and more reliable 24×7 alternative to the existing payment gateways. Bill payments, moving funds quickly across wealth-bearing investment options for dynamic money management, or funding digital wallets for in-store payments can be completed in a matter of seconds.

In the words of Jennifer Barker, CEO of Treasury Services at BNY Mellon, one of the banks on the Fed’s early adopter list, “Instant payments help to solve a good number of use cases for our clients. There’s a lot of opportunity to get money into the hands of people much faster and then overall it’s a marketing opportunity.”

Real-Time Payments is the New Normal

By 2027, 27.8% of all electronic payments globally are expected to be accounted for by RTPs. Choosing to implement FedNow is optional. But 24×7 instant payments is the future of the rapidly evolving payments domain. Do you want to take the chance of being a step behind the competition in enabling real-time payments for your customers?

Opus, a leading digital technology solutions provider, is adept at assisting banks and credit unions to assess their existing infrastructure and build API-based comprehensive solutions to leverage modern payment technologies. Contact our experts to know how we can help your business gain a competitive advantage in the payments market.

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